Hexcel Corp (HXL) 2003 Q2 法說會逐字稿

Good day, everyone and welcome to the Hexcel Corporation Second Quarter Earnings Conference Call. This conference is being recorded. With us today are Mr. Stephen Forsyth, the EVP and CFO and Mr. David Berges, Chairman, President and CEO. At this time, I would like to turn the call over to Mr. Forsyth. Please go ahead, sir

Thank you and good morning, everyone. I would like to welcome to you Hexcel Corporation's Second Quarter 2003 Earnings Conference Call on today, July 22nd. With me today is David Berges, Hexcel's Chairman, President and CEO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our second quarter earnings release distributed last night. 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 2002 Form 10-K and its amendments and today's press release.

Lastly, I might also remind you that this call is being recorded by Hexcel Corporation and it's copyright material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. Having taken care of the formalities let me turn the call over to Dave.

Thanks, Stephen. If you had a chance to get through last night's earnings release, you've seen that Hexcel had another solid quarter despite the challenging market conditions we continue to face. As in the first quarter, the strengthening of the Euro played a big role in the apparent top-line growth. Sales of $234.1 million, or $12.9 million over a year ago. A $12.1 million of that came from changes in the FX rates. We are nevertheless pleased with the relative stability that we have seen in our revenues for several quarters after the dramatic drops of 2001 and early 2002.

Operating income for the quarter was $18.8 million as compared to $19.5 million last year. Depreciation for the quarter was $12.9 million, which was $1.2 million higher than last year due to exchange rates and accelerated depreciation resulting from some of our restructuring actions. Business consolidation and restructuring expenses this quarter were $700,000 versus $100,000 in 2002. We had a net income for the quarter of $4.8 million as compared to $5.3 million in Q2 of 2002. Our performance last year was aided by a $9.8 million litigation gain in the quarter while this year's numbers were aided by $3.2 million of other income generated by asset sales and the exploration of a contingent liability related to the prior sale of a business. In the second quarter of 2003, equity losses from joint venture activity were $0.4 million dollars. This compares to losses of $5.6 million last year which included a $4 million write down of a joint venture.

We had another good quarter on cash management, reducing net debt by almost $22 million to below $497 million, another 5-year low. The reduction resulted from solid operating performance, asset sales, lower interest expense, and improvements in working capital. On July 1st, the company exercised its previously disclosed option to sell the remaining ownership in its AFCO joint venture for $23 million in cash. We received the proceeds on July 14th, and we anticipate utilizing these funds to reduce debt. We expect to continue to work with our former joint venture partner on initiatives in the electronics business.

Looking at our markets, commercial aerospace revenues of $101.4 million for the quarter were slightly lower than last year. Primarily due to lower sale in the structures business. Both Boeing and Airbus are tracking to their 203 forecast for the delivery of about 580 aircraft in total. They continued to indicate publicly that 204 deliveries will be at a comparable level, so they expect only the usual seasonal adjustments in the second half. The a-380 continues on schedule with some good orders announced at last month's Paris air show. We are also encouraged by Boeings recent announcement that their next plane, if launched, will have a composite wing and fuselage. Space and defense revenues increased solidly, again, year over year in both US and Europe, growing over 23% to $47.8 million on a wide range of programs, and with an assist from FX and some non-recurring tooling sales. European approval to launch the new a-400 and transport was also good news for the quarter as it is expected to include a carbon fiber composite wing.

Our industrial market had another 9% year over year gain recovering from a soft first quarter on the strength of blastic material demand. Electronic performance, unfortunately, was consistent with prior quarters. In fact, years, and represents only 6% of our total sales. So looking at the first half of 2003, revenues were up 4.4% to $462.7 million. So on a constant currency basis, sales were down about $7 million. In the same period, we have been able to improve operating income by almost 10% to $36 million. The third quarter is traditionally our weakest due to summer vacation period, but the last 12 month sales of $870 million is a good proxy for the year assuming current exchange rates continue to offset any volume declines. We, therefore are raising our revenue guidance by the year by 50 million. We now expect 2003 sales of 850 to $900 million despite the continued uncertainty in some of our markets. Now, let me turn the call over to Stephen for a final rundown of financial details before we open it up to questions.

Thank you, Dave. Well, let me fill in a few brief details that may complete your review of the quarter. As Dave has noted, total debt net of cash decreased by $21.9 million to $496.9 million as of June 30th, 2003, compared to March 31st, 2003. Operating profitability, $3 million in asset sales, lower interest expense, and reductions in working capital growth that decrease. Interest expense during the quarter was $13.9 million as compared to $15.3 million in the second quarter of 2002. The decline in expense was driven by lower debt balances. To give a really more visibility into interest expense, we provided an additional table in this quarter's release, table C. That details the cash and non-cash components of our interest expense. The asset sale in the quarter is a continuation of our focus on limitizing surplus assets. We generated $3 million in cash and $1.8 million in net income. We also saw the expiry of a contingent liability from acquired transaction in the quarter that resulted in income of $1.4 million. To help you, we have summarized other income expense in table D of our news release.

Expanding of the Euro makes working capital comparisons complicated. As you have seen from our cash flow statement, however, working capital reduced by about $5 million in the quarter despite the continued relative strength in sales. Constant currency terms, accounts receivable were at a comparable level to the first quarter and inventory showed some modest reductions. Accounts payable also showed a small reduction in constant dollars. Accrued interest increased at a dozen a quarter where we have no coupon payments to make. We normally will see further working capital reductions in the third quarter as revenues dip as a result of the European indication period.

The company's tax provision for the quarter was $2.9 million for income -- for taxes on European income. The company paid $2.8 million in net cash taxes for the quarter. The company will continue with the establishment of a non-cash valuation allowance attributable to U.S. net operating losses until such time as U.S. operations have returned to consistent profitability.

Lastly, during the second quarter, an equity loss of affiliated companies was 400,000. Primarily affecting losses being recorded for the structure joint ventures in China and Malaysia as they continue their ramp-up production of aerospace composite structures. Just to remind you, JB losses do not affect Hexcel's cash flows. While this completes management comments on the first quarter's results, if I may return the call to the conference call operator, we would be happy to respond to your questions. Thank you.

Thank you. The question and answer session will be conducted electronically. If would you like to ask a question, you may do so by pressing the '*' key followed by the digit 1 on your telephone keypad. Again, if would you like to ask a question, please press '*1'. And we'll pause for a moment to assemble the roster.

We'll take our first question from Hilal Oshen from Deutsche Bank.

Good morning, gentlemen. First question, Dave, can you give us an update on the military body armory program? Has a new one been put in place, or are we still operating on the old one?

I'm starting to regret that I brought that up last summer. We're still operating on the old one. The contract let was supposed to be due last Friday, as I understand it, and it's been deferred to July 31st. I think what maybe is more relevant for everybody to focus on is that there's a strong demand for whatever protection they choose to purchase because of the activities in the Middle East.

Right, and David, can you comment maybe on some of the other markets within the industrial segment, like automotive, wind energy, and recreational, what are the trends you're seeing in those sub-segments?

Well, just generally, I would say ballistics, as I mentioned, is very strong. Wind has had some staggered --wind has become a little more lumpy than historically because of the delays in PTC extension in the US. PTC bill did not pass recently. Now it's part of the energy bill. The energy bill, I believe, passed the House and has a mere 350 amendments that are being debated. There seems to be strong support for the tax credit extension, but nevertheless, it expires at the end of this year until such time that Congress approves it, so it's created some funny months and/or quarter on wind up and down. Recreation, I don't know of any trends that are notable or material. Automotive has been growing from a fairly small number because of new applications that we've won.

OK, and regarding, you know, your comments in the press release of 2.5% head count reduction in the quarter, was that something that was sort of planned where you saw some excess head count, or is there a, you know, I didn't hear from any of your comments, but there was any --may be any change in some of your end markets where you felt you had to decrease your cost structure because of any lower demand that you're seeing?

I think as I mentioned on a couple other calls, I think we have a pretty good cross-company culture to try to find ways to get productivity improvements, so it's a combination of things. There might be certain product lines or markets that have some softness and people are doing a good job of adjusting. Certainly, the direct labor work force, we have got some restructuring actions that carried over in to this year that we have referred to a number of times that took longer to implement that are going on, and we've got some just general taking advantage of attrition and otherwise trying to reuse fixed cost offset inflationary pressures in the market that we see as pretty flat or down, so it's a collection of things. I hope business as usual in this company now.

OK just finally, Stephen mentioned $3 million, I guess, of proceeds, give or take, from asset sales, and you mentioned that was as part of your strategy to monetize some excess assets. Are there any other assets to mention of that you'll feel you will be able to monetize in the next 6 to 12 months?

Like cost reduction, I would like to consider that a continuous process, so I think we have everyone tuned to understanding what they need and what they will not need in the future and when new equipment comes in making sure we do what we can to optimize our assets, so I think they'll just be a steady stream of little opportunities like this to come along.

Thank you.

Sure.

Again, if you would like to ask a question, press star one. We'll take our next question from Brad Brian with Jefferies & Company.

Actually, most of the questions I had had been answered. Just one housekeeping item. What was your unused availability on your revolver at the end of the quarter?

We haven't disclosed that, but as you can see from the debt table, we only had (inaudible) is about $8 million, so you can comfortably assume we had at least as much money available as we had last quarter, which was over $40 million.

Very good. Thank you.

And we'll take our next question from Patricia Melon with Franklin Templeton.

Good morning. Just a quick question on the Asian joint venture. You are not receiving any cash flows from that, is that correct, or you had been?

I'm sorry, the one that we just exited?

Yes.

We were receiving minimal cash flow.

Minimal? OK great. Thank you.

And as a final reminder, if you would like to ask a question you may press star one. We'll pause for a moment to assemble the roster. It appears there are no further questions. I'll turn the conference back over to Mr. Forsyth for any additional or closing remarks.

Well, just to thank everybody for participating. A recording of this conference call will be available for several days on our Web site for those who are interested in listening to it, and we look forward to talking to you again at the end of the coming quarter. Bye then.

That does conclude today's teleconference. Thank you for your participation and you may now disconnect.