Q2 2024 Hexcel Corp Earnings Call
Participants
Patrick Winterlich; Chief Financial Officer and Executive Vice President; Hexcel Corp
Tom Gentile; Chief Executive Officer and President; Hexcel Corp
Sheila Karin Kahyaoglu; Analyst; Jefferies LLC
Myles Walton; Analyst; Wolfe Research LLC
Gautam J. Khanna; Analyst; TD Cowen
Bert Subin; Analyst; Stifel, Nicolaus & Company, Incorporated
Matthew Carl Akers; Analyst; Wells Fargo Securities, LLC
John Patrick McNulty; Analyst; BMO Capital Markets Equity Research
Gavin Eric Parsons; Analyst; UBS Investment Bank
Scott Mikus; Analyst; Melius Research
Pete Skibitski; Analyst; Alembic Global Advisors
Michael Frank Ciarmoli; Analyst; Truist Securities, Inc.,
Richard Safran; Analyst; Seaport Research Partners
Noah Poponak; Analyst; Goldman Sachs Group, Inc.,
Presentation
Operator
Thank you for standing by. And welcome to the Hexcel second-quarter 2024 earnings conference call. (Operator Instructions) I would now like to turn the call over to Patrick Winterlich, Chief Financial Officer. You may begin.
Patrick Winterlich
Thank you, Rob. Good morning, everyone. Welcome to Hexcel Corporation's second-quarter 2024 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the Safe Harbor provision 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 that 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 earnings 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 expressed permission. Your participation on this call constitutes your consent to that request.
With me today are Tom Gentile, our CEO and President; and Kurt Goddard, our Vice President of Investor Relations, the purpose of the call is to review our second-quarter of 2024 results detailed in our news release issued earlier this morning. Now let me turn the call over to Tom.
Tom Gentile
Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our 2024 second-quarter results. I'm excited to be succeeding Nick Stanage as CEO and President of Hexcel and participating in my first Hexcel earnings call.
Nick had a very strong tenure as CEO over the last 10 years and position the company for future leadership. The strong financial results this quarter reflect the efforts the Hexcel team has made over the last several years to recover from the pandemic.
As you read in our news release earlier this morning, Hexcel second-quarter sales of $500 million were up more than 10% year over year and strong performance. Especially so in commercial aerospace, where sales grew more than 21% year over year. At $0.6, our EPS was 20% better than Q2 2023. As a sidenote, last time Hexcel quarterly sales exceeded $500 million was the first quarter of 2020.
As we look ahead to the second half of 2024, some of our commercial aerospace customers are flagging continued challenges in the aerospace supply chain and slowing previously communicated production rate increases. Notably on June '24, Airbus signal a reduction in deliveries for 2024 from 800 to 770 aircraft, indicating would impact all programs, including importantly, perhaps now the A350, which is our largest individual program. Boeing deliveries, have also been below plan for the first half of the year.
Our initial 2024 guidance was based on sales from Airbus and Boeing, continues to grow throughout the year. That now appears to be less likely. And we expect sales and earnings in the second half of 2024 to be generally similar to the first half of the year. We have, therefore revised our guidance for 2024 accordingly based on a more cautious near-term outlook.
Our revised guidance is as follows. Sales of $1.9 billion -- $1.98 billion. Previously, it was $1.925 billion to $2.025 billion. Adjusted diluted earnings per share of $2.2 to $2.18, previously $2.10 to $2.30, and free cash flow of around $200 million, previously greater than $200 million. We feel this revised guidance is a more prudent reflection of the softer market conditions for commercial aircraft production that we now expect in the second half of 2024.
With that said, we remain confident in the midterm outlook for commercial aircraft and expect both Airbus and Boeing to continue to increase their production rates over the coming years. For example, Airbus has announced that the A350 will be reaching 12 aircraft per month by 2028.
We are therefore not making any changes to the mid term guidance previously shared by the company at our February Investor Day and reconfirm at the beginning of May. Underpinning our confidence in the midterm outlook is the increased demand for new lightweight aircraft, with around 14,700 aircraft now in backlog for Airbus and Boeing combined.
Total revenue passenger kilometers or RPK continues to grow with the (inaudible) reporting record Internet national passenger traffic. Domestically, the TSA reported a record level of security screenings earlier this month. This strong air traffic and healthy backlog is driving the recovery aircraft production rates, which should get back to 2019 production levels during 2026.
The outlook for commercial aerospace production in the midterm and beyond is tremendous, and Hexcel is well positioned to benefit as the aerospace supply chain continues to recover. Likely Hexcel advanced composite materials will enable enhanced sustainability and efficiency for decades to come as lighter aircraft and more aerodynamic architectures extended range, reduced fuel consumption, and drive lower emissions.
This compelling lightweight value propositions is one of the things that attracted me to Hexcel and will become even more powerful over time as the aerospace industry focuses more on emissions reduction and sustainable aviation. Every generation of aircraft over the last 30 years has used more advance positive materials in the last (inaudible) .
(inaudible) now represent more than 50% of the weight of both the A350 and the 787. We expect this trend to continue. I began my tenure as CEO at Hexcel about 11 weeks ago, and my initial priority has been visiting our sites to meet and listen to our employees and learn more about the operations, our innovation agenda, and the lightweight materials solutions we provide that are so critical to current and future aerospace and defense programs.
At my previous companies, I was a significant user of advanced composites to make airframe and engine parts instructions. And now, I have the opportunity to learn in-depth how these amazing materials are developed and produced. Hexcel is a highly technical advanced composite materials company with very high barriers to entry, making Hexcel an important partner to commercial and defense customers.
Only a few companies make the premium carbon fibers and lately composite materials required by the aerospace and defense industry. And Hexcel has the largest and broadest portfolio of these products.
Hexcel has 22 manufacturing sites, and so far, I have I visited 12 of them in the US, Europe, and Morocco. I've met hundreds of employees, and had the opportunity to learn more about Hexcel's manufacturing value chain, in-depth, starting with precursor to producing carbon fiber to weaving to prepreg and then both honeycomb and engineered core.
Just as importantly, I had the opportunity to see first hand, how the one Hexcel culture ensures that these product rates are manufactured in one of the safest workplace environments that have ever experienced. The foundation of the Hexcel culture is worker's safety. All meetings begin with a safety message.
Our teams constantly reinforce safety practices in a positive manner. Our Hexcel performance metrics for operation management incorporate safety metrics and so many employees I've met have told me how committed they are not only to their own safety but also to the safety of those around them. In addition to safety, I saw firsthand the commitment this team has to operational excellence with a very strong emphasis on quality.
In our continuous process flow production system, we are literally conducting testing on batches pf products 24/7. This commitment to safety and operational excellence has resulted in a continued focus for on-time delivery to ensure that Hexcel is never the weak link in the supply chain.
I've been very pleased to see that we have the capacity in place and the staffing in our factories to meet all of our customers near-term requirements. Our new staff have received their training and are getting now valuable on the job experience as production rates and efficiency continue to recover.
I've also spent time at a number of our research and technology centers of excellence, meeting with our scientists and better understanding the lightweighting solutions being developed for next-generation applications. This is truly leading edge material science technology. We are continually working closely with many of our customers on the material systems for next generation programs.
Even though the launch and entry into service of some of these projects might be years into the future, the discussions on material systems are happening right now. Besides site visits, I participated in Hexcel's annual management developed review, enabling me to quickly get up to speed with understanding the strength of the Hexcel team.
This was followed by the annual Hexcel strategic planning meeting or strap as we call it. Strap is primarily focused on the next five years, but also encompasses a 10-year strategic view of the aerospace cycle ahead. It is about how we execute on our commitments, how we innovate to ensure we lead the world and advanced composite technology, and how we identify the best opportunities to grow our business.
In other words, it's all about how we win, how we build on what is working, and how we continue to strengthen our engagement with our customers. Strap is based on a multiyear planning horizon using a very comprehensive bottoms-up forecasting process.
Hearing from our global leaders makes me more convinced than ever that modern commercial and defense aircraft and the potential for zero emissions aviation will utilize increasing quantities of the lightweight composite materials that Hexcel provides. And because of that, our market opportunities are compelling.
As CPO, I intend to reinforce and optimized Hexcel's existing strategy. We are a global technology leader in advanced material composites with an unrivaled lightweighting product portfolio, especially for aerospace applications. We focus on innovation, and we benefit from a global scale along with deep customer relationships.
We target market undergoing secular growth, where we can benefit from a sustainable competitive advantage. We are in sole source positions by developing leading edge solutions and delivering quality products on time. And we do this by focusing on our talented employees, the team that is highly experienced, engaged, and committed to what they do.
In addition to meeting with employees. I've also met with many of you on our investor community in recent weeks at analyst conferences and individual investor meetings. We have had an engaging conversations, and I look forward to continuing that dialogue.
In addition, I have, of course, been active in reconnecting with many of Hexcel's customers in my new capacity. While I was in France last month, I had the opportunity to meet with Safran and attendant 50th anniversary celebration for CFM, which is the partnership between Safran and GE that produces the LEAP engine for the 737 MAX and the A320 NEO.
CFM is extremely successful and a case study on partnerships. At that event. I also met with key leaders from many of our other customers. Finally, I am flying to Farnborough tomorrow and have a full schedule of customer meetings in the coming days at the Air Show.
Now, let me take a moment to share a couple of more highlights that are related directly to Hexcel. First in the area of sustainability, Hexcel established a relationship with a composite material recycler called Fairmat almost three years ago to recycle carbon fiber prepreg from our European operations. In May, we announced yet another agreement with Fairmat, this time in the US.
It's a 10-year agreement to recycle carbon fiber composite materials from Hexcel's Salt Lake City to reuse any composite materials sold into various commercial markets. Our continued partnership with Fairmat further demonstrates our dedication to reduce landfill waste, which is part of our 2030 sustainability targets. Second, we were pleased to host Utah Governor Spencer Cox and others at our Salt Lake City site as Project Alta was announced.
This project is a coalition of industry leaders, policymakers, and community members working together to build a safe and collaborative future through advanced air mobility. Hexcel remains at the forefront of materials science to support the development of electric vertical takeoff and landing aircraft for use in advanced urban air mobility network. This is thanks to our advanced lightweight composite materials that will help make energy efficient, reliable, and cost competitive air vehicles a reality.
Finally, let me take a moment to reiterate a point from our earnings release earlier this morning. And that is capital allocation and specifically, our share repurchases. In the second quarter of 2024, we repurchased around $100 million of Hexcel stock, and in the first quarter, we had done the same, bringing the total repurchases to just over $200 million this year as we see value in textile stock and returning excess cash to our shareholders.
As we continue to recover back to 2019 levels of production, we will generate more cash. Our capital allocation strategy will be first to fund the execution on our current customer commitments, drive productivity in our factories and continue innovating to position Hexcel to provide the material systems and solutions a next-generation platforms.
We have a lot of organic growth potential. We will also look in a disciplined way at inorganic materials science growth opportunities that meet our strategic and return thresholds and strengthen our competitive technology portfolio. But if the right opportunity to not materialize, we will continue to pay a dividend and review opportunities for future share repurchases. We currently have remaining authorization of $285 million. Now, let me turn it over to Patrick provide more details on the numbers. Patrick?
Patrick Winterlich
Thanks, Tom. As a reminder, regarding foreign exchange exposure, and I have explained in detail during previous earnings calls, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over 10 quarter of time horizon. The year-over-year sales comparisons I will provide will be in (inaudible) constant currency, which thereby removes the foreign exchange impacts to sales.
Second-quarter results demonstrated both year-over-year and sequential sales growth and margin expansion led by commercial aerospace. The commercial aerospace market represented approximately 64% of total second quarter 2024 sales of $320.7 million. Second quarter commercial aerospace sales increased 21.6% compared to the second quarter of 2023, with double-digit growth for both wide body and narrow bodies.
Both the major commercial aerospace platforms grew both year over year and sequentially. The other commercial aerospace category increased 15.4% on strong regional and business jets demand. Space and Defense represented approximately 28% for the second quarter sales and total of $138.9 million, increasing 1.4% from the same period in 2023.
Military helicopter programs was strong, both domestically and overseas, including the CH-53K. and the Apache. V-22 sales were significantly lower as that program winds down while new V-22 build a sunsetting, we will continue to benefit from replacement rotorcraft blades from the existing V-22 planes. F-35 was also down in the second quarter of 2024 compared to the prior year period. Our F-35 sales have a tendency to fluctuate from one quarter to the next.
As F-35 sales were particularly strong in the first quarter of 2024, so on a year-to-date basis, F-35 sales are higher than the comparable 2023 period. Industrial comprised 8% of second quarter 2024 sales and totaled $40.8 million, increasing 21.8% compared to the second quarter of 2023. Automotive largely aimed at high end performance vehicles witness growth, while the remaining industrial submarkets were down.
Gross margin of 25.3% in the second quarter of 2024 increased year over year and sequentially on improved operating leverage combined with price realization as we work to offset inflationary pressures. As a percentage of sales, selling, general, and administrative expenses and R&D expenses were 10.9% in the second quarter compared to 10.8% in the second quarter of 2023. Please note, we will incur a modest amount of expense in 2024 related to the CEO transition, which will hit our general and administrative costs.
Adjusted operating income in the second quarter was $72 million or 14.4% of sales compared to $61.8 million or 13.6% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the second quarter to operating income was favorable by approximately 40 basis points. Sequentially, the adjusted operating margin improved 290 basis points on higher operating leverage and the absence of the first quarter stock-based compensation charge that is historically been incurred at the beginning of the fiscal year.
Now turning to our two segments, the constant materials segment represented 82% of total second quarter sales and generated an operating margin of 17.2% and the operating margin in the comparable prior-year period was 16.2%.
The engineered products segment, which is comprised of our structures and engineered core businesses represented 18% of total sales and generated a 41.1% operating margin as compared to 8.9% in the comparable prior-year period. Net cash provided by operating activities was $37.2 million for the first six months of 2024, which compares to 30.1 million in the first six months of 2023.
Working capital was a cash use of $118.3 million for the first six months of 2024. For the comparable prior-year period, working capital and the cash use was $113.9 million. Capital expenditures on an accrual basis were $41.1 million for the first six months of 2024 compared to $70.5 million in the comparable prior-year period.
Recall that in 2023, we purchased the land and building for our Amesbury, Massachusetts operations for approximately $30.38 million in the first half of the year. Free cash flow for the first six months of 2024 was negative $14.4 million, which compares to negative $44.7 million in the second quarter of 2023.
Our accounts receivable collections were a little weaker than expected at the end of this most recent quarter, principally because the quarter ended on Sunday. Collections in the first week of July were very strong.
The Board of Directors declared a $0.15 quarterly dividend this morning. The dividend is payable to stockholders of record as of August 2 with a payment date of August 9. We continue to repurchase Hexcel's stock, buying $101.1 million of common stock during the second quarter. Year to date through June 30, repurchases totaled $201.8 million. The remaining authorization under the share repurchase program as of June 30, 2024 was $285.3 million.
As Tom discussed, we decreased our 2024 sales guidance in relation to continued uncertainty in the aerospace supply chain. And we decreased our EPS guidance, principally lower on operating leverage, combined with cost headwinds arising from the inefficient supply chain environment, but also some additional costs associated with CEO transition. This also led us to modestly soften our position around our free cash flow generation.
We thrive on predictable demand so that we can optimize our operations, including our staffing and asset utilization. Much of our operations are continual flow operating 24 hours a day, seven days a week, including holidays, and we are typically sole source. So we must hire ahead of our customer ramps. Last year, we had a strong first half of the year for reductions in narrowbody demand, ultimately lead to a lower second half.
Unfortunately, we are now experiencing a similar dynamic in 2024, with some softening or temporary boarding in the pace of forecasted rate ramps in the second half of 2024 for both narrow-bodies and wide-bodies. Our focus on training efficiency and factory throughput, however, will continue to ensure Hexcel is positioned as strongly as possible for when the ramp increases do take place.
As a result, sales and earnings in the second half of 2024 are expected to be similar for the first half of 2024. So a flat second half rather than the growth we were previously forecasting. As Tom said, these near-term market disruptions are not significant enough to warrant a change in the midterm guidance that we issued in February this year. With that, let me turn the call back to Tom.
Tom Gentile
Thanks, Patrick. These past few months of visiting Hexcel sites, meeting our people, and learning more about our technology and our markets have reinforced for me everything that I knew about Hexcel significantly more. I'm more convinced today that the opportunities for next-generation innovations in light-weighting are compelling and that Hexcel is well positioned to meet this growing demand.
With their traffic recover from the pandemic and backlogs now higher than they were in 2019, the demand outlook over the next several years is very positive. However, based on recent announcements in deliveries from our commercial customers, our view is that the back half of 2024 will be softer than our original expectations. And so we have trimmed our guidance accordingly. In light of this more cautious outlook.
Going forward, our goals at Hexcel will be as follows. First, continue our relentless focus on safety and quality; next, to meet our customer production rates increases across all programs. We have a strong capital base and the staffing in place to do so. Invest in productivity to make our factories more efficient as production rates ramp up; continue, investments in research and technology to advanced Hexcel's light-weighting solutions and position ourselves to be part of the material systems for the next generation of aircraft, including narrow-bodies, engines, UAVs and space and defense; explore additional growth opportunities in adjacent aerospace markets and select industrial submarkets.
We will selectively look at inorganic growth opportunities, but only when it brings high-quality margins and broadens or deepens our innovative material science portfolio to support our efforts to gain more than our fair share of future opportunities. And lastly, continue returning capital to shareholders through dividends and stock buyback.
In conclusion, this has been an incredible 2.5 months. I am more optimistic than ever about the future impact Hexcel's light-weighting materials to have on sustainable aviation fuel. This one Hexcel team is truly amazing, and I am fortunate and excited to have the opportunity to lead this team. Rob, we're now ready to take some question.
Question and Answer Session
Operator
(operator Instruction) Sheila Kahyaoglu, Jefferies.
Sheila Karin Kahyaoglu
Thank you. Good morning, Tom and Patrick. Tom congratulations. And just given this is your first quarter, I wanted to ask about profitability. You reiterated the midterm guidance, but how do we think about profit given 13% in the second half as you just said.
And consensus is embedding about 250 basis points expansion in '25 or about 25% EBIT growth. So how do we think about that margin expansion if volumes don't materialize, especially given that Hexcel is carrying 20% more head count per plane versus pre-pandemic levels. So just kind of how you balance the midterm guidance for profitability.
Tom Gentile
Right. Well, I think you highlighted the operating leverage that we have as we continue to recover and revenues go up back toward the 2019 level that drives an incredible amount of operating leverage to absorb fixed costs and improve margins.
Now, since we expect that the second half of '24 is going to be similar to the first half. The margins, therefore, will be similar as well. But as the production rates continue to increase and revenues increase next year and beyond, that's when we'll start to see the operating leverage kick in and margins really increase.
So we're not changing our outlook for the midterm that we outlined at the February Investor Day, which simply just trimmed the guidance for the second half of this year based on some communications, particularly the one from Airbus on June 24.
Sheila Karin Kahyaoglu
Okay, great. I'll stick to one. Thank you and thank you.
Operator
Myles Walton, Wolfe Research.
Myles Walton
Thanks. Good morning, Tom I have a follow-up on that last comment you made about the Airbus June 24, announcement being the primary contributor. It seemed to be that their contribution commentary is more focused on the 320 and even the 330 or 220 than the 350 at the time. And I wonder did the Leonardo pause on the 787 for the composite fuselage. Did that have a material contributor to the change in the outlook? Or to your point, was it really Airbus's June 24 indication?
Tom Gentile
It was -- Myles, it was really all of the above and we took a look at a lot of the demand signals that were see in the market, both from Airbus and Boeing as well as some of the other customers. And on the June 24 Airbus announcement, they really weren't specific in the actual release about which programs that impacted. They said it was all programs, and that was reiterated in some of their commentary afterwards.
And so we do understand that the A350 would be impacted, and it's more along the lines of the rate increases that we expected later this year, may be pushed out or delayed. And that's what we took into account as we made some of our decisions about trimming the guidance.
But we also looked at the deliveries that both Airbus and Boeing reported for Q2. And we took into account some of the other announcements like the one that Leonardo made that you just referenced. So it was all of that. We took into account where we felt it was just more prudent to be more conservative and have a more cautious outlook for the second half of this year.
Myles Walton
Okay. And I think one of the questions I get is, is the company being more conservative than what you're being told? Are you just basically mapping to what you're being told? And Tom, this is your first opportunity to just reset guidance and expectations. And so I think it's important to understand, are you embedding more conservative assumptions than what you're being told to absorb further deterioration if any.
Tom Gentile
I think we're just being realistic based on what we're seeing in RemX. And so we're not trying to be conservative or aggressive. It's just being realistic with the outlook. And what I would say is that the guidance change that we made was really more trimming it to align to what we're seeing. And as I said, we've obviously got all the capital in place for higher levels of production. And we have the staffing in place to what we were originally forecasting.
So yes, the supply chain does stabilize better in the second half. And things are better than we'll look for upside. But we're being realistic in terms of what the outlook is. And we are prepared in terms of our capital in our staffing for whatever the customer requirements are.
Myles Walton
Okay. All right. Thank you.
Operator
Gautam Khanna, TD Cowen.
Gautam J. Khanna
Good morning. Tom, I was wondering if you could maybe elaborate. Last quarter, Nick mentioned what rate you guys thought you were on the 787 and likewise on the 737. Would you mind refreshing us on where you are right now. Are still at 5 a month and low 30s.
Tom Gentile
In the MAX, yes, we're still pulling really right now in the low 30s. On the 787, it's been in the [5% or 6%] range. We're obviously continuing to monitor the outlook and the demand signals that we get from from our customer. And we're staying closely lined out.
We're literally in conversations every day with our customers on all the programs, and we're staying very closely aligned to what their demand and their outlook is. But yes, that continues to be the same case this quarter as it was last quarter for the MAX 737.
Gautam J. Khanna
Okay. And just to be clear on the guidance revision that you provided today, is this more just anticipation of that which will be conveyed to you at some point or is that, as you mentioned, just may be just reflective of Airbus. I'm just curious.
Tom Gentile
It's reflective of everything that we're seeing in the market and also the demand signals that we're getting from both of our customers. So after the Airbus announcement, they have given us some indication of what the back half of the year will look like. And we are staying very aligned to them in terms of what will happen now.
It's important to also reiterate that our delivery system is quite complex. So for example, on the MAX we delivered a 30-plus locations, on the A320 over 80 locations, and on the A350, more than 75 locations. So all of those might have a slightly different demand signal in the second half. We're looking at the totality of it, though, as we make our determination for our guidance book.
We feel that, again, based on what we're seeing and hearing that a more cautious outlook for the second half is prudent and realistic.
Gautam J. Khanna
I appreciate that. Just to follow up one more time. On the Boeing side, are you anticipating been at below the rates you're at in the first half on those two programs in the updated guidance?
Tom Gentile
Well, we are going to continue to just monitor what our customers are telling us and stay closely aligned with their production schedules in the second half.
Patrick Winterlich
Just to add, I would -- as we communicated, second half sales are going to be very similar to first half sales. So I don't know that we necessarily see reductions, as Tom said. And as Tom said, it's really -- this is about delays in ramp increases rather than reductions. ns, as Tom said. And as Tom said, it's really about delays in ramping increases rather than reductions.
Gautam J. Khanna
Thank you, guys. Appreciate it.
Operator
Bert Subin, Stifel.
Bert Subin
Hi, good morning and welcome, Tom. Just to follow up on Gautam's question there, if we look at the guide you gave, if we look at the midpoint of that 1.94, it assumes $485 million in sales per quarter for the rest of the year, which would be a step down from the second quarter.
So is that just looking at mix across the programs and assuming the growth you were starting to get ready for in the second quarter moderates. It sounds like not necessarily pulling down programs specific production. So was just looking for a little more clarity on like the actual dynamics of what happens from 2Q to 3Q?
Tom Gentile
Well, what I would say is we expect the second half to look very similar to the first half, and that's at about the midpoint if you double it. So as Patrick just said, we're not expecting any decreases necessarily. We're just expecting things to remain flat and for potential increases not to materialize until later.
Patrick Winterlich
But please also, remember the seasonality. So we have a seasonality effect. So I wouldn't just assume three and four -- Q3 and Q4 exactly the same. Q3 is going to have that seasonal effect, especially in Europe. Q4 is going to be stronger than you can kind of put EPS align that as you assume Q4 is going to be stronger than Q3 because of the normal seasonality. So I hear your 485 number that don't just straight line in.
Bert Subin
Yes, understood. And then just a follow-up on the defense side. Could you give us a little more color? I think it was helpful, the walk that you did there in terms of talking about the F-35 and the V-22. But you had seen six consecutive quarters of double-digit growth and that's stepped down to 1%. Is that expected to step back up there? Just some lumpiness in the second quarter, obviously stuck by your mid-single digit guide. But just curious how you're thinking about defense for the rest of this year and the midterm outlook is the view still the same?
Tom Gentile
Yeah, the midterm outlook is still the same. We're still very bullish on defense. I think Q2 was just a bit lumpy. If you look at the first half of the year, it's still up by 6%, which is very good, solid growth. And by the way, that's solid growth over 17% last year.
So defense is going just fine. There were a couple of programs that had some ups and downs in the quarter. But overall, defense and space are going to be a very strong segment for Hexcel going forward. .
Bert Subin
Thank you.
Operator
Matt Akers, Wells Fargo.
Matthew Carl Akers
Hey, guys, good morning. Thanks for the question. Tom, I wanted to ask, you've been around the industry for a long time. As you go through some of these facility tours, where do you see the biggest opportunity? Is there some opportunity to streamline operations there? And how does that translate to cost takeout or working capital or better throughput or however you kind of want to quantify it?
Tom Gentile
Right. Well, first of all, Matt, what I would say is that Hexcel has world-class facilities. These are premier factories that have the latest state-of-the-art equipment for making these advanced composite materials in all phases of production. It's a continuous process flow, and there's a lot of activity that's underway.
There's a lot of continuous improvement activity leveraging the best of Lean as well as Six Sigma as well as APQP in terms of quality and efficiency. And there's opportunities for continued digitization and automation. So one of the things that we're doing, in fact, right now is upgrading the ERP and the MES systems, which are two critical systems to factory operations. And that's rolling out now across all the factories over the next 12 to 14 months. So that will be one aspect of improving in the factories.
The other thing is we've got an initiative which we call our Hexcel manufacturing initiative or future factory, which is really looking at what is the next level of technology to really improve the efficiency of our equipment and improve the output of these lightweight composite materials for the future. And the team have a lot of ideas, and we will be basically synthesizing those and putting them into an action plan that we'll be implementing over the next few years. So between continuous improvement, digitization, automation, and future investments in technology, all of those savings represent an opportunity to continue to drive productivity in our factories as we go forward.
Matthew Carl Akers
Great, thanks. Thanks. And I guess just one more on the industrial, the guidance change there. Could you talk about specifically what end markets drove most of that change?
Tom Gentile
Well, if you look at industrial, it's a smaller part of Hexcel's overall business today. Wind has declined a lot. The market has just changed, and it really is no longer leveraging the Hexcel premium fibers or materials systems. So that has diminished a lot.
Automotive was actually quite strong. It is now the biggest component. And as we go forward on in industrial, we'll continue to look for opportunities to focus on premium lightweight materials and where Hexcel can add a lot of value. And we do see some opportunities in some of the submarkets, but it's clearly changed, and that's why we guided to a double digit decline this year.
Patrick Winterlich
I would just sort of -- so exactly, as Tom said, so we continued to decline perhaps even slightly more than we expected. But really it's automotive. And we had a soft Q1 in automotive. If you remember, the growth in automotive just won't be quite as strong as we initially expected when we gave the guidance in January. So that's really the driver.
Matthew Carl Akers
Got it. Thank you.
Operator
John McNulty, BMO Capital Markets.
John Patrick McNulty
Yeah, good morning. Thanks for taking my questions. So the first one is around the cash flow and uses. So your buyback was more aggressive than we've seen in a while in the first half of the year. It's almost on pace to kind of match your full year free cash flow. So I guess how should we be thinking about your comfort in continuing on that buyback programs just given where the stock is right now, as we look through the rest of the year?
Tom Gentile
Well, I think you're exactly right is the buyback in the first half of the year is basically our outlook for free cash flow from the full year. So we're very bullish on the future for Hexcel stock. And we saw a great opportunity in the first quarter end, the second quarter to buy.
And so we'll continue to monitor the situation. We will look for opportunities to continue the share repurchases. And I think what you said is completely accurate. It was a great opportunity to buy, and we took it in the first half.
John Patrick McNulty
Got it. Fair enough. And then maybe just a little bit more on the commercial aerospace slowdown in terms of your numbers or at least a leveling off maybe with the with the first half. When you think about the second half and how things progress and also the timing of when you're delivering for where you're six months in advance of when your customers need the products.
Is there a risk just given the supply chain issues that this slowdown or this more muted rate drags on into the first half of 2025. I know it's a little bit of a pull out a crystal ball, but what your what you're hearing from your customers, how are you thinking about if this could drag into the first half?
Tom Gentile
We're not anticipating that. The messages that we're hearing was the second half of '24. It's going to be a little softer than expected. And so what I said is we're not seeing rates going down, but rather some of the increases being delayed and pushed out.
Next year and beyond looks just as strong if not stronger than before. And by the way, at the back half of '24. If the supply chain stabilizes and there's upside, we'll be prepared to deliver on. So we trimmed our guidance because of what we're hearing, but that's only really related to the second half of '24. '25, '26 and beyond, still look very strong given the strong recovery in air traffic and the backlog and the increase in production rates that we see coming.
John Patrick McNulty
Got it. Thanks very much for the color.
Operator
Your next question comes from the line of Gavin Parsons from UBS. Your line is open.
Gavin Eric Parsons
Good morning. Tom, it sounds like you have some guidance from the OEMs, but that maybe you're still having to guess as to what production rates might be? I know you talked about the complexity of the ship-to locations, but is there any way you can improve visibility or line of sight on that front?
Tom Gentile
Well, it's been a challenge for the whole industry over the last couple of years. Despite the fact that there is strong air traffic recovery, there's huge demand for aircraft that's reflected in the orders and the backlog. It's just been a little bit harder to predict production and deliveries because of a lot of supply chain disruption.
And so I wish we all had a crystal ball to see a little bit better, but that's just the reality of the situation. And so we've tried to be pragmatic and realistic about what the second half of '24 looks like in terms of trimming our guidance. But the medium and longer-term outlook hasn't changed.
Air traffic has recovered to well above 2019 levels. The backlog is bigger than it was pre-pandemic, and production rates are going up across all the programs over the next few years. So Hexcel has the capital in place to meet that demand. We have the staffing in place for short term requirements. And the outlook is very good. It's just that the back half of '24 is a bit softer than we originally expected and we trimmed the guidance quarter.
Gavin Eric Parsons
Got it. That makes sense. Any way you can quantify how labor efficiency or utilization has improved over the last few quarters after the hiring in second half of '23?
Tom Gentile
Well, you see it reflected in the improvement in the margin, and that's really a reflection of the operating leverage that we get. So don't forget back in 2019, Hexcel revenue was about $2.35 billion. And we had the same capital in place, and the headcount was a little bit higher. But the margins were in the 80% level. So as the revenues recover, you'll see the operating leverage drive margin improvement. And some of that will be due to labor productivity and efficiency as well.
Gavin Eric Parsons
Thank you.
Operator
Scott Mikus, Melius Research.
Scott Mikus
Good morning. Patrick, are you seeking any conservatism into the guide for a potential strike at Boeing and how that could impact their demand pool?
Patrick Winterlich
Yeah, the simple answer is no. I think that that would be a step too far. We're obviously very conscious of that negotiation about to happen. We will stay very close and as we always do align ourselves with our key customers, Boeing and others in this case. But no, we have not built in a strike, but we will obviously stay very vigilant, and we will respond react accordingly. And I think that would be a little bit too much to put that into our guidance.
Scott Mikus
Okay. And then for Tom, when you were at Spirit, you work to diversify sales mix to get more aftermarket and defense work. At Hexcel, do you think there needs to be some aftermarket exposure that you get through inorganic means? And then if so, has the Board giving you the mandate pursue that goal through M&A?
Tom Gentile
Well, the discussions I've had with the Board are very much focused on continuing to drive growth at Hexcel. And we're going to do that in a variety of ways. You mentioned defense and space. That's a key opportunity for Hexcel.
We've got a very good platform and base, and last year grew 17%. We're going to expect your growth as we go forward. So that's one big opportunity. We'll continue to look for other adjacencies. Aftermarket, it probably a little tougher for Hexcel given the lightweight materials that we provide. Either aren't as much -- there's not as much obvious opportunity in that.
We'll look for it. But the opportunity for us is to continue expanding our lightweight materials and next generation programs and expanding into some adjacencies, including defense and space and some industrial submarkets. That's where our focus is, and that's clearly what the Board wants to see is more growth as we go forward with continued profitability and margin improvement as we get the operating leverage with revenue recovery and continue to drive efficiency in our factories.
Scott Mikus
Thanks for taking my questions.
Operator
Ken Herbert, RBC Capital Markets.
I'm just wondering if you could give us a little bit more finer detail of what you're seeing at Hexcel from an OE build rate perspective now as compared to when you first joined? And then if you can kind of further bridge that between what you were seeing at Spirit when you had left there as well, I think that might be really helpful from an industry perspective.
Tom Gentile
You mean in terms of what we're getting on build rates from the --?
Build rates or just the supply chain generally as well, I think all of that kind of commentary would be helpful as we kind of dissect the build rates there.
Tom Gentile
What I would say is that the communication and the relationship and the partnerships with all of our customers, including the major commercial OEMs, Boeing and Airbus is very strong at Hexcel. We have a very active dialogue. We stay connected to them in terms of what their build rates are and what their future outlooks and plans are.
And so I would say the the dialogue and the information and the transparency is the same as I've seen elsewhere. And that's very important. And we're going to continue to do that because this is a very dynamic environment. It's extremely volatile. There's still some instability in the supply chain. But we want to stay very close to our customers and make sure that we are aligned to what their current outlook is and continue to evolve with them.
Patrick Winterlich
I mean, the one thing I would just add is just to state the obvious is that Hexcel supplying materials is different from many others applied, including spirit. So we tend to be earlier in the supply chain where, as we've said many times, four to six months ahead, sometimes more sometimes less, but largely. So you have to think that offset for Hexcel. So that is the difference. And there is the reality of where Hexcel is there in this supply chain.
I realize you guys have done about $200 billion in share repurchases with about $285 billion left in the authorization. Do you anticipate any change in the capital allocation priorities, we'll be looking to expand that $285 billion?
Tom Gentile
Well, I think the $285 billion gives us a plenty of headroom to do a lot more share repurchases. And our goal is to keep our leverage in the $1.5 billion to $200 billion range and to look at what our free cash flow generation is and determine how we want to allocate that capital. Right now, share repurchases are a very good use of cash, and we obviously did a lot of it in Q1 and Q2 and we'll continue to look at the opportunity in Q3 and Q4 as we go forward.
Thank you so much.
Operator
Pete Skibitski, Alembic Global.
Pete Skibitski
Hey, good morning, everyone. Hey, Todd, just in the way of thinking about other kind of land mines that are out there are risks factors. And maybe just first one, I think I know the answer, but due to storms that rolled through Houston is a big commodity town, Big Oil and Gas pounce on it for you guys anticipating any material availability issues as a result, the result of the standard way through there net, not right now?
Tom Gentile
No. I mean, we obviously monitor the situation. We're in close touch with our suppliers on our residents and in our accrual, nitrile those kinds of commodities. And we're not hearing anything right now that gives us any concern from from those storms that all.
Pete Skibitski
Okay. Okay. And kind of what your unique vantage point on spirits, you know, we all anticipate appeared to be absorbed by Boeing and impartially by Airbus. Can you pursuing any kind of issues with production rates as a result of that dynamic?
Tom Gentile
No, we don't expect that to be a smooth transition and the contracts will just carry on as they were before. So we don't anticipate any issues whatsoever.
Pete Skibitski
Okay. Thanks.
Operator
Michael Ciarmoli, Truist Securities.
Michael Frank Ciarmoli
Hey, good morning, guys. Thanks for taking the questions. Tom, maybe just back to the Army, you know, we've seen a lot of struggles in the supply chain. Looks like 26 stores to get there. It looks like it's going to be more back-end loaded. I mean, should we just be thinking more on the low end of this?
I mean, it would seem like it would be a challenge to get to the upper end now, especially with, you know, the Neo kind of rates getting pushed out.
Tom Gentile
And we don't re ally have that much time here for these wide body rates to double it. I mean, I think the confidence level in the supply chain, we've probably got to be more conservative.
So, you know, should should we think about board the low end? And then I get the same side. Is cash flow generation still think and greater than $800 million? Yes. Look, I wouldn't change the midterm outlook at all. We're very confident in the outlook. I wouldn't be saying low end.
I would be saying the same, if not even better, the demand is there. The and the plans are in place to increase to build rate. So we said 800 million over the three years, and we're going to keep to that and look to exceed it. Yes, we're very bullish on the midterm outlook, and we feel confident in it. Some softness, obviously in the back half of 2020 for the outlook for '25, '26 to '27 still remains very strong, if not stronger, based on the recent orders and the recent indications, unfortunately, innovation to see what happens in pharma and and what kind of orders come up, particularly for wide bodies .
And that's probably if anything, just going to improve the outlook.
Michael Frank Ciarmoli
Got it. Got it. Just last one on the cash. Given your product has a shelf life given the kind of softness in the back half, any kind of destocking risk for any kind of things moving around with inventories that we should be aware of?
Tom Gentile
No, I don't I don't think so. In terms of the shelf life for the product is a fairly long time. It's Captain freezers. It can be can last for over a year. And there's plenty of freezer capacity out there because everybody was producing at much higher rate before the pandemic. So so that's not an issue whatsoever.
Michael Frank Ciarmoli
Okay, got it. Thanks, guys.
Operator
Richard Safran, Seaport Research Partners.
Richard Safran
Tom, Patrick. Good morning. So from for cash conversion way back, when you did see a path to 100% made it clear, you weren't sure that we're going to happen at 24. But I'm wondering, since you're maintaining your bullish midterm outlook, is that something we could see in 2025 or my 400% cash conversion be more like 26?
Tom Gentile
No. I mean, it's a 2% adjustment in top-line revenue. Sort of put things in perspective. We still see that that lines 100% net income cash conversion from 25 and beyond. We're clearly moving in that direction and we still have that confidence. Right. Okay. And then just lastly here, one more question on M&A .
Richard Safran
I know your restaurants every once in awhile, you've been pretty consistent on about what you're considering a technology bolt-ons. I thought maybe you could comment a bit on the environment and the opportunity set if you're seeing attractive deals or since it's been such a wireless, just a case where crisis may just be too high and you can't just cut by the investment.
Tom Gentile
And on that topic, also, do you think the portfolio as it stands supports your growth strategy? Well, I'll take that first. In terms of the port, Philips absolutely supports the growth strategy that we have that we've got the recovery first over the next several years as production rates increase and we get back to 2019 levels of production revenue.
And then we have some new opportunities in space and defense. We'll continue to help us grow. On the M&A front. We're going to continue to scan the market and look for opportunities. But we're going to be very disciplined way out of work to do in terms of execution on the rate increases and continuing to drive productivity in our factories continue to innovate so that we can be on the next generation of programs, including the narrowbody as well, defense and space.
So so that creates a huge amount of organic growth over the next several years. And for M&A, we'll look for things that extend our advanced composite materials and provide some technology innovations slipped, but it has to meet our strategic criteria and also will have some very high return thresholds doesn't have to be an asset that, as we said, we'll continue to issue our dividend and consider future stock repurchases.
Richard Safran
Thanks a lot. Thank you.
Operator
Noah Poponak, Goldman Sachs.
Noah Poponak
Good morning, everyone. Fair enough. At the large commercial aerospace OEMs appear to be pulling from the supply chain at higher rates than their deliveries. Keep the supply chain humming along for when they eventually are ramping more consistently, how should we be thinking about the risks of how much inventory is in the system, especially given the longer lead time?
And I guess how much of the back half change is expecting an inventory destock and we have to think about that happening, you know, beyond 2024?
Tom Gentile
I think that is part of what's happening right now at the OEMs are ensuring that the supply chain can continue to get stable and to improve their efficiencies to the production rates go up their rate to do it. So I think it's just a question of smoothing the production over a time period and that trying to front load too much.
So I think with the OEMs are doing, it is prudent and it's going to help us stability and the financial and the operational strength of the supply chain. So I think it's a it's a good in a prudent approach to the production rate increases. And it's all about smoothing the demand between this year and next year.
Noah Poponak
So that the supply chain can get back to school. Just to follow up on what Tom said that, no, I mean, any meaningful program where that's really happening, I think is the max. I mean, I'm not saying it's not happening on the other is a little bit, but any meaningful one is the max and I would remind you of the shifts that back.
Patrick Winterlich
So on-demand sort of at the lower end of the RED 200 to 500,000 range. So really destocking impact because of an adjustment is not massive ahead. So on that particular program, where that sort of pull is slightly ahead of production. But as Tom said, we're very pleased with and Mondelez, but it's not we're not expecting a huge impact.
Noah Poponak
Okay. That makes sense. And then Tom, respecting that you're here now and you're not at Spirit now, but just given your tires for the company and then I guess yourself to just hear about Boeing, Boeing's seem to have the posture of the deliveries.
Tom Gentile
The Alpha was going to be very low until Spirit was pretty cleaned up than the traveled work in particular was no longer taking place and the fuselages were clean them to spec the June. I guess the June underlying production rate on the MAX looked pretty healthy when to where that stands?
I don't my whole focus has been on headcount, and I'm excited to be here and looking forward to the future. We've got a great opportunity as we go forward. So I'm excited about it.
Noah Poponak
Okay. Thank you.
Operator
Thank you. This does conclude today's conference call. Thank you for your participation, everyone. You may now disconnect.