Hexcel Corp (HXL) 2002 Q2 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone. And welcome to this Hexcel Corporation's Second 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 over to Mr. Forsyth. Please go ahead, sir.

Thank you. Good morning, everyone. Might I welcome you to Hexcel Corporation's Second Quarter 2002 Earnings Conference Call on today, July 23rd.

With me today are David Berges, Hexcel's Chairman, President and CEO, as well as Michael Bacal, our Communication and Investor Relation's Manager.

The purpose of the call is to review our second quarter earnings release distributed this morning. As always, we'll 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 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 and 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'd like to also remind you that this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

Well, I've taken care of formalities. Let me turn the call over to Dave.

Thank you, Stephen.

If you've had a chance to get through our earnings release this morning, I hope you will have concluded that by virtual any measure, except revenues, this was a quarter of solid progress for Hexcel.

Unfortunately, our commercial aerospace sales were as bad as expected, driving our total company net sales down 13 percent to $221.2 million or about $32 million lower than the second quarter of 2001.

But with the help of our ongoing restructuring program, adjusted EBITDA for the quarter was 31.3 million, on 2.1 million lower than last year. Compared to the first quarter of this year, we improved adjusted EBITDA by 5.5 million, a 21-percent gain on essentially flat sales.

Our gross margin rate of 20.3 percent of sales was about the same as in last year's second quarter and up two-and-a-half points from the 17.8 we reported in the first quarter.

Operating income, adjusted operating income and net income were all better in both the last quarter and the same quarter last year.

Even more gratifying, however, was our progress on cash management. We reduced net debt by $33.5 million in the quarter, to 654.2 million, the lowest point since the September 1998 acquisition of Clark-Schwebel.

So despite $23 million in cash restructuring costs over the last 12 months, net debt is now $50 million lower than it was a year ago after what I certainly hope will go down in history as our darkest period. More on our debt outlook later.

Now let me hit the revenue picture by market. The 27-percent year-on-year decline in commercial aerospace revenues for the quarter were comparable to the impact we saw in the first quarter.

Remember that our sales tend to precede aircraft build rates by four to six months. So we think that most of the announced line rate adjustments and inventory corrections have been absorbed in this half.

So given our position in the supply chain, we should now be starting to see demand based on the 2003 anticipated build rates. Of course, this same stagger affect will help us see any upturn on average two quarters before the primes step up their production.

We are encouraged by recent industry projections that suggest 2003 deliveries will be closer to 600 than 550 in aircraft, well within the range we use to size our restructuring program and plans.

But we, at Hexcel, stand ready to respond either way. If the rates go down further, we'll act on cost like we have since November. At some point, we hope for good upside leverage as we hold fixed costs down.

With comparisons starting to ease in the fourth quarter, we still see our year-over-year revenue guidance as on track.

In the space and defense segment, revenues were up by about 18 percent over last year's second quarter and up by about 10 percent from the first quarter level.

As a new generation of military aircraft and helicopters continue to move into production, the revenue outlook remains one of growth. It's worth noting that we have a significant position on the troubled V-22, as well as the depressed satellite and launch vehicles markets. So our underlying growth in this market is being somewhat muted.

Our industrial market segment grew 3.3 percent versus last year's second quarter but short of the solid eight to 10-percent growth rate we've seen in our last two years.

The four-month delay in the U.S. tax credit extension for renewable energy temporarily broke the stride of our wind energy customers. Now that legislation is passed, we expect this major segment to get back on its growth track in upcoming quarters. And we still like our prior guidance for the year.

Finally, electronics. Sales of our glass fabrics for printed boards were $14.5 million for the quarter, only six percent of our revenues. This is slightly down by $2 million from both last quarter and last year's second quarter but not enough to lead to any conclusions.

We still have not seen evidence of a recovery in this segment but stand ready to participate when it does.

Just before the meltdown, we spent significant capital to provide state-of-the-art equipment capable of supporting the demand for next generation lightweight substrates. And employees have helped us develop a rotating short-time scheme that positions us for rapid response to customer needs.

We've done what we need to do to make this business close to profit and cash neutral and look forward to the leverage a recovery could provide. As always, I offer no guidance as to when or even if this will happen.

As for costs, the foundation of our performance progress this year has been our ability to make our fixed costs variable as revenues have declined. With the benefit of the actions, June year-to-date cash fixed costs are 23 percent lower than the first half of 2001.

Have sales bottomed? We truly don't know. But we know that we should accept no concept of a bottom on what we formerly referred to as fixed costs.

Now, back to cash. As stated earlier, we generated 33.5 million in free cash flow this quarter. We've had the help of an $11.1 million payment from our litigation with Hercules. Our 22.4 million came from operations, earnings, working capital improvement and good capital expenditure control.

During this quarter, we also covered $5.4 million of cash restructuring payments that will provide savings in the future.

As for the future of our net debt, you can expect continued focus and progress on working capital and cap ex.

This morning's release also points to a restructuring of our agreement with our partner in our Asian Electronic joint venture. This has already generated a $10 million cash receipt in July and provides us the contractual opportunity to obtain another $23 million next year.

While our heavy European presence makes our third quarter a seasonally soft sales and profit period, it has historically been one of our best cash quarters. So with the JV cash receipt and the cash control momentum we've developed, I would expect positive cash trends to continue.

We are well ahead of any covenant restrictions described in our bank amendment announced in January. We are - we are aware that these will need to be revisited in the fourth quarter. And we are certainly aware of our 2003 debt maturities, such as the $43 million redemption of our 2003 convertible notes in August of next year.

With solid two quarters behind us - with a solid two quarters behind us, we are now working on these future obligations. While we are not ready to describe our specific plans, we've narrowed our auctions and are actively working on a solution.

Now, let me turn the call over to Stephen to wrap up some financial details before we open it to questions.

Thank you, Dave.

Well, I'm just going to quickly fill in a few details of this morning's release. Firstly, the litigation gain. As previously announced, the company recognized a litigation gain of $9.8 million in connection with the contract dispute with Hercules, Inc. That dispute arose out of the acquisition of Hercules' composites products division in 1996.

The net cash proceeds received were $11.1 million, which was in satisfaction of a judgment entered in our favor after Hercules had exhausted all appeals from a lower court decision in New York courts.

On the debt front, debt, net of cash, decreased by 33.5 million to 654.2 million as of June 30th, 2002.

The company had undrawn revolver and overdraft availability under its senior credit facility of $82.7 million as of June 30th. This availability, together with the cash on hand, allowed Hexcel to easily meet the June 30th, 2002 liquidity test contained in our amended senior credit agreement and be comfortably within all of our financial covenants.

You will have noted that interest expense was lower than the first quarter, being at $15.3 million, which is a more normalized level. You'll recall that the first quarter expense included the cost of amending our senior credit facility on January 25th, 2002.

Our tax provision was $3.1 million in the quarter. And that related to taxes on our European income. The company will continue the establishment of a non-cash valuation allowance attributable to generate U.S. net operating losses until such time as the U.S. operations have returned to consistent profitability.

In terms of our investment and equity and losses, during the quarter, we wrote down the carrying value of our Asian joint venture, whose estimated fair market reflect the terms of our agreements that David has described.

In connection with that action, we recorded a non-cash $4 million write down. But there's no benefit for taxes recognized on that write down.

Excluding that write down, the equity and losses affiliated companies for the quarter was 1.6 million, reflecting the ongoing impact of the electronics markets decline on that Asian products joint venture, together with the affect of the startup losses associated with our engineering products joint ventures in China and Malaysia.

Just to remind you, these JV results do not affect Hexcel's cash flows.

Lastly, you'll note that we reported with the benefits of the litigation gain, net income this quarter for the first time in over a year.

Now, due to our tax circumstances, it's not easy to adjust that net income figure to show you what would be a recurring amount. It's simpler for us to look at pretax income on adjusted basis.

Pretax income, excluding the non-recurring items for the quarter, was $4.3 million. And that compares to $4.8 million in the second quarter of 2001 if adjusted both to reflect the same non-recurring items but also to exclude goodwill amortization from the 2001 results and make it comparable with the current accounting practices.

This was a notable performance if you look at it in light of the reduction in sales that has occurred between these two periods.

Well, that completes management's comments on our second quarter results. If I may return you to the conference call operator, we'll be happy to respond to your questions. Thank you.

Thank you. If you would like to ask a question at this time, please signal us by pressing the star key, followed by the digit one on your touch-tone telephone. Once again, please press star, one to ask a question at this time. We'll pause just a moment to assemble our roster.

And we'll take our first question from with Credit Suisse First Boston.

Good morning.

Good morning, .

Nice quarter, gentlemen.

Thank you.

I just wanted to start with looking at the top line. David, you had made some comments that it seems as if, from what you can tell at this point, the inventory adjustment has been reflected in the last couple of quarters, as well as the lower volumes. And you're, sort of, on your way now to reflecting the lower 20003 build rates, as well?

It's a bit speculation, , because the supply chain is pretty complex. But, I mean, we are running at a rate that is now in line with Boeing and Airbus and have been for some time. So after six months, it's my belief that there shouldn't be any inventory lingering out there that will affect us materially.

OK. And as a clarification, you said that you're actually shipping today towards the lower 2003 build rates?

Yes, to the extent that they're the same as the second half of this year, which all indications are that the will be.

OK. And is there indication that - you know, we had probably talked in the past about the potential for in past downturns, either the contracting on price and/or seeing additional competitive pressures in terms of pricing. Can you give us an update on what's happening on that front?

That's a competitive world and we work it every day. We tend to - we tend to work to achieve share when there's new potential sales available and tend to resist if there's not something in it for us. So far, I would say I can think of no examples where our customers are not honoring their contracts. And a lot of what we have are on long-term contract.

Are there any significant contracts that are coming up for renewal?

Most of our big contracts go through 2004.

OK. Just lastly, I guess, Stephen, you made a comment, I guess, in the - in the press release, as well, that Q3 is obviously going to be a seasonally softer quarter. How does it play out in terms of - in terms of the cash quarter for you?

From a cash perspective, look back in history because revenue shrinks, working capital shrinks. And so, it's usually a pretty good cash quarter for us.

OK. Good. Great. Thanks, gentlemen.

Welcome.

And we'll take our next question from , Deutsche Bank.

Hi. Good morning, gentlemen. Can you just give us some color - obviously, you guys did a great job on the cost side - just give us some more color how you were able to beat your expectations of 20-percent cost reductions now standing at 23 percent and perhaps growing?

Well, I said last quarter that I'd just as soon not be talking about the 20-percent target. It was a - it was a target that we scratched out on the back of an envelope in November and converted into a program on November 7th.

What we need to think about is always trying to get productivity gains and take cost out, particularly in the are of fixed cost when the market isn't in a growth mode. So I would like to characterize it as more a new culture that we've got in this company.

OK. Great. You guys spent, I believe, around 5.2 million of cap ex in the first half of the year, which was, you know, below where I had anticipated. Should I be thinking about a lower full year number than maybe we - you know, we, the market, were previously thinking about?

You're welcome to think what you want. I would suggest that what's happened is a little bit of course direction like a - like an inventory correction in that a lot of the cash that was going to capital expenditure was for a growth scene that isn't there anymore.

That's not to say we won't have some unique positions of growth within some of our markets nor maintenance needs in the future. But everybody is focused on cash management. And so, I think we had a very good response from the organizations. I wouldn't say that that's the proper amount going forward.

Let me put it this way. If you guys spent 16.9 in last year's second half, would you expect to spend something along those lines or should we expect a lower number?

I haven't really looked at it, to tell you the truth. I trusted everybody is putting together what approvals for capital expenditures they need going forward. And we review them one at a time, as long as everybody's under budget. I haven't spent a lot of time forecasting.

OK. Great. And just finally, you guys spent, I guess, 14-and-a-half million of cash restructuring costs year to date. How much more of cash restructuring costs do we have for the remainder of the year?

Well, we have a balance in the charge that we took last year of about 20 million. We are reviewing - we are reviewing the business situation right now with each of our businesses. And we don't have specificity yet to announce on what actions will be taking place in the second half.

OK. Great. Thank you.

And we'll take our next question from Sarah Thompson, with Lehman Brothers.

Actually, a couple of questions. One is a follow up. I think I just misunderstood what you just said. How much of charges you took last year cash?

I didn't understand that. Say it again, Sarah, please.

The charges that you took last year, how much of - how much is left to pay out cash on this? How much cash ?

You're asking what - you're asking the same question as the previous quarter, which is...

Yeah. I'm saying I think I just didn't understand your answer.

Yeah. You're asking what are the cash restructuring expenses in the second half of the year?

No. No. I'm asking you, of the - of the charges you've already taken and you've got accrued liability for, how much cash still has to go out the door in the second half of the year?

question. Well, we've got 20 million of the accrual is still there. And David just mentioned that, you know, what we're looking with the business units is to what will be their spending patterns in the second half of the year with respect to that 20 million.

OK. So there's no more that will flow through the P&L?

I wouldn't say that. There's, I'm sure, some small bits and pieces that will still need to go through the balance of the year. But you've seen that what's going through the P&L, which relates under the accounting rules of things where you're moving equipment and relocating activities, those things are, you know, comparatively small and a trickle at this point.

OK. And then, second question and this was actually asked earlier, as well. But on the commercial aerospace side, obviously if Boeing and Airbus are and build rates being 25 to 30-percent lower next year and you guys are four to six months, how does that - that would suggest that your revenues in the second half of this year on the commercial aerospace side will be lower than the first half of the year?

Well, our first half, if you'll - if you'll look at both quarters, is, I think, 27-percent down versus the prior year. So that's partly why I'm saying I think we've felt pain pretty much already. And so, we should be at this run rate. And come the fourth quarter, we'll start getting some easy comparisons.

So - I'm sorry. When you're saying the run rate, are you saying the run rate on a year-over-year basis or on a sequential basis?

First half, year over year versus - first half of this year versus first half of last year, I believe 27 percent I the commercial aerospace segment.

Right. And what I'm asking is, is the second half of this year going to be down 25 percent versus the second half of last year?

I didn't actually look. But I believe we gave the guidance through the full year between 25 and 30. And we're holding to that. You've got a strong third quarter of last year when you factor in the typical third quarter seasonality. And I believe we started showing some significant softness in that segment in the fourth quarter but not as dramatic as the first.

OK. And given that - I'm just trying to . I'm not trying to be difficult. I'll just catch you off line. Last question is on your bank requirements, are they - do they have a cash regenerate? I know you paid them down on the litigation proceeds. But is that the same on the proceeds in the JV and cash regenerate from operations?

There aren't what people would understand as a sweep type condition in those agreements. Those agreements do have, you know, the usual sorts of net proceeds language which describe how you treat specific receipts of money.

The - your litigation proceeds were specific called out in the seventh amendment or something, that would pay down debt upon receipt. And so, that's why you saw that as an immediate action.

OK. thank you.

Thanks.

Once again, if you would like to ask a question at this time, please signal us by pressing the star key, followed by the digit one on your touch-tone telephone.

We'll take our next question from , JP Morgan.

We'll move next to with Conseco Capital Management.

Hi. Congratulations on a good quarter.

Thanks, .

A question regarding the V-22. As you mentioned, that is a troubled program. And I was wondering, if the government decided to cancel that, you know, could you discuss how much revenues you get from that on a yearly basis, what impact it would have on you?

Well, you know, that isn't a piece of public information I can give you. The reality is, though, that we've already seen a fairly significant impact between 2001 and 2002.

You know, back in 2001, they built, you know, what, 11 or 12 of those aircraft. They then, sort of, suspended production so they could do some of this redesign and reengineering for a proportion of this year. And so, there's been quite a pronounced reduction in revenues.

And we now wait to see if that reengineering and redesign is successful. You know, certainly, they're forecasting that it's a program that will come back to the prior production rates and then higher starting next year. And it's one where we understand there is a significant demand for the services.

You know, this is a, sort of, successor aircraft to the helicopter and important to many parts of the military services.

So how many are you building in '03 and how - excuse me. How many are you building this year and how many do you expect to build next year?

I think the expect-to-build rate this year with the - you know, with the hiatus, is something like six or eight this year.

I think they are projecting in the - you know, the most recent, sort of, DOD numbers, 11 or 12 again next year, then 22 the year after. I think it's 36 the year after that, which, of course, happens, will be, you know, tremendous additional growth for us.

But relative to your original question, I think we've taken a lot of the damage already in terms of a step down from where it has bee produced over the last couple of years.

The second question regarding the joint venture, how likely - can you discuss the contract for you to receive $23 million next year? Is that a put option? You know, do they have to buy it?

It's a put and a call. So they can - they can choose to sell it or we could choose to - I'm sorry. They can choose to buy or we could choose to sell.

OK. So your put option, you can choose to sell it 23 million in the second half of next year.

That's correct.

And they can - their buy option, they can buy it at any time?

I believe that's also second half of the year.

OK. And why is it second half of 2003? Is it so the business ramps up, you know, financing ? But why not until late next year?

Well, this was a part of the major discussion on a whole host of options and discussions on distribution, on territories, on licenses. And it's just how it ended up.

Fair enough. And I understand that, you know, you said that you're working on your '03, you know, convert. Does your bank agreement allow you to purchase the converts and/or bonds in the open market at a discount?

It does not.

OK. Thanks for your time.

Thank you.

Once again, please press star, one to ask a question at this time. We do have a follow-up question from , Credit Suisse First Boston.

David, you mentioned - you've obviously responsive on the cost side for the change in volumes. the possibility of the volumes unexpectedly were to drop off further, at what point does it make sense that you shift from a headcount focused strategy to actually downsizing capacity?

Well, I don't - I don't think I could answer that unless you told me what's going to happen two years beyond. If someone tells me people aren't going to fly anymore, I'd have a different plan, I'll grant you.

We certainly took more the headcount actions. We looked at every element of fixed costs. And there are a lot of things in fixed cost besides headcount.

right.

Headcount is the quickest driver, of course. We didn't get too far into even looking at closing plants and the like, number one because this company has done quite a bit of it in consolidating through all the acquisitions.

Number two, it takes so long and takes so much cash that by the time we'd get it done, hopefully, the market would be back. So unless you tell me people are going to stop flying, I don't see any major move in that direction.

And I know it's hard to talk for the competition. But generally, can you talk about what the industry capacity is looking like or, for instance, the Japanese competitors shutting down capacity or any of your direct competitors here shutting down capacity?

I really can't imagine - I don't know the true answer to the question. But I can't imagine people, you know, capacity with this industry, if you're talking about aerospace. I mean, anyone who thinks that airports aren't going to be crowded again, be flying again, just ought to be in another business.

OK. Great. Thank you.

And we'll take our next question from , with .

Yes. Hi. Could you just break out the 19.6 million on the cash flow statement from working capital and other? And then, also, the 10 million from the joint venture proceeds, will that also be required to go to the banks? Thanks.

In terms of the working capital, I think you can get, sort of, an indication from it - from the balance sheet. I mean, when you look at the cash flow statement, you know, the cash flow statement the impact of changes in the foreign exchange rates, including some of our working capital assets in Europe have increased in value during the quarter.

But if you look at the relativities, you'll see that accounts receivable are actually down a bit compared to where they were at the end of the first quarter. And that's probably the most significant contributor to the improvements in working capital in the quarter when you do it on a constant currency basis.

But what else is in the 19.6 million? Because when I run through the - if I run through the the balance sheet accounts, I don't think I get to that big of a number.

Yeah. Well, that's why I'm describing the impact. You know, when you do the cash flow statement, you decompose out of there the affect of changes in the exchange rate so that the change in working capital reported in the - in the - in the - in the cash flow statements is more of a constant currency number.

And so, what you would see in the balance sheet is the part of the change in the value of receivables and inventories, the impact of exchange rates and those in the balance sheet, you pull those pieces out when preparing on a cash flow basis.

Great. And the 10 million from the joint venture?

The 10 million from the joint venture falls under the net proceeds language under our bank agreements.

There is not a requirement to immediately pay down debt but depending on a set of circumstances that you - a set of tests you have to go through, we may have to use that money in the medium term to repay back debt.

Does that answer your question?

Yes, thanks.

OK. Thanks.

And there appears to be no further questions at this time. I will turn the call back over to Mr. Berges for any additional or closing comments.

Well thanks, everybody, for joining us. And I appreciate the compliments for those of you who said a good quarter. As I said to the people here at Hexcel, this wasn't a good quarter. This was good progress. You want to see a good quarter, give me another swing at a billion dollars of sales with this cost structure and we'll show you a good quarter.

We are very pleased with the progress and how this company responded well ahead of - quickly to very difficult market situations. And we've delivered what we think is a solid first half performance under the circumstances.

What gives me the greatest pleasure is the culture of confidence that I think we've developed in the process. I think the entire organization has come to understand that fixed costs must be driven to variable in a down cycle. And mind you, when we have an up cycle, we'll not talk about fixed cost being variable.

And now, we also understand that a widespread focus on cash can yield some dramatic results because almost every employee, in one way or another, can affect our cash performance. So we're pretty pleased with the progress. And thank you very much for your attention.

This does conclude today's conference. We thank you for your participation. You may now disconnect.