Hexcel Corp (HXL) 2002 Q4 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the HXL corporation's fourth 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 to open the call, I'll turn it over to Mr. Forsyth. Please go ahead, sir.

Thank you. Well, good morning, everybody. I'd like to welcome you to Hexcel Corporation's fourth quarter and full year 2002 earnings conference call today, January the 23rd. With me is David Berges, Hexcel's president, chairman and CEO, and Michael Bacal, our communications and investor relations manager.

Now the purpose of the call is to review our fourth quarter and full-year earnings release that we distributed this morning. As always, we'll be happy to take your questions at the end of our prepared remarks. Before beginning, I need to cover the formalities, and there's quite a few of them.

First, I need to remind everybody about the safe harbor provisions related to any forward-looking statements we might make during the course of this call. Certain statements 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 also referenced in today's press release.

Now, in light of the pending sale of equity securities, I have to remind you that Hexcel Corporation and certain persons that may be deemed to be participants in the solicitation of proxies in relation to the proposed transactions along the company, Greenbriar Equity Group LLC, and the proposed transaction among the company and affiliates of Goldman Sachs. The participants in such solicitation may include the company's executive officers and directors, none of whom own in excess of 1% of the company's outstanding stock. Further information regarding the persons who may be deemed participants will be available in the company's proxy statement to be filed with the Securities and Exchange Commission in connection with these transactions.

This press release is not a proxy statement, nor is this call. The company has not yet filed a proxy statement in connection with the solicitation of proxies relating to these proposed transactions. Stockholders of the company will receive such a statement at a proxy card in connection with the solicitation. Stockholders of the company are advised to read the statement when it becomes available because it will contain important information. Such statement, when available, and other relevant documents, can be obtained free of charge either from the company or from the Securities and Exchange Commission's website. From the company, please contact our investor relations department.

And lastly, might I also remind you that this call is also 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 this request. After that long list of formalities, might I turn the call over to Dave.

Thank you, Stephen. If you've had a chance to get through this morning's earnings release, I hope you'll have concluded that Hexcel continues to perform well despite tough market conditions. For the quarter, aerospace sales continued to be off as compared to 2001's results, driving our total company net sales down 13.6% to $206.5 million, or about $32 million lower than the fourth quarter of 2001. For the full year, the decline is even more dramatic, with revenues falling 158.6 million or 15.7% versus 2001.

For those of you that track EBITDA, adjusted EBITDA for the fourth quarter was a more normal $25.7 million, 29% higher than last year's 19.9 million in the same period. For the full year, adjusted EBITDA was 109.4 million, only 9.8 million or 8% lower than last year's $119.2 million. Put another way, with sales down almost $159 million, we had less than a $10 million EBITDA drop year over year. Over the last three quarters, our revenues have settled into a consistent range, reflecting the lower production rates that came into effect as a result of the September 11th tragedy.

In those quarters, cumulative EBITDA and almost every other measure has improved over the prior year. We had a net loss for the quarter of 6.1 million or 16 cents per diluted share, an improvement over last year's fourth quarter performance of a 400 million (ph) loss or $10.08 per share.

Excluding business consolidation and restructuring expenses, impairment charges, assuming the company ceases amortizing both years, the pre-tax losses end of quarter would have been $2.3 million, up from the $9.2 million loss for the fourth quarter. On the same adjusted basis, also excluding the litigation gain we had this year, the full-year Hexcel adjusted basis net income would have been -- or pre-tax loss would have been 1.6 million versus last year' 3.7 million. Despite the $32 million drop in the top line for the quarter, our gross margin rate of 19.2% of sales improved over last year's fourth quarter rate of 14.7%.

Operating income was also up substantially over last year's fourth quarter number. The fourth quarter was an easy comparison, of course, but for the full year 2002, our gross margin rate of 19% was slightly higher than 2001's 18.9%. This means that our facilities did a good job of aligning with the drop in revenues. But thanks to the dramatic cuts in fixed costs, even operating income and other fully loaded performance measures were significantly improved.

Another positive for the company is our continued progress on cash management. We reduced debt by $22.5 million in the quarter. Another four-year low. For the full year, we reduced our total net by 60.8 million, despite spending almost $24 million in restructuring activities. Our debt structure for the quarter was driven by further reductions in inventory and strong operating cash flows.

Our inventories are now at the lowest level since the 1996 acquisition. So we generated about $66 million in cash from operations in 2002, almost $31 million better than the prior year. In addition, we reduced capital expenditures from about $39 million to $15 million, and as you recall, we received a $10 million upside from the sale of a portion of a joint venture interest.

Looking ahead to 2003, we expect to significantly delever the company by completing our previously announced sale of $125 million of convertible preferred stock. The proceeds from this transaction will be used to retire our maturing convertible subordinated notes, and to reduce our senior bank debt.

The company is also planning to refinance its senior credit facility with a combination of new revolver term loans and notes, all with maturities of at least four years. Thus extending the maturity of our senior debt to a time when one can reasonably expect that the aerospace cycle is on an upturn.

Now let me cover the revenue picture by market. At $96.3 million, the 22.5% decline in commercial aerospace revenues for the quarter was less than the 27.4% drop we saw for the full year. This reinforces our belief that we essentially bottomed from the biggest impact of the post 9/11 production stepdown back in the first half of 2002. Our commercial aerospace revenues have been seasonably consistent since four to six months ahead of these line rate reductions just as we expected.

Recent customer pronouncements continue to suggest that the 2003 large airframe deliveries will be in the 275 to 285 aircraft range. This is about the rate that we've been supplying to for the past two quarters. We are encouraged by the accelerating activity on the A-380 and Airbus and the continuing development work on some new form of aircraft at Boeing. Any new Boeing aircraft is likely to have significantly more composites than existing designs.

Our industrial market segment declined slightly versus last year's fourth quarter to $59.9 million, and was 29% of our sales total in the current period. While this segment and many of its applications has been growing consistently, that growth was stalled somewhat this quarter due to a lull in demand for the bulletproof vest materials for military contractors. Sales were impacted by delays in government funding for military body armor programs, and pending product transition within the services.

Civil body armor applications remain strong, but the military transition creates some uncertainty as to the overall soft body armor sales trends for the next few quarters. Sales of composite materials used in other non-aerospace applications including automotive, wind energy and recreation equipment continue to show strength. In fact, sales of composites for wind turbine blades again achieved another record quarterly sales. Albeit off of a modest baseline. For the full year, industrial sales were up slightly to $253.9 million from 250.2 million in 2001.

Looking ahead to 2003, until the next round of military soft body armor orders are in place, industrial revenues may fluctuate, but the underlying trend remains one of growth. In the space and defense segment, revenues were down by about 6% against last year's very strong fourth quarter. But for the full year, revenues were up 2.9% to 147.5 million. Unfortunately, every new program does not grow consistently every year. For example, the C-17 and the new F-18 E and F actually takes scheduled steps backwards in the not too distant future before resuming growth due to funding timing or irregular export orders.

Overall, however, the trends in this market continue to be positive. The electronics sales of our glass fabrics for printed wiring boards were 13.1 million for the quarter, or about 6% of our total revenues. This is slightly down from last quarter, but up against last year's very low fourth quarter revenue. We still have not seen any evidence of recovery in this segment. We've done what we need to do to make this business close to adjusted EBITDA neutral, look forward to leverage recovery could provide, but as always I offer no guidance as to when or if this will happen. In summary, we performed pretty well from an operating standpoint during the quarter under difficult circumstances. The foundation of our performance this year has been our ability to attack fixed costs before revenues decline. Last November -- or November 2001, we targeted a 20% cash fixed cost takeout. In 2002, we reduced cash fixed costs by 22.8%. And since the program was initiated back in 2001, we've actually taken out about 24% of our cash fixed costs. And exceeded the 60 million target for savings.

Now, I think 2002 was a very solid year under the circumstances for our company. We met our financial commitments, we improved our operating performance, and believe we surpassed the market's expectations for debt reduction. In 2003, we would now expect the company's net sales to be in the range of 800 to $850 million, and we continued to work on productivity gains and cost reductions to deal with inflation and other potential downsides that the marketplace might bring. Now let me turn the call back over to Stephen for a final rundown on some of the financial details before we open up to questions.

Thank you, Dave. Let me fill in a few of the details you need to complete your review of the quarter. First, as you will recall in January of 2002, we amended our senior credit facility, relaxing the 2002 quarterly financial maintenance covenants for last year. As of December 31st, 2002, the company was in compliance with those financial covenants. As we've mentioned in the past and again in today's release, the January 2002 amendment did not change the financial covenant test -- for 2003 or beyond.

Now while the company is working to refinance its senior credit facility in connection with the proposed equity issuance in the first half of 2003, the company is taking the step requesting the amendment of the existing credit facility so that the financial maintenance covenants will accommodate our anticipated financial performance in the first half of 2003 prior to closing. As Dave noted, total debt net of cash decreased by a further -- to 613,500,000 as of December 31st. And that was compared to the debt that was outstanding on September 30th, 2002.

The company had -- revolve and overdraft availability under its senior credit facility of $87.9 million as of December 31st, having already made a previously agreed voluntary reduction of $21 million to the revolver commitments during the month of December. That reduction helped Hexcel reduce the spread it would have paid on advances in 2003, and the cost reduces fees payable on unutilized commitments. The total commitment under the senior credit facility as of the end of the year was 297.6 million. As you would expect, with less deck outstanding, interest expense for the quarter was down and was just a little lower at $14.4 million for the quarter.

As you have noticed in the news release, we observed that we believe that we will successfully complete our $125 million equity investment and the attendant financings, but you all understand that we have to say that those can be no assurances that that will occur until we do close. If the transactions have not closed by the time we file form 10-K for the year of 2002 towards the end of March, the company's independent accountants in light of the fact that there can be no assurances will issue their opinion with an expiratory paragraph highlighting the liquidity concerns.

Taxes. Our tax accounting in the quarter, it's been the same as in the prior quarters of the year. The company's tax provision of 2.5 million in the quarter was for taxes on European income. The company paid $5.1 million in cash taxes during the quarter, and 8.4 million for the year. Those cash taxes benefited from the expenses related to restructuring expense, reducing taxable income in certain of the countries in which we do business. The company will continue with the establishment of a non-cash valuation allowance attributable to U.S. net operation losses until at such time our U.S. operations will return to consistent profitability.

During the quarter, equity losses of affiliated companies were $1.5 million. Reflecting as they have in the recent quarters of the losses being recorded by our joint ventures in China and Malaysia as they ramp up their production of their aerospace composite structure components. Just to remind you as we always do, those JV's do not affect Hexcel's cash flows. Equity and losses from affiliated companies last year was higher at 10.1 million for the quarter, simply because we have a writedown in the carrying value of one of our JV's. Well, that completes management's comments on our fourth quarter and full year results. Might I return the call to the conference call operator, and we'll be happy to respond to your questions. Thank you.

Thank you, sir. Today's question and answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch-tone phone. Again, star 1. If you're use ago speakerphone, please be sure that your mute function is turned off so that your signal may reach our equipment. Again, star 1 to ask your question. We'll pause just a moment to assemble our roster. We'll go first to Adam Plissner, CSFB.

Morning.

Good morning, Adam.

David, just get back to one of your comments about the commercial market which you've indicated beforehand, it sounds as if you're building today towards, as you said for the last two quarters, towards the 03 build rate, but if I look at Q3 and Q4's revenues of about, you know, 201 and 206 respectively, that kind of puts you on target for the low end of your range. Is there seasonality or is there some upside to get you in other markets towards that 850 mark on the high end of your range?

Well, there's some seasonality in commercial aerospace. It hasn't been exactly the same this year as in past years. In the past, the fourth was always -- not always, but the fourth tended to be strong, getting ready for the first quarter. And the third quarter is almost always weak because we have a pretty strong European position and they have a pretty heavy holiday period. I think this year, I don't have the numbers right in front of me but I believe the second quarter would have been our strongest this year unless there was some carryover from the line rate reductions so they really started to affect us in January and February as I recall.

So I think, Adam, we're, say, three quarters into a fairly consistent pattern with no apparent radical line rate shifts, you know, in the next couple quarters, if you listen to our customers. So I think if you went back and kind of looked at normal years, you might be able to interpret what kind of seasonality we could expect this year if there are no radical changes.

And if I -- I guess we're not privy to the build schedules that you are and the timing of them, but can I safely assume that it's somewhat spread evenly across the year, thus in the back half of 03, build schedules are not going to be a dramatic dropoff that you have to face in addition just to meet that 275 to 285 build that you referred to?

I think, you know, I think we don't share that kind of detail. I think what we're suggesting is people are tending to, in general, our customers publicly are tending to kind of indicate that they're sort of at the line rate they think they're going do run -- to run at for a while, and so you have to try to understand what they're saying. They're talking about deliveries, they're tending to be talking about the same deliveries the following year, so, I mean, I think what you have to think about is, if there's going to be an adjustment, if this future, you know, gets bleak enough and they figure out a way to go down further or if things strengthen, we, of course, would start to see that change before they would. At this stage, nobody's talking like that, but, you know, I think it's just lack of clarity.

I think they've thrown out some general, you know, guidelines for 2004 that are kind of like -- we don't know of any significant change. I think they always try to get to the line rate that they can stay at for as long as possible because it's so expensive to change a line rate. So I think you just have to watch the market and if there's something that significantly changes, they take quite a while to make the change. I recall Boeing last year after September 11th, their real step rate was in the June time frame. That's how long they tend to try to go before they make a radical change. I don't know if that's how it will always be in the future, but then you wind back six months. So I think that should give you a general sense.

So that change may affect your 04 revenues before 03 if it does get sort of a delayed impact.

Well, any time there's a change, it will start to affect -- up or down, it will start to affect us six months prior. You saw us drop in the first quarter even though Boeing really only dropped in the third quarter.

Okay. Let's say we just take a hypothetical, you end up towards the low end of the range at 800 million and you've done such an admirable job of maintaining margins and considerably lower revenue environment. Can you look at your opportunities now to continue to take out fixed costs? Is it any more difficult for you to keep up that pace of maintaining margins in the face of, you know, a lower volume environment, or do you think you still have ample opportunity but difficult choices to keep pace with that?

Well, that's a combo question. I think it is certainly more difficult now, after what we've done in the last year. That's not to say we don't mind difficult tasks. On the other hand, I would hope that the swings of the steps that we'd have to do are also diminished. There was a huge drop down in two of our most important markets, and we've made a huge drop and we're in line.

So, you know, if the markets fluctuate, you know, we'll -- I don't plan to fluctuate up in any case. I mean, we hope to keep the momentum. We've got, of course, inflation and insurance costs and everything, you know, other people have to deal with, so we have to offset those first before you'll see gains in it, but, you know, I'm not forecasting the future. I'm just saying what we have now is a fairly -- the appearances of a fairly stable environment, albeit a terrible environment.

Okay. And just quickly, Stephen, two financial-related questions. Do you sort of think about when you're involved with the negotiations with the banks to refinance, do you expect there to be any sort of agreement that would require the potential for you to sell off the remaining stake in the JV with Asahi to sort of force those proceeds back to the banks? We might be able to count on that as potential additional liquidity if you were to go that route, or would the bank sort of require that to be part of their negotiations?

Well, you know, it's not really appropriate to go into the details of what we may or may not be negotiating with our bank group but to talk to the asset sale proceed, I'd just take you back to the facts as we've disclosed them. We have an option for a six-month period commencing the first of July to put our interest to our JV partner $23 million. Our partner has an equal, as a matter of fact, opposite option to call our JV interest for $23 million in that six-month period. And when you think about the interplay of those two options, you know, clearly there may well be $23 million of asset proceeds in the second half of the year if there are, that obviously helps our leverage.

Okay. Good. I'll let somebody else go and I'll hop back on. Thanks.

NEW SPEAKER Okay, thanks.

We'll go next to Sarah Thompson and Lehman Brothers.

Question on the Body Armor side. Can you give us some sense of how much of that segment's revenue that represents?

We don't disclose that, of course, but we have indicated in the past that it's significant, and we maybe even have disclosed that oftentimes it's the largest sub-segment.

Okay. And then in terms of the negotiations, maybe I just read too much into this, but it sounded like it was going to be kind of all over the place for the next couple quarters. Does that mean you expect to get a new order in the third quarter? Not sure what the timing on it was.

Didn't quite understand. Are you still talking about ballistics?

Yes.

Okay. What we're suggesting is that military contracts tend to be big and run for a long period of time, and there's a transition that's going on now. As a an old contract has run out, a new design, new proposal, new RFP that's out looking for proposals. So until that gets closed in place, current requirements have to be ordered on the old order, so we're seeing -- we're just seeing some volatility where it had been a very steady growth pace in the past. So you get some spot buys, and it's not like the business goes away. It's just erratic until a big order gets in place and starts rolling. So we're just suggesting that you could have some low quarters and high quarters assuming there's still demand, particularly with potential buildup for any action in Iraq. It's not gone away. We just suddenly have to kind of put it into the unknown on the quarter by quarter basis. We feel good about it generally long-term.

And when do you expect that contact to be in place? Do you know yet?

Last August.

Okay. Fair enough. In terms of the kind of 8 to $8.50 guidance, it sounds like versus fourth quarter, that's kind of the only place where you're concerned about potentially lower numbers? I mean, if you run it at kind of where you expect commercial production to be on the aerospace side, space and defense sounds pretty good, electronics isn't that great but seems to have stabilized, sounds like the weakness would be in the ballistics or industrial side?

Well, I didn't actually say that, Sarah. You know, what we have now is a much more stable commercial aerospace look, usually military is pretty predictable, not dramatically so. Ballistics has become a little bit of a quarter wild card. Electronics is a quarter wild card, and we just put in all the pluses and minuses, and we've got a lot of vagaries so we're not even giving guidance within a segment at this point. Just at the end of the day, the pluses and minuses look like that's a fairly safe range, so I don't really have specifics or timing on any of that at this point until we get a little better clarity.

Okay. Fair enough. And then just two or other questions. In terms of running a sensitivity to those sales, should we still assume that you're kind of one-third fixed costs, two-thirds variable?

I'm not sure -- I didn't know we were that actually.

I thought that was the guidance you'd given in the past quarter.

If you backed into what we said about our fixed costs and how it's going to reduce them, you'd come out with that analysis. We've not sort of ever really updated that statement, but because you've seen us reduce our costs equal to or slightly more than the rate and change in sales, you could assume that the same proportionality probably still applies.

Okay. That's helpful. Last question is, on the inventory, you guys have always done a great job of getting it down here. Is this a sustainable level?

Oh, there are people who say no, but I'm not one of them. We've got a lot of people really engaged in getting, you know, inventory out and getting lean and having inner company transfers be much smarter from a company perspective instead of from a plant perspective, so I think we've got, you know, tens or hundreds of people who are working on creative ideas to improve inventory, so, I mean, this is assuming a stable sales level, Sarah. I mean, if we suddenly double line rates, I'll be thrilled to see inventories go up, but in general, this is an area of continuous improvement, and, you know, last year we took 30 million out of the fourth quarter and we were so shocked at how well we'd done, we didn't think we'd be able to hold it in the first quarter, and we did.

So I'm hopeful that all the continuous improvement will continue to offset all the surprises we have. So I didn't quite answer your question other than to give you a sense of my desire.

No, that's fine. I appreciate it. Thank you very much.

Thank you.

Again, ladies and gentlemen, just a reminder, it is star 1 on your touch-tone phone to ask your question. We'll go next to Hilal (ph) Oshen (ph) Deutsche Bank.

Good morning, gentlemen. Nice job. I have two quick questions. Just in terms of the income statement, looking at SG&A, 23.8 million for the quarter, I know that about a million and a half in that number was due to the potential equity investment. That's up from the third quarter where you guys were quite low at 18.5. What is the proper, you know, run rate we should be looking for? Is it closer to that 18.5 or is it closer to, you know, $22.5 million quarterly number? Or is there some seasonality in that?

Well, I think the truth is, there is a little bit of seasonality in the third quarter that, you know, your costs do dip with the European vacations. We're not really giving any specific guidance on individual cost lines, but, you know, I would say nothing -- in terms what if we've done in taking costs out, nothing has changed in the fourth quarter. You know, most of our gains in terms of what we've done in terms of total employment and those things that have occurred already in the third quarter, so there's not much that's changing here, so you're seeing a flow out of a pattern of seasonality. I don't think you're seeing any underlying changes in what we're doing at this point in time.

Okay. Great. And just one other question. What are the cash restructuring costs outstanding from last year's restructuring program?

I believe -- if you look on the balance sheet, there's about $10 million still left on the balance sheet, and then there will be, as you've seen in the past, some smaller pay-as-you-go type expenses, the rules require you recognize the cost as you incur it, you couldn't accrue it in advance, there still will be some of those things to go in 2002, but -- 2003, but clearly, we're having had a cash spend in 2002 of nearly $25 million, we're over the hump.

Right, right. Okay. Great. Thank you.

Okay. Thanks.

Gentlemen, we have no other questions at this time. Mr. Berges, I'll turn it back to you for additional or closing remarks.

I don't have anything in particular to add. We appreciate everybody's patience through the year. We hope we've built your confidence in our performance under the circumstances, we feel like the potential equity raise during one of the most difficult periods for equity I can recall in some period of time is sort of a testament to the confidence that certain investors have in us, anyhow, and we hope that you'll continue to support us. Thank you very much.

Ladies and gentlemen, thank you for joining us today for this Hexcel Corporation fourth quarter earnings conference call. This does conclude our call, and you may disconnect at this time.---