Hexcel Corp (HXL) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the Hexcel Corporation third quarter earnings conference call. Today's 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 Ececutive Officer. At this time, I would like to turn the call over to Mr. Forsyth. Please go ahead, sir.

Thank you and good morning, everybody. Might I welcome you to Hexcel Corporation's third quarter 2003 earnings conference call on today, October 21st. With me today are 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 third 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 about the safe harbor provisions relating 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 discussed in the Company’s SEC filings, including our 2002 form 10-K and its amendments, as well as today's press release.

Lastly, might I 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, having taken care of the formalities, let me turn the call over to Dave.

Thanks, Stephen. As you have seen in last night's earnings release, Hexcel had another solid quarter, especially on the debt reduction front. Like the first two quarters of this year, the strengthening of the Euro inflated revenues versus last year.

In this $212.8 million dollar quarter, 6.7 of the $11.8 million sales increase came from exchange rates. Nevertheless, for the second quarter in a row, real sales are better than the prior year. The incremental $5 million of growth contributed a $2.3 million increase in gross margin. While SG&A and R&D spending is higher than the unusually low third quarter last year, they are in good control after considering currency effects and the costs related to a strike in our Kent, Washington facility. Kent is now back in full operation with a new three-year contract that provides for significant productivity improvements.

During the quarter we reduced our headcount by another 2%, lowering total employment to just under 4100 people, almost 8% lower than staffing levels of one year ago, 32% below September of '01.

Implied improvements in operating costs and productivity helped offset the impact of upward cost pressures in such areas as energy, insurance and pension expense. Business consolidation and restructuring expenses of $1 million this quarter were 1.1 million higher than the third quarter of '02. Depreciation of $12.3 million was 700,000 higher than last year, driven by exchange rates and increased depreciation from some of our restructuring actions. As a result, the operating income for the quarter was $11.1 million. Year-to-year we’re at 47 million, about the same as last year.

Before the accounting treatment of our preferred stock, we have reduced our net loss for the quarter to $3 million as compared to 3.6 million last year. And year-to-date, our $1.4 million net loss is over 6 million better than last year on essentially flat constant dollar sales.

Now back to Cash. We reduced net debt by $38.5 million in the quarter to 458.4 million, a five-year low. We received $25.7 million from the sale of our Asco joint venture shares and surplus really estate, but more importantly, we delivered $16.8 million from operations in the quarter. We used these funds to reduce term debt, retire a capital lease, meet our sinking fund obligations for our 2001 bond and purchase some of our '09 notes on the open market. The combination of these actions resulted in the retirement of 37.3 million in long-term debt from our balance sheet. No material gains or losses were recognized from these redemptions. Retirement of the capital lease reduces our scheduled principal amortization to about $2 million annually for the next four years.

Looking at our revenues, the third quarter showed its usual seasonal weakness, due in large part to the European summer vacation period, but was 2.4% stronger than last year after adjusting for exchange. Commercial aerospace revenues for the quarter were about the same as last year, in constant dollar currency terms. Both Boeing and Airbus are tracking to their 2003 delivery targets and have indicated publicly that 2004 should be at a comparable level. Industrial and market sales were about even with last year on a constant dollar basis. We are disappointed with the continued delays in the U.S. Energy Bill, which has an important influence on U.S. wind energy investments. On the other hand, we are pleased to see significant attention in Washington related to the funding for updated body armor for thousands of soldiers in Iraq.

Space and defense sales had another very strong quarterly gain versus last year. The gains were in both the U.S. and Europe across many, many programs, reflecting higher production, upgrades and spares, as well as nonrecurring revenues associated with aircraft development. Electronics revenues remained depressed for the quarter. There seems to be a drum beat of news from the industry that suggests a brighter future. But as in the past, this CEO will remain in the show-me camp until our revenues force me to celebrate.

In summary, we've now seen seven quarters of relative stability after the dramatic declines of the prior periods. While the fourth quarter of recent years has become a period of some inventory adjustments, suggestions of economic recovery, gains in air traffic and continued strong defense spending have encouraged us to focus on building our positions on the next generation of commercial and military aircraft, while seeking to exploit the growing non-aerospace applications for our products. The A380 Super Jumbo, the A400M European transport and its launch the all-carbon 77, offer composites industries an exciting long-term upside that requires our active involvement today. Now let me turn the call over to Stephen before we to open it up to questions.

Thank you, Dave. Well, let me fill in a few brief details you may need to complete the review of the quarter. First of all, might I talk about operating expenses.

As a result of the abnormally low level of SG&A expenses in the third quarter of last year, this quarter's spending of 22.9 million shows a year-on-year increase of approximately 4.4 million,.6 million if you take the calculation on a constant currency basis. For the last three quarters, SG&A expense has actually run, surprisingly, at 23.8 million in each quarter, despite the impact of a strengthening Euro and other cost inflation. This quarter's expense is down .9 million from last quarter despite $500,000 in one-time expenses related to the work stoppage in Kent during the quarter. R&T spending is up from last year and last quarter as we invest in new product and process and program qualifications.

The sale of our Asian joint venture interest was in accordance with the terms of our option and there were no gains or losses on the transaction. As Dave has noted, the Company generated 2.7 million from a real estate transaction and recognized a gain of $400,000 reported below operating income. As in the past, the Company will continue to explore opportunities for miscellaneous asset dispositions.

On debt, Dave has noted that total debt net of cash decreased by 38.5 million to 458.4 million as of September 30th, 2003, compared to the prior quarter, June 30, 2003. Interest expense during the quarter was 13.5 million as compared to 15.5 million in the third quarter a year ago. The decline in interest expense is driven by lower debt balances and lower interest rates. Table C at the last page of our news release provides a breakdown on the components of the quarterly interest expense between cash and non-cash ,fees and actual coupon.

With taxes, the Company's tax provision of 700,000 in the quarter was for taxes on European income. The company paid 2.7 million in net cash taxes during the quarter. As it has in the past, the Company will continue to adjust its tax provision rates through the establishment or release of a non-cash valuation allowance attributable to currently generated U.S. net operating income or losses until such time as U.S. operations generate income in future periods to utilize the net operating losses (indiscernible).

Equity and losses during the third quarter of affiliated companies was $300,000 for the quarter. These primarily reflected losses being recorded by our Asian joint ventures producing composite structures in China and Malaysia, as they continue their process of ramping up production of their components. Just to remind you, these joint venture results do not affect Hexcel’s cash flows. Equity and losses (inaudible) affiliated companies was 500,000 in the second quarter of last year.

Well, this completes management's prepared comments on the third quarter 2003 results. If I may return the call to the conference call operator, we will now be happy to respond to your questions. Thank you.

Thank you. (Operator instructions) We will take today's first question from Steve Binder with Bear Stearns.

Dave, can you maybe touch -- sequentially you always see, obviously, detrimental margin because it’s your lowest volume. But I'm just wondering on a pre-SG&A basis, when you look from Q2 to Q3, I think the detrimental margins kind of approach 40%, which was not as good as a year ago but probably better than over the last couple of years before that. Were you happy with the performance when you look at it? Maybe can you shed some light if there is any pluses or minuses included in that?

What level of margin are you looking at, Steve?

If you look on a pre-SG&A basis, sequentially from Q2 to Q3 -- right? So a drop in sales of 21 million, right? And on a gross profit basis, I was looking at some -- before restructuring, right? In both Q2 and Q3 it looks like you kind of (inaudible) the 35 to 40% range, which is typically you have done worse than that back -- if you date back a couple of years ago.

Well we don't want to date back to a couple of years ago. The gross margin as a percent of sales if you were to normalize it are even with last year. So, I wouldn't say there are any big surprises in there. Of course, you have some mix in any business. You’ve got to have your mix of space and defense. Pretty strong ballistics. So there is some mix going on. But I didn't see anything on the variable or gross basis that disturbed me at all in the quarter.

Can you maybe also comment with respect to what you are expecting with respect to working capital performance in the fourth quarter? Do you expect working capital to actually build or will you see a further decline there?

Let me just think of the elements. Inventory is always -- you know we always try to really handle inventories in the fourth quarter. It always gets tricky, because customers sometimes push and pull trying to do the same things at the end of the year. Receivables and payables are generally related to sales. So, you have some increase in the fourth quarter versus the third quarter, but not as much as in early years, many years ago, when the fourth quarter used to be strong. I don't see that in the last couple of years until the economy starts to get going again.

Working capital -- I'm sorry -- capital expenditure by the way was up this quarter, but still light as the total year goes. Our timing on capex has clearly been back-end loaded this year as we hesitated and delayed some things at the beginning of the year with the Iraq situation.

Stephen, do you have anything to add on the working capital?

Yeah, the other thing that tends to drive working capital is how strong or weak December is. We've mentioned in the past that sometimes if the customers decide to press their inventories, you can get a strong October or November and then a sparse December, which means if your sales are low in December you didn't build a lot of receivables in that month. So sometimes you get a sort of drop-off. It very much depends on what that final customer buying behavior is at the end of the year.

I guess last on the commercial aerospace front. I was wondering if in your conversations with Boeing and Airbus, do you get a sense that the '05 build schedule will be higher? I mean, Airbus is kind of thinking to themselves that they've got basically potentially 350 positions in '05. But, you know, it's unclear on how much of that is truly firm and (inaudible)skyline. Do you, from a planning purpose standpoint, are you expecting kind of the manufacturers to be flat in '05, or do you think we will see an increase?

I don't know that I have got a strong view on '05 yet. It is all a question of when things start to come back. I still don't think things will go much lower. I've said that for sometime. Fortunately it is still the case. I mean, of course you have the addition of A380 build-up which is incremental to what you would normally see from build rates. But our planning doesn't really require that we have a real good eyeball on 2005 at this stage.

Dave, one last thing on the 77. The Japanese obviously could potentially have a big role in production of the plane. How will that really affect your penetration, given the fact it's going to be nearly an all-composite plain?

I don't know that the fact that partners are global would have any dramatic influence on us. For a long time, both builders have used tier ones who are big customers of ours. So when we look at Boeing or Airbus sales, we always look at the chain -- all the people who make the pieces and parts. The discussion on the 77, sounds like they are going to make bigger parts at some of these partners. But we do business with all of these customers; we call on all of them. So I don't know that the split on those parts by Boeing or Airbus necessarily influence us one way or the other, just still a share fight .

Okay. Thank you.

We will take our next question from Hilal Oshen with Deutsche Bank.

Good morning, gentlemen. First, David or Steve, on the SG&A last year, can you just remind us why it was abnormally low in last year's third quarter?

I think a confluence of events. I wouldn't point to any one thing. I think you did see the impact (inaudible) reduced headcount significantly in the first half of last year. Across the front, expenses related to people were coming out and being leveled off. So all of those things accumulated. At the end of the day, you just had a pattern of events that everyone was pushing hard to take cost out of the Company last year. So you got a remarkably low quarter, which we haven't, obviously, replicated since.

If you look at the run rates, you know, we have been pretty successful despite upward pressures and things like pension expense and insurance and those sorts of things. We're being pretty successful in keeping the costs under containment.

Okay. And regarding R&T expense. You guys obviously are going -- are focusing a lot on the next-generation aircraft, both commercial and military on the military side. Are you still comfortable with the 2% of revenues sort of range for R&T expense?

I wouldn't predict a sudden sharp change. 2% is an outcome as opposed to a deliberate policy decision, where we spend the money we need to spend to achieve our goals. You have seen an upward trend in spending over the last few quarters, which reflects specific programs and projects. As is required, we will invest in what needs to be done to support our customers. Don't interpret that as suddenly some large explosion in spending. We were clearly spending more dollars this year than we spent last year.

Right. Okay. Just switching to the industrials business. The -- on the reinforcement side you guys are up strongly. And I guess that is because of the body armor composites. You are down for the first time in about a year. Just from David's comments I'm guessing that is due to the Wind Energy, is that correct?

It is a collection of things. Recreation was a strong quarter. Normally it's stronger in second and third quarter, and was again this year. Automotive was down a little bit. Wind is a little lumpy. You have got a couple things that go on there as our customers develop new, bigger designs. There are change-over periods when they go from one generation to the next generation. There is some of that in there. There's certainly some hesitation over the tax credit in the U.S., I would suggest, or public markets would suggest. And there is a little slowing perhaps in Germany that is being picked up in some of the other countries. But I wouldn't say the underlying wind market is down. I'd say we had a little bit of a soft quarter perhaps, and that certainly ballistics are running strong -- have been running strong for a number of quarters. Based on what I read in the media about what is going on in Washington, I think you can expect it to be strong for sometime to come.

Great. Finally, David, on – we definitely appreciate you being cautious on the electronics side of things. But can you maybe discuss some of the things that you are seeing that might point to what you call the brighter future in that segment?

You are going to try to draw positive comments out of me?

Exactly.

Well, I read the earnings releases and projections from all the big end-market people there. People like Cisco and IBM and Intel, and all of those, they are seeing a bright future. I would be encouraged if I was that kind of a person. I just don't want to go there.

Okay. Appreciate it. Thanks.

(Operator instructions)Next to (inaudible) with J.P. Morgan.

Good morning. The first two questions I have are for Stephen. Stephen, I noticed in the press release that you guys bought back some of the sub-debt. Can you just give us an idea of what the basket is under your bank agreement to buy back public debt?

Under our bank agreements, we are permitted to repurchase sub-debt as long as we meet certain covenant conditions and -- which relate to fixed charge and total availability, and I don't precisely remember what those are. There are two conditions that basically say you have to have both liquidity and you have to be running at a certain level of fixed charge.

You know, the other component that controls our ability to repurchase debt are the terms of our bond indentures. The senior secured notes have certain baskets to permit sub-debt repurchases. And, you know, provided the ability that the proceeds we got for ASCO could be deployed for the repurchase of sub-debt. But, then of course, at such time as we get ourselves back to being able to pass the coverage ratios as you would normally find in a high yield indenture, then we have much more flexibility in these matters.

I would say for the nearer term, the baskets give us the ability to defray some of our cash flow to repay debt when the opportunity arises.

Okay. And the second question is, we haven't spoken on guidance. Have you given out any EBITDA guidance (indiscernible) an EBITDA guidance for this year?

We have not given any guidance on EBITDA or EBIT for this year or next year, for that matter.

Okay. The two other questions I have actually relate to the macro fundamentals. Number one, I think we touched upon Boeing and Airbus deliveries for this year. And I think in the press release you mentioned they are basically expected to be flat going into '04. Can you just sort of refresh my memory as to what the absolute numbers are for Boeing and Airbus deliveries for this year? Then secondly, Boeing recently cancelled the 757 program. I just wanted to find out how that is going to affect you?

As I recall, the Airbus public statements are in the range of 300 aircraft and Boeing are in the range of 280, for a total of 580. 757 cancellation -- 757 has been winding down for sometime now. The order book and build rates have been dramatically declining in recent years and months. So I don't think any of us who are close to the industry were surprised at that. It wouldn't have any material effect on us.

Okay. Thank you.

This concludes today's question and answer session. At this time, I'd like to turn the conference back over to Mr. Berges for any additional or closing comments.

Thanks very much for attending this morning. We appreciate your continued support and look forward to some growth in the not-too-distant future. Thank you very much.

Once again, this does conclude today's conference call. We thank you for your participation. You may now disconnect. (Normal Termination.) The call concluded at 11:26. --- 0