Hexcel Corp (HXL) 2003 Q1 法說會逐字稿

Please stand by. Good day everyone and welcome to the Hexcel Corporation's First Quarter Earnings Conference Call. As a reminder, 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 conference over to Mr. Forsyth. Please go ahead sir.

Good morning everybody. I'd like to welcome you to Hexcel's First Quarter, 2003 Earnings Conference Call, today, April 22nd. With me is Dave Berges, Nexcel's Chairman, President, and CEO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of today's call is to review our first quarter's earnings release distributed last night. And today, we're taking the additional step of having provided you with a brief presentation to accompany Dave Berges' remarks.

If you've not already found it, it can be located from the link on the Investor Information section of our website, hexcel.com, that's hexcel.com, and you just click on the web pass link, or alternatively, you can just go to the Presentation section of the Investor Information section of our site and you'll find it directly located there too. We trust you'll find it a helpful innovation. As always, once we have completed our prepared remarks, we'll be happy to take your questions. 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 through the course of this call.

Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation for 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a wide variety of factors that could cause actual future results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings including our 2002 form 10-K as amended and today's press release. Lastly, I'd like to also remind you that this call is being recorded by Hexcel Corporation and is copy-writed material. It can't be recorded or rebroadcast without our expressed permission. on this call constitutes your consent to this request. With having got the formalities behind us, let me turn the call over to Dave.

Thank you Stephen. As Stephen mentioned earlier, I'm going to work this morning of off a 7 page presentation that's on the website. In addition to covering the quarter, I'm going to cover a few slides on the re-financing that we accomplished in this quarter because of the importance to the company. So, on page one we show the comparisons and the key financial data. Quarter one ended with sales of 228.6 million, up 6.5 million from the prior year, or 2.9 percent. The currency, of course played a role this quarter with many companies, ours included.

On the costs and dollars basis, our sales actually were down 3.6 percent versus the same quarter last year. Gross margin expanded, nevertheless, to 20.1 percent up 230 basis points from the same quarter last year. And you'll note that we have moved to operating income as a for us. The SEC is discouraging non Gap measures, so we've dropped EBITDA discussions.

Of course, the pieces are available in the press release, if you care to return to that measure. The operating income for the quarter was 17.2 million dollars up 3.9 million from the same quarter last year, or 29.3 percent. The net-loss for the quarter was 3.2 million. This compares to a loss of 9.2 million first quarter of 2002, or a 6 million dollar gain. As spelled out in the press release, the quarter included about 700,000 dollars of restructuring and a 4 million dollar loss due to early retirement of debt when we financed our capital structure. Excluding these items, pretax income was 4.2 million versus a loss of 3.6 million in the same quarter last year. So, we're happy to see the results of our restructuring efforts for the prior quarters.

Now, on page 2, we show the sales by market, to give you an indication of what's going on below the top line. Commercial Aerospace came in at 106.8 million dollars in sales. That's up 3.3 million from the same quarter last year. Up 10.9 million, I'm sorry. Up 3.3 percent, and it's up 10.9 percent from the fourth quarter of '02. This suggests some inventory affects as many of our customers try to run inventories down and the end of the year. Industrial segment came in at 66.8 million dollars in sales, , but the same quarter of the prior year. Architectural, automotive, and grew as they usually have, but there was quite a bit of movement in the ballistics' sub-market.

First quarter of '02 was very strong, very strong ballistics' quarter and as you recall, the third quarter and fourth quarter of '02 seemed to be softening as the government was in the midst of transitioning to a new contract. However, that contract has been extended again, and there was a serious ramp-up in ballistics' activity in the second half of this quarter. So, in the end, what looks to be a pretty normal looking industrial segment, had a lot of volatility in this quarter, and we expect that the ballistics' lumping us until our new contract is settled will continue for the next few quarters. Space and defense were unusually strong at 40.4 million dollars in sales, up 14.8 percent from the same quarter last year, and up 8.6 percent from the fourth quarter of 2002. Electronics bounced along again at 14.6 million dollars in sales, that's 8 quarters in a row that it's been running at about the same rate.

No particular activity of note in that segment. So, in total, the 228.6 million dollars in sales was up 10.7 percent from the fourth quarter of '02. On a LTM basis, that's 847 million in sales. This suggests to us if we continue to stick with our previous guidance for 800, 850 million dollar sales outlook for the year. Again, on a confident FX Rate basis, sales were down 3.6 percent. If we used the same currency formulas as the first quarter of '02, our sales would have been 214.5 million. Now, if I could move to the re-capitalization, just to re-summarize what we've told you in a prior press release on page 3, on March 19th, just hours before we so rudely interrupted Saddam Hussein's at a staff meeting, we managed to close on 3 separate transactions. 125 million dollar sale converted over for preferred stock for cash.

That's 47 million from Goldman Sachs Capital Partners and 78 million from Partners in Equity Group. Simultaneously, they closed on a 115 million dollar senior secured credit facility, due in 2008, and 125 million dollars senior secure note operating also due 2008. This will allow us to redeem our 47 million dollar notes that are due this summer. We pay our former senior credit facility that was to be due in 2004, and reduce our total debt by almost another 20 percent. So, there was a 12 month process that took place and we believe that we have now got the right kind of capital structure for our market environment.

On page 4, you'll see the impacts over the years of what we've done to try to reduce our debt, starting from our peak in 1998 and what's worthy of note on page 4 is that the senior debt is now down to 138 million dollars, 48 percent down from the end of 2001. On page 5, we have 5 charts that show the reason we had to take this on. We had maturities of 227 million dollars in '03 and '04 that needed to be dealt with in what we think are some pretty nasty markets. So, we've managed to reduce and delay maturities, so we've replaced the 227 million with facilities that aren't due until 2008. On page 6, the impact on our amortization schedule, you can see that before the transactions, we had maturities in '03 of 62 million, '04 of 124 million, and '05 of 65 million. And now, the maturities respectively will be 6 million, 8 million, and 9 million.

So, we've taken concerns about our viability during these traumatic times out of the minds of our customers, suppliers, and employees. So, on page 7, to summarize what we've been about for the last number of quarters, 9 quarters, that's since our troubles began in second quarter of 2001, is right-sizing the company and now we've right-sized our balance sheet. You can see that our LTM sales in a period have declined 17 percent and our employment has declined 31 percent. And as for debt, you can see our debt was reduced by 26.3 percent during the period. So, we now think we're positioned for what we hope will be the worse time for Hexcel, we'll be able to focus on the growth that we think is our long term future, and see leverage further. Stephen?

Thank you Dave. Well, let me try to fill in a few additional details that might help you complete your view of the quarter. As Dave as noted, the total debt net of cash decreased by approximately 95 million dollars during the quarter to 519 million as of March 31st. The change of debt really occurred in 2 components. The refinancing transactions resulted in a net reduction of debt net of transaction costs of 112 million dollars, whereas, cash flows from this on-going business operations, increased that in the quarter by 70 million dollars, primarily due to the timing by semi-annual interest payments, as well as working capital increasing a little bit as sales revenues increased compared to the fourth quarter of 2002.

If you look at our history, you'll see the traditional, we do use a little bit of cash in the first quarter as that tends to be a time of the year when we have more outgoings than incomings. If you looked at interest expense grow in the quarter, it was significantly lower, 13.7 million dollars compared to 17.6 million reflected in our first quarter, 2002 results. That decline in expense really comes from 3 factors. First of all, lower debt balances. Secondly, back quarter in '02 had some nonrecurring bank fees of approximately 1.7 million dollars, and thirdly, have continued to decline in the period.

However, if you look at things in cash terms, our actual cash interest payments this quarter were 24.5 million dollars. Now, recognizing that our new capital structure acquired that many of you update your models, we have provided some guidance in our news release to help you in some of these financing costs. First of all, our interest expense, we've indicated to you that we think interest expense of a quarter over the balance of this year will be in the order of 12.5 to 13.5 million dollars per quarter. Of this expense, about 800,000 dollars relates to the non-cash amortization of capitalized financing costs, as well as the amortization of discounts on terms of original issuance discount on certain of our bonds. If you look at it from a caste perspective, we now have the coupon payments of our 2009 senior subordinated notes, payable semi-annually, January and July. And then the coupon on the new senior secured notes due 2008 will be paid semi-annually in April and October, with the first payment due in October of this year.

As Dave discussed, our scheduled principal amortization of debt is now significantly lower, about $6 million this year. Our current debt balances as of March 31st show $9 million. That's simply because we have approximately $3 million of demand lines in Europe, which are obviously shown as current liabilities. More importantly, though, compared to the end of the year, you will note that all of our debt has shown at its stated maturity. In other words, the vast majority of our debt now appears as long-term debt on our balance sheet, and these are non-current liability.

For those of you who have more interest in more detail about amortization, you'll find the schedule of our amortization revised for the refinancing in the Form-8K we filed on April 7th. For those of you who asked, we've given you a little bit of guidance on capital expenditures. Namely, there will be less than $25 million this year. From a tax perspective, you'll see that we continue to account as we have, where we place a valuation allowance against U.S.-generated net operating losses. And so, the provision and cash flows that you see predominately relate to European operations.

Let me conclude by just saying a couple of words about the mandatory redeemable convertible preferred stock. Obviously, our statements now include this new security for the first time, following its issuance on March 19th. The accounting is somewhat complex, which caused us to provide you some guidance, again in that 8K we filed on April 7th.

If you look at it from an income statement perspective, in summary, though, the impact is the addition of the new line being preferred dividends and on our income statements towards the bottom of the statements. Now, all of these expenses on this line, as of today, are non-cash items. You may be puzzled by the fact that we do accrue the dividends, even though the holders of securities do not accrue a right for dividends until the third anniversary on the series A convertible preferred loan. Under the accounting regulations, though, which is supposed to accrue dividends over the life of the instrument, and so, we have an accrual in our books. Now, at some point in the future, we could pay those dividends in cash after the, well, they become due after the third anniversary. But see, the, the company's election to pay them in cash or accrue them. At this point, we have made no decisions on those matters.

As we noted in the earnings release, being preferred dividend will be about $3 million of non-cash expense in each of the quarters in the coming year. And you'll find actual projections for the entire life of the instrument in that Form-8K to which I referred.

The convertible preferred stock as, in fact, are the 2000 level convertible bonds or stock options are all antidiluted at this moment. So, a computing EPS, you'll see, is using a count of 38.5 million as the average shared count for the quarter, comparable to that in the fourth quarter of last year.

Lastly, if you look at the income statement, there are two sort of non-recurring actions, relate to refinancing. The 4 million write up of previously capitalized financing costs relating to the old senior credit facility and the 2003 notes that will be amortized over the life of those securities. And secondly, 300,000 of just expenses related to transaction itself.

Well, that completes management's comments on the first quarter results. I return the call to a conference call operator. We'll be able to respond to your questions.

Thank you very much, sir.

The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our . We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star 1 on your touch-tone telephone to ask a question. If you do find that your question has been answered, you may remove yourself by pressing the pound key. And once again, that is star 1 if you would like to ask a question today. It appears our first question today will come from Adam Plissner with Credit Suisse First Boston.

Morning, gentlemen.

Morning, Adam.

Just giving understanding of Q1, looking at some of the various businesses, but overall, when you think of the cost-saving programs that you obviously initiative, initiated and see the benefits of, would you say in the first quarter reflective of a full run rate at this point, um, that on a go-forward basis you had sort of baked in at this point in Q1 '03 all you expect to achieve?

With respect to cost cutting you mean?

Cost cutting, yeah. Without having to do anything new to what you've already accomplished.

Well, I don't think of cost focus as something that you do once it stops, so, we certainly still are doing some things. We still have some restructuring going on. Although we have...

So, it's separated sort of production and, you know, initiatives and efficiencies from restructuring actions and headcount save, that sort of thing.

We still have some of both, but we also have offsets. We have inflation and other things to deal with. So, you're not going to see the dramatic move like you did in the last six quarters if that's your question.

OK. Right. And in terms of some of the, you mentioned, certainly the commercial side there was some sequential improvement that, I guess is somewhat contributed to, as you said, year-end inventory adjustments by some of your customers. I mean, does that imply it's sort of a catch up to first quarter and it may not be sustainable for the rest of the year or is it sort of a return to our normal pace. How would you look at that?

I think it's a little bit of a combination. It seemed a little bit stronger than it should have, and the fourth seemed a little bit softer than it should have. So, I think there are some effects. I think in commercial aerospace, as we said last quarter, maybe even the quarter before, we made our move six months before the line rates dropped at our customers, so, we really have had, believe it or not, four quarters, maybe five, of fairly stable kind of run rate. You have to think about seasonality with our business, of course, but if you look at LTM, you know, you don't see a lot of volatility of what you take out the seasonality.

OK. And then just quickly on the ballistics part of the business that you mentioned, it sounds like caught you somewhat offguard and, in an upside surprise, and the, in this first quarter, whereas the contract was extended. How far out was it extended, and did it give you any sort of near sense of confidence so that at least the next of quarters to look similar or is this something that could sort of return to the unpredicatableness that we had seen previously starting in the second quarter?

Well, the best answer is I don't know. The new contract has been extended and extended and extended. I have to think, this is just speculation on my part, that the war has distracted from the testing that needs to go on on all of the submittals from the best manufacturers. They obviously, though, had some current demands, and if they weren't ready to lift the new contract, they've ordered against the old contract. And they've ordered pretty aggressively in the last couple of months, so, you know, I don't know how long they'll run. I don't know whether that is now intruding upon the next contract because they're putting new vests in the depots. But it came on strong in the latter part of the quarter, and I would expect there would be some momentum for another quarter or two, and then I'm not sure what will happen.

Great. Thanks very much, guys.

Next move to with Lehman Brothers.

Hi. Couple questions. Can you just remind me what percentage of your revenues would be denominated in Europe so we can figure out what the impact would be for that rest of the year?

In round terms, about half of our European revenues are in euros. About half are in dollars. But the reality is, you could then go across the market segments. The concentration is different, you know. Commercial aerospace this day, these days is a dollar-denominated industry worldwide, whether you look in terms of what, the price factor, sold in the cost of fuel, operate them how they price tickets. And so, you get a much higher percentage of European commercial aerospace revenues and . Where if you take things like wind energy and our electronics in Europe and those things, those are all euro-denominated.

So, if you look at defense too busy to exchange rates movements, there's much more in our industrial segment than there is in, for instance, our commercial aerospace segment.

OK, great. That's helpful. And then I'm sorry. I got on a little late, if you already answered this. But any update in terms of the Asian JV and are you going to put your interest in it or all their interest or any decisions yet?

We haven't made any statements as to what may or may not occur when that auction agreement comes effective on July 1st.

OK. That's all I have. Thanks a lot.

Thanks, Sarah.

And as a reminder to our audience today, if you'd like to make a comment or if you have a question, please press star 1 at this time. And moving on, we'll hear from with RBC.

Hey, guys. Congratulations on the quarter and getting the .

Thanks.

A couple of quick questions. Most of what I had was asked and answered already, but two things. First of all, could you speak a little bit as to sort of what the nature of the military business you guys are doing? And it doesn't seem like, while military business is escalated, it doesn't seem like new builds for aircrafts or helicopters trying to get a better idea as to sort of how you're making money off the military and where that is going and where you see it going as you and also what your plans are with the technology business. I know it's sort of just coming along, but whether or not you plan to sell it or weed it out or .

I'm sorry. What business?

The technology segment, sorry.

The electronics, you mean?

Yeah, electronics. I apologize.

OK. First, on military, this, the strength in this quarter, I would have to call an anomaly. We, you know, this tends, over time, to move pretty slowly. We're involved in almost everything that flies, whether it's helicopters, fighter jets, missiles, launch vehicles, satellites, and not just in the U.S., it's in Europe. So, it's a very, very diverse population. There's no one program that has a huge influence on us. We probably are active, we probably have 80 active programs that we participate in. So, that's why it tends to be, to move in kind of gradual increments other than anomalies within the quarter.

Whether or not there was a little bit of extra activity in the first quarter because of the actions in Iraq, well, I'm not clear. Most of what we do is for OEM production. However, helicopter blades do have a life limit and use our materials. So, I imagine we got a little bit of a temporary boost there. But overall, this, we haven't given guidance on any individual submarkets this year. I was at a conference recently, though, where many of our customers were speaking, and they all were talking in the four to six range in their markets, four to six percent kind of growth pattern. And I would think we should tend to go along with what they say.

And with respect to electronics, we've done what we can to get it down to a break even, and look forward to some recovery and what it might do for us, but we haven't announced any specific plans about that business.

Great. Thank you very much. Congrats again.

Moving on, we'll hear from Hilal Oshen with Deutsche Bank.

Hi. Good morning. I also apologize. I jumped on late. If you answered this, I apologize. But just housekeeping, Stephen, what was the availability on the revolver at March 31st?

Well, we didn't provide that, 'cause that's not really something we focus on.

OK.

If there's an interest in that sort of information, we can always put that in the Q when we file it.

OK.

But life is a lot more stable now post our refinancing.

Certainly so. And Stephen, what would we should be thinking about in terms of, you know, just going through free cash flow estimates, but in terms of cash taxes for this year? You know, I'm thinking maybe a single or a low double-digit number.

You know, I would make the following observation, which is you're looking at taxes last year when we got a benefit from the fact that under one of the pieces of legislation passed by Congress last year. You were able to sort of claw back some of your AMT from prior years. So, there's actually a $2 or $3 million benefit in last year's number and so, if you back that out, you're probably looking at an appropriate run rate.

OK. Fair enough. Thank you.

OK.

Once again, if you would like to ask a question today, please press star one at this time. Next we'll hear from with

Hi. Good morning. Just two questions. Did you provide any information regarding backlog? And then second is, can you provide, I guess, an update on, I guess, the certainty of the A380 program and any business developments of Hexcel regarding that program? Thanks.

We don't track backlog, nor provide any backlog information in this company. We haven't for a number of years is my understanding. The A380 is all, as far as I can tell, on track. There are commitments to airlines and penalties if it's delayed. And we're working fiercely, providing materials for the development hardware and for certification hardware. And it's going to be helpful to us in this year, next and beyond. So, I have no indication that there's any change in the A380 schedule.

Thank you.

And that does conclude today's question and answer session. I'd like to turn the conference back over to Mr. Berges for any additional or closing remarks.

OK. Thanks everybody for joining us. I hope you agree we had a solid quarter, and I hope you all can feel good that we dealt with what I've referred to in the annual report as the our capital structure. We feel pretty good about our positioning for the future and just hope to see some growth real soon. Thanks very much.

That does conclude today's conference. We thank everyone for your participation today, and have a great day.