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John J. Lee
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Following three years of strong, profitable growth, 1999 marked a period of transition and consolidation for the company. Driven by macroeconomic changes, Hexcel’s financial and stock market performance weakened dramatically. Although the effects of these market challenges are waning, their influence is likely to continue in some capacity into 2000. However, management moved during the year to proactively address these issues by adopting programs to reduce costs, improve operational effectiveness, reduce debt and sharpen operational focus on our core businesses. As a result, Hexcel is now well positioned to face these new market conditions. Looking ahead we see growth and improved profitability in all primary markets. Furthermore, we are committed to realizing Hexcel’s true market value and are currently positioning the company to deliver acceptable long-term returns to all of our stockholders.
Changing World
While the outlook for our core markets is now positive, 1999 was a very challenging year. Our two largest markets, commercial aerospace and electronics were significantly impacted by the aftershock (effects) of the Asian economic crisis that emerged in 1998. In addition, initiatives by Boeing and other customers to reengineer their business processes further affected the commercial aerospace market. And finally, we had to contend with a carbon fiber market that changed from a period of short supply to one of excess capacity.
Asia’s problems impacted both the demand for new aircraft, as well as the type of aircraft produced. The impact is most evident at Boeing where aircraft production will decline to approximately 490 aircraft in 2000 from 620 in 1999. However, total aircraft production in 2000 and 2001 by Airbus and Boeing will be around 800 aircraft annually, still a very robust level of output. Unfortunately, many of the order reductions and cancellations for 2000 were for wide-body aircraft, thereby creating a less profitable product mix for Hexcel due to the decreased amount of composite materials needed. As a result, Hexcel’s performance declined beginning in 1999’s second quarter concurrent with the company’s material shipments for the 2000 aircraft production cycle.
At the same time as these shifts in demand occurred, the aerospace industry in general moved towards an “automotive” production model. The industry paradigm of superior performance at any price was replaced by adequate performance at a competitive price. As a result, aerospace companies have adopted “lean manufacturing” principles to decrease product cost through reduced inventory levels, improved production efficiency and shorter production cycles. These initiatives resulted in an industry-wide inventory reduction, which became evident in the third quarter of 1999. Although a number of customers are indicating they have achieved their initial inventory reduction goals, we expect most companies to remain focused on improving manufacturing efficiency and asset utilization. Obviously, these changes coupled with the changes in build rates made forecasting a particular challenge during 1999.
In our electronic materials business the Asian economic crisis negatively affected regional demand in the electronics market thereby creating excess supply in Asia. Asian producers of fiberglass electronic materials placed greater emphasis on exports to Europe and North America, resulting in reduced pricing and margin pressure around the world. Our Hexcel-Schwebel business unit adapted to this new environment by adjusting prices to maintain market share. In the second half of 1999, demand for fiberglass electronic materials began to steadily strengthen following the global growth in demand for personal digital devices and other electronics. Hexcel is expected to benefit significantly from this continuing market trend going forward.
