Hexcel Corp (HXL) 2002 Q1 法說會逐字稿

Thank you for standing by. You are currently online for today's Hexcel Corporation first quarter earnings conference call. At this time, we are gathering additional participants. We expect to be starting in about 2 minutes. We do thank you for your patience and please stay on line.

Please stand by. We are about to begin. Good day everyone and welcome to the Hexcel Corporation first quarter earnings conference call. This call is being recorded. With us today are Mr. Stephen Forsyth, the Executive Vice President and Chief Financial Officer and Mr. David Berges, Chairman, President, and Chief Executive Officer. At this time, I would like to turn the call Mr. Forsyth. Please go ahead sir.

Good morning, everybody. May I welcome Hexcel's first quarter 2002 earnings conference call today, April 23,2002. With me today are David Berges, Hexcel's Chairman, President and CEO, as well as Michael Bacal, our Communication and Investor Relations manager. The purpose of the call is to obviously review our first quarter's earnings release that we distributed this morning. As always, we will be happy to take your questions at the end of our prepared remarks. Before beginning let me cover the formalities. First, I would like to remind everybody 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 including our 2001 10-K and today's press release. I will also remind you that the call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without express permission. Your participation on this call today constitutes your consent of our request. Well, having taken care of the formalities let me turn the call to Dave.

Thanks, Stephen. In this morning's call, we will review our performance for the first quarter, give you our view on the markets, and update you on our restructuring plan. We will also be happy to take your questions at the end of the prepared remarks. As you will see from this morning's earnings release, our reported results are well down from last year but improved over the last quarter. Because of the dramatic changes in our biggest markets since September 11, we will include both year over year and sequential quarter comparisons in today's discussion. First let me say, we are encouraged by the progress made during the quarter given the difficult state of some of our markets. Our electronics business remained depressed and we began to see the real impact of the projected decline in commercial aircraft build rates. But in response, we took another step change downward in our employment as we moved ahead with our restructuring program. And our fixed cost takeout goals exceeded for the quarter. As a result, both adjusted EBITDA and gross margin improved significantly from the fourth quarter levels. Good cash management and revised bank amendment have also bolstered our confidence. For the quarter, revenues of $221.1 million were almost 20% lower than last year and 7.1% lower than the fourth quarter. Adjusted EBITDA for the quarter was $25.8 million, down from the $38.9 million peak achieved in last year's first quarter, but up almost 30% from the fourth quarter despite the 7% sales decline. The main driver for the improvement was our fixed cost reduction program. Though we are also aided by more normal absorption rates, thanks to our stabilized inventory profile. As you recall, we have removed over $30 million in inventory last quarter in anticipation of revenue decline. These factors reflected themselves in gross margin and improved 17.8% of sales compared to the fourth quarter's 14.7%. Net debt increased by only $13.4 million to $687.7 million, less than we expected since the company traditionally has more cash demands in the first quarter of the year. In fact during this quarter, there were $9.4 million of cash restructuring payments, $19.1 million in bond coupon payments, and non-recurring cash payments of $8 million. So operations generated solid cash in the period. You will see in the details that we held the inventory gains of last quarter and had good capital spending control. To get a better understanding of our sales trends, let us briefly each market for our materials. During the quarter, our commercial aerospace business declined as expected with sales down 30% from last year's level, down 18.4% when compared to our fourth quarter. Because our sales tend to precede aircraft builds by 4-6 months, this decline includes some inventory correction by our customers. Recent Boeing and Airbus projections for 2002 and 2003 deliveries are still in the range we use to size our restructuring program and business plan. In the space in the defense segment, revenues were up by 5% over last year's first quarter, though they declined by about 6% from the unusually strong fourth quarter level. Revenues in this segment often vary quarter to quarter but the overall trend is higher for sales associated with military, aircraft, and helicopters in both the U.S and in Europe. Hexcel has a significant position on every US military plane and helicopter in production. We also have major positions on the leading European programs, especially the new Euro-fighter with a build schedule of over 40 aircrafts this year. Our industrial market segment again had double-digit year on year growth, income positive for wind energy blades and for unique applications of our materials in automotive markets. We also continue to see significant growth in sales of specialty fabrics used in [group west] and we have better than expected growth in recreational market sales. In total, our revenues for the quarter in the industrial markets grew 9.3% versus last year's first quarter, 5.3% over the fourth quarter, and represented 30% of the sales in the period. And finally electronics, sales of our glass fabrics for printed wiring boards were $16.5 million in the quarter or 7% of our revenues. Though this was up 4.9 million from the last quarter, it is still less than half of last year's $34.7 million first quarter. We still have not seen evidence of a substantial recovery in this segment nor do we care to speculate about if or when it may rebound. So in total our revenues came in as expected and our outlook remains about the same for the year. The decline of commercial aerospace sales will be with us for the foreseeable future offset in part by the strength in our defense and industrial markets. Electronics continues to be the wild card. With limited visibility, we manage with the assumption that the electronics sales will continue at a depressed level while we preserve the capability to respond quickly when our customers call for it. As for costs, during the quarter we pressed ahead with the restructuring program we announced on November 7 2001, and we have reduced our workforce by another 582 people in the quarter. So since September, we have reduced the employment by over 20% with a disproportionate decrease in management and overhead staffing. As you noted in the earnings release, our cash fixed costs were down by $17.9 million compared to the first quarter of 2001. Our $60 million takeout goal is clearly on track. The aggregate cash payments made during the quarter in conjunction with this restructuring program were $9.4 million. About $25 billion of cash restructuring costs remain to be incurred over the balance of 2002. In summary, I think Hexcel responded well to the dramatic circumstances that were beyond our control. In the six months since September 2001, we have cut fixed costs as if they were fully variable. We have obtained the support of our bank syndicate for our revised business plan and we managed cash better than expectations. While we are well short of the performance that we desire, our first quarter performance was evidence that we can react quickly to extraordinary pressures. And I believe we have established a cost control and cash management momentum that will serve us well in the upcoming quarters. With some level of stability achieved in a turbulent market, we can now direct more energy to the opportunities ahead. The recent aggressional authorization for renewable energy taxi centers will have a significant positive effect on our wind turban customers. The Airbus 8380 and the Boeing Sonic cruiser programs continue in development with a quantum lead income positive materials content likely. The proposed European A-400M military transport is expected to include even posting some income positive wins. Material selections on these future programs are being made now. Hexcel is uniquely positioned to participate in a major way. Our short-term issues will continue to require our diligent attention, although the long-term prospects of our products remain bright. Now let me turn the call back to Stephen to wrap up the financial details before we open the floor to your questions.

Thank you, Dave. Let me spend a few moments just to briefly cover some of the details of our first quarter performance before we open the call to your questions. As previously announced back at the end of January the company's bank syndicate approved an amendment to our senior credit facility that among other matters accommodated our projected 2002 performance plus a modest cushion. That amendment provided revised financial covenance that will accommodate our anticipated financial requirements throughout 2002. For those of you who haven't seen it, it was filed back then with the SEC attached to a form 8-K. As at the end of the quarter, Hexcel has income plans for all of those revised covenants. As of March 31, 2002 the company had ingrown over that overdraft availability under that senior credit facility of $65.2 million. Now in the first quarter as of January 1, Hexcel adopted the new accounting standards for goodwill and business combinations. And as a result, we ceased the amortization of goodwill that had previously been recorded under Selling, General and administrative expenditures. Goodwill amortization in the first quarter 2001 had been $3.2 million and in the fourth quarter 2001, it had been $2.8 million. As we are no longer amortizing goodwill, our depreciation expense full quarter first quarter 2002 was $11.8 million, an anticipated rate for the balance of the year. As we would have expected, the window changes in the current value of our goodwill upon the adoption of the future accounting standards have been reviewed carrying values back in the fourth quarter. Interest expense for the quarter was $17.6 million and included expenses associated with the bank amendment of 1.7 million. The company's tax provision was $2.5 million in the quarter and it was the taxes that need to be provided on a European income. As you will recall, we established a non-cash fabulation allowance against all our current generated US net operating losses. Equity losses in the affiliated companies for the quarter was $2.4 million, reflecting the ongoing impact of the electronics market decline on our Asian Electronics joint venture together with the effect of stock-up losses associated with our engineering product joint ventures in China and Malaysia. Just to remind you though, these JV results do not have to impact Hexcel's cash flows. Having covered those details, that completes management's comments on our first quarter results. I will turn the call to the conference call operator so that we can start the question and answer session. Thank you.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key followed by the digit 1 on your touchtone telephone. Once again if you would like ask a question press *1 on your touchtone phone. We will pause just a moment to assemble our roster. We will take the first question from Adam Plissner, Credit Suisse First Boston.

Good morning.

Good morning, Adam.

The first question, David, you had talked about the inventory correction. It is sort of implicit in the first quarter. Is there a way that is distinguishable to you guys, where you could have a sense that on a going forward basis, that there may be a more normal ordering pattern going forward and that sort of getting behind of you, or is that too tough to tell.

I think the best indication you can have is maybe looking at Boeing's reports last week that there sales in the first quarter were sum of the last year or so. I think it is safe to assume that the volume decrease that we have seen and it is a similar situation with Airbus, though they are not dropping as much. We are well ahead of them from a stepdown standpoint. I do not know whether we are finished or how much more there is. There may be going rate adjustments around mid-year or so. It seems to make sense that we have absorbed a good share of it in the first quarter, but only time will tell.

Okay and as you just mentioned, the production decline has sort of layered in throughout the year. I know Boeing started their production declines later this year for some of their wide body aircrafts etc., and we know that you guys, with the time lag, actually start shipping early for 2003 build rates, which are obviously scheduled lower than 2002. All that considered is there a need at this point as look at it, it does not sound like it from your comments, that you need to take additional measures on the indirect side or is it just additional flex-down on the direct side.

Well, we have got time to wait and see on it. I think we have done most of what we wanted to do for the start of the year. We do assume that next year will be a further stepdown in the aircraft build, at least in our business planning. So we expect that as it is time to position for that, we will have further actions.

And Stephen, when you look at the cost savings, I guess I am a little bit confused on ... it certainly sounds like you are ahead of schedule in terms of the cost savings achieved thus far and the run rate looks like it leads to that, but if nothing else changes in the terms of top line going further in the second quarter, do you have the full run rate of what you would expect in the 60 million in the first quarter as your opportunity going forward, that additional...

I think it is true to say that most of it is fair. If you look at the comparisons for the first quarter or clearly of 2001, you are comparing a point of time where we have really seen the full impact of the downturn of the electronics market last year. So the comparisons get a little tougher as the year goes on. But I think you got the most of it there. We will obviously continue to drive out the balance. However, things have always, as David has commented, is probably a function of planning.

Right. You know, Adam, the way I keep score of this... two things we did. When we picked the target, we had everybody compare to the second quarter, which we thought was the pre-September but post electronics run rate. So the second quarter comparison is really where I benchmark, coincidentally it works out about the same for the year. We are just about there on the 60 and that is what the year over year should look like. It is not something that we will continue to compare over a quarter on quarter, though.

What actually is the 8-million nonrecurring cash cost were announced in the quarter.

They were the payout of certain pension and deferred compensation payments to the [_____] attributed this quarter.

Okay, thanks gentlemen.

We will take our next question from Sarah Thomson with Lehman Brothers.

Hai. Actually I just had a followup on the cost payments and you may have answered the question already. The 60 million in annual fixed costs and that would ... I thought you said in the first quarter your fixed costs was 17.9 million less than the first quarter last year.

That's right. Last year's first quarter was our highest though because we were running electronics at full capacity.

Can you just remind me what you took out for fixed costs of electronics?

I am sorry. I am not hearing you very well...

Could you tell me what you took out of the electronics for the fixed costs.

I do not have the absolute number but we targeted $60 million over the total year. We had an easy comparison in the first quarter, but $60 million is still where we should end up on cash fixed cost takeout this year versus last.

Okay. I was just trying to figure out if there was anything incremental from electronics that we weren't picking up, but it sounds like a fixed DSFO number.

That's right.

Okay. On the military side, I know it is kind of [lumpy] on a quarterly basis, but do you still feel that about the 15-20% increase?

I do not think we said 15-20, we said 10-20.

Okay 10-20.

We have got to pay attention to what goes on in the future here. We obviously had a slow start for the year, but there are some deferrals on the V-22, but so far we are staying with our guidance.

And then, just a last question.

You made an observation in the third quarter and fourth quarter that we were... we did not make that observation this quarter. So I think you jumped to the conclusion that is ... that is the cost savings we are giving you some benefit now.

Okay fair enough. Is it possible to find whether you are neutral or are you actually generating anything from that business?

Let me address that point when we file for Q2.

Okay thank you.

Once again, it is *1 if you would like to ask a question. We will go next to [Hittle Alshom] with Deutsche Banc.

HITTLE ALSHOM]: Hai. Good morning gentleman. Just a couple of quickies, first with capital expenditure... it came in at 2 million, which is below what was I expecting... I was still thinking about a 20-25 million capital expenditure in a year, has anything changed there?

We are staying with our guidance on that.

HITTLE ALSHOM]: So it is just some timing issues.

I think we said less than 25 million and we are still less than 25 million.

HITTLE ALSHOM]: In terms of electronics business, obviously still depressing, how are you stacking up versus your competition... has there been share loss or is that where the whole industry is still?

The volume is so small that is kind of hard to track it and it is also kind of lumpy. There are a lot of spot buys going on and we are starting to see some activity in Asia, which is where we expect it to start...I do not know if I have seen share numbers, nor that I would share them, nor that I would share them, nor that they would make much sense for this low volume levels.

HITTLE ALSHOM]: Okay. Fair enough. And finally, you have spoken in the past about generating cash from working capital during the year and obviously first quarter was a cash usage... should we start to expect in the second quarter some cash generation from working capital?

I think the dramatic takeout in the fourth quarter is the principal reason. I mean if you put the two quarters together, they would look pretty good. Second quarter typically is a little stronger seasonally from a sales standpoint. It remains to be seen what will happen with the aerospace stepdown and inventory corrections there, but we have to pay attention to what the volumes are... so there might be some inventory requirement if volumes pick up in the second quarter.

I will also make the observation that the negative you see is because that is the line where you capture the reduction in accrued liabilities we talked about.

HITTLE ALSHOM]: All right. Thank you.

We will take the next question from [Rand Wilson] with Merrill Lynch.

RAND WILSON]: Hai. Most of my questions have been answered. I just have one question... can you tell me what the actual cash fixed costs were in the most recent quarter?

We did not disclose that. We just disclosed the change and you might ask us why can't we disclose that... we obviously didn't because of some the stuff is competitively sensitive so ...

RAND WILSON]: In your 10-K you say that you are going to have a 20% decline in you cash fixed costs and you are going to get 60 million...so it will sound like 300 million.

We won't be talking about them...

RAND WILSON]: That is for the year. I was curious whether it is on a quarterly basis.

I told you earlier that because electronics were running a lot hotter a year ago, it is higher in the first quarter than later in the year, and obviously we cut off through the year... so you could surmise that it steps from beginning to end high to low.

You also see a bit of proxy for it if you look at the changes in the SG&A spending because while we cut across a little over the board, roughly at the same rate, so you get a sense where the changes are in the SG&A spending.

RAND WILSON]: Is that where most of the $60 million is going to come from?

A pro rata share is going to come out of it.

RAND WILSON]: Pro rata versus cost of goods sold on total cost.

When I saw pro rata, cash element of SG&A will come down about 20% as will the cash element of the fixed overhead in the cost of goods sold.

RAND WILSON]: Okay thank you.

Gentlemen, it appears there are no further questions at this time. I would like to turn it back to you, Mr. Forsyth, for any additional closing remarks.

I just want to thank everybody for your participation. We look forward to reporting on how we did in the second quarter in three months. We will see you then, bye.

We thank you for your participation in today's conference. And that does conclude the call. You may now disconnect at this time.