Hexcel Corp (HXL) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the Hexcel Corporation First Quarter 2004 Earnings Release 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, CEO and President. At this time I would like to turn the call over to Mr. Forsyth. Please go ahead, sir.

Yes. Good morning, everybody. Might I welcome you to Hexcel Corporation's first quarter 2004 earnings conference call today, April 22nd. With me today are David Berges, Hexcel's Chairman, President and CEO, Michael Bacal, our Communications and Investor Relations manager. The purpose of today's call is to review our first quarter earnings release distributed last night. 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 may make during the course of this call. Certain statements contained in the 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 2003 Form 10-K and 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 expressed permission. Your participation on today's call constitutes your consent to that request. Well having taken care of the formalities, let me turn the call over to Dave.

Thanks, Stephen. For the first quarter since my arrival almost three years ago, Hexcel had both sequential and year-over-year revenue growth in every one of our four markets, even if you adjust for currency changes. The bank saw our cost control efforts, good leverage resulted in what we think is a great quarter under the circumstances.

As we told you during our last call we've got our sight set on delivering net income on a consistent basis. So we feel particularly good that we were able to generate positive EPS during the quarter without the benefit of income from non-recurring events. As we did last quarter, our press release provides our estimate of revenues for the quarter at the same exchange rates as last year, what we call constant currencies, to help you understand real volume trends. Income and expense references remain in current dollars.

In this quarter, 10.8 million of our 15% sales increase came from exchange rates. So on a constant 2003 currency basis, current sales would have been $252 million 23.4 million higher than last year or 10% real volume growth.

Gross margins were up $8.6 million, and as a percent of sales, up .7 of a point compared to last year, despite the impact of FX rates on our sales and the significant portion of our depreciation. Operating income was $23.7 million for the quarter up almost 38% over last year’s 17.2 million. It included $13.3 million of depreciation and $0.5 million of business consolidation and restructuring expenses.

Net income for the quarter was $8.1 million compared to a net loss of 3.2 million for the same period last year. The accounting of deemed preferred dividends and accretion, a 3.1 million this quarter compares to last year’s 0.5 million for a partial quarter. Nevertheless, net income available to common shareholders was $5 million or 9 cents per diluted common share as compared to a net loss of $3.7 million or 10 cents on the same basis last year.

As for cash, despite traditionally being our heaviest cash usage quarter, net debt increased by a modest $4.6 million to 446.3 million. Major uses during the quarter included annual compensation and benefits payments, coupon payments on our 2009 notes and working capital increases from year end lows. Despite this seasonal usage and because we came into the year with over 41.7 million in cash, we are able to reduce borrowings under our senior secured credit line in European overdraft facilities as well as purchase $10 million of our 9.75 senior subordinated notes in the period.

Now let me cover our sales trends by major market using constant currency to remove the impact of exchange rates. Constant dollar commercial aerospace revenues for the quarter were up $1.5 million over last year, thanks to stable OEM bill rates and growing sales to the A380 program. Additionally, as you can see in table A, the relevant sales of our structures business declined by $3.1 million year on year, reflecting the continued transition of work to its Asian joint ventures. I'm sure you've all noted the encouraging global year-over-year air traffic numbers, but remember, they compare to the pre-war and SARS worry period. There are no public indications of line rate changes at Boeing or Airbus, but we remain hopeful that the next changes are more likely to be up than down.

Industrial market revenue showed continued strength in the quarter, up almost 20% in constant currency terms over last year driven by another strong quarter of ballistic reinforcement sales and large increases in our sales for recreational applications. You may recall that it was only late in the first quarter of 2003 that ballistic demand jumped up. So this is the last easy year-over-year quarter comparison, though we do expect it to continue at the current strong pace through 2004.

Wind energy revenues demonstrated the growth we anticipated due to continued market growth and new product introductions. Sales, the space in defense were very strong again, also up almost 20% over the last year's period on a constant currency basis. The gains were broad based reflecting higher military aircraft production, particularly the F22 Raptor and many U.S. and European helicopter programs. Unfortunately during the quarter, a stop work notice was received after the cancellation of the Comanche helicopter programs. Sales for this program were $14.1 million last year and running at a similar pace through the first quarter. Because of our diversity of participation in this market, and our expectation that some of the Comanche funds will be diverted to helicopter blade replacement and upgrades we are maintaining our view that our space and defense revenues will be up this year.

In constant currency, electronic revenues for the quarter were $15.2 million compared to 14.6 million last year. In both the U.S. and Europe, our product mix continued to shift towards higher end applications, which is consistent with the ongoing migration of commodity type products to Asia. So, as we've said in the past, we do not expect Hexcel's electronic revenues to return to prior levels, but do expect enhanced marginal rates as we focus on a advanced technologies and special applications with our lower cost structure.

As I said earlier, we are focused and moving to consistent delivery of net income through growth and productivity, as well as all the elements below operating income. Reductions in total debt have played a significant role in reducing our interest expense. And we will continue to look for additional gains going forward. Our Chinese and Malaysian joint ventures are making steady progress towards profitability as their production volumes grow. So, we expect improved equity and earnings from affiliated companies.

I'm sure you've all noted that the first half is traditionally stronger than the second for Hexcel, but I hope you will agreed that we are off to a terrific start for 2004. Now let me turn the call back over to Stephen, before we open it up for questions.

Thank you, Dave. Well let me fill in a few brief details, you may need to complete your review of the quarter. As I did last quarter, let me start by talking a little bit about the constant-currency estimates so people have a better understanding of the impact on the company. Here we have again provided our estimates of total revenues and market segment revenues in constant-currency. That is, at the foreign exchange rates that applied in the applicable periods in 2003.

You might well ask, why do increases in the euro and the British pound also -- do not also inflate gross margins and operating income. The impact here is more complicated. Most of the aerospace industry does its business in U.S. dollars. As a result, Hexcel has a significant amount of its European manufactured aerospace sales denominated in dollars. As the euro strengthens, absent hedging, the sales price in dollars remains the same, but the product cost measured in U.S. dollars increased, squeezing margins.

However we do undertake some foreign exchange hedging as described in our SEC filings. If the euro strengthens, we recognize income from those hedges that increases the dollar value of our sales to help compensate for the higher manufacturing cost in dollar terms. We also have European sales denominated in euros and manufactured in euros. So, as the euro strengthens sales, cost and profitability all increase for those goods as measured in U.S. dollars. So, as the euro strengthens, some of our products become more profitable in U.S. dollars terms and others become less profitable. And as a result, the impact of the strengthening euro and pound is less pronounced on our margins than it is on our sales.

Next let me talk a little bit about our debt. As Dave has noted total debt net of cash increased by $4.6 million to $446.3 million at the end of the quarter due to a number of factors occurring this quarter. Interest expense was 12.4 million compare to 13.7 million last year. If you recall that in the first quarter of last year, we accomplish our refinancing and reduced some of our interest burden. The subsequent reductions in our debt balances have continued to drive down our interest expense.

Table C provides the reconciliation of the components of quarterly interest and I'm sure will be helpful to you should you wish to try to forecast interest expense for our company. Lastly, equity and earnings during the first quarter were actually equity and earnings as apposed to equity and losses and we reported $0.3 million for the quarter. It reflected our US TechFab joint venture doing better and continuing decline in the losses recorded by our structures joint ventures in China and Malaysia having ramped up production and moved towards profitable performance. This is a $700,000 improvement over last year’s reported performance. Well, this completes management’s comments for the first quarter. If I may turn the call back to the conference call operator, and we will be happy to respond to your questions. Thank you.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question please press the "star" key followed by the digit "one" on your touchtone telephone. Once again it is star "one" if you would like to ask a question.

And we'll take our first question from Steve Binder with Bear Stearns.

Yeah. Good morning. Good quarter. Dave, can you maybe just touch on space & defense? You know, you talked about the Comanche program but will this represent -- I mean I imagine this represents the strongest quarter, but on a year-over-year basis, you know when you back out the impact of Comanche, how does the year-over-year comparisons kind of progress through the balance of the year, and do we see a slow down in '05?

The Comanche as I said I think was 14 million last year. So the first quarter was kind of a typical quarter. So you would take out a run rate of 14 million if you want to compare it to last year. Of course to this point none of the Comanche wasn't so much the 14 million, it's what's the potential was longer term. We had a very good position on it. Nevertheless, it seems to be offset, Steve, a lot at least currently by demand for blade replacement. We normally think of ourselves as an OEM-only provider but they're going through quite a few blades in Afghanistan and Iraq. So the demand for blade work is going up, and I think it will all but neutralize the Comanche impact in the first couple of years.

Can you try to quantify how big a benefit that is right now?

Well. I’ve indicated that I thought it would nullify the Comanche so that gives you a general idea -- I don't have the specific numbers.

So year-over-year you're saying basically it's sufficient to nullify, but then you get some of that benefit in the first quarter?

Some, but it's more a funds transfer, a redirecting of the funding to replacement kinds of programs.

Right. With respect to -- can you give us an update at all on the 77 and how that's progressing for you?

Well, as I have said in the past, an airplane program gets launched and it's a massive opportunity and a massive effort for the whole organization and it goes for years. So there's not a lot of specificity I can give to what has happened in three months, but we probably have you know 10 or 15 different kinds of materials that we are presenting and reviewing and trying to show the advantages of, and it's just a long process that almost in any circumstances has got a favorable ending to this story. So it will be a long time. The A380 though is starting to have a material impact on our top line.

And with respect to build rates on the aerospace side, based the way -- given the way you are sized today what are you -- you talked about six months -- that you basically have an advance of six months as far as any rate changes. I mean is your anticipation right now that we won't see an upswing in production for the two manufacturers until '06, or do you think you'll see a small increase in '05 for the OEs which means some firming in rate as we progress through the balance of this year?

You probably have a better view of the future than I do, Steve, because of what you do for a living. You know, the air traffic is certainly encouraging. I think you have to kind of answer the question to what happens to global terrorism and what happens to the rest of the economy? I am encouraged by the latter. I am discouraged by the former. If you took Sears out of the equation, clearly, we seem to be on a trend to recovery that's going to indicate some increases at some point in the future. 2006 is starting to look like a long ways away. So, I would hope that there will be some firming in 2005 and of course that we'd like to get a jump on six months before they go up. I don't have any indication though from any public statements of our customers that that date is set for increases.

In your working capital usages it was, you know, seasonally consistent with patterns in the past. Can you maybe give us some kind of commentary on the full year 2004 as far as working capital variance, what your current assumption is?

Well, I think, typically we use sort of a day’s calculation for, you know, sort of a benchmark. As an old manufacturing guys, I would like to see us do better than that, particularly on inventory. So, what Stephen would help you with is probably some days projections, and I will always be pressing to do better than that. I think we've done a good job on inventory management in the past. And what I'd really like to do is see real just-in-time progress indicating that we don't have to go up proportionally with sales. That remains to be seen though.

Yes, maybe I would just add. You know if you look at the seasonality historically to our business, the fourth quarter and particularly December is a low sales quarter. So, you see real revenues decline and with it working capital decline rebuilt every first quarter. It stays at that sort of level through the second quarter. But then you usually will see inflows from working capital in the third and fourth quarter. And so, in looking at 8. -- 18.1 million outflow this quarter, that's probably close to the peak for the year and then we'll recover sort of as the year progresses.

So, do you expect to more than erase -- you expect that working capital for the balance of the year to be usage or do you think be a source?

It all depends on revenues. You know, if things remain as firm as they are at the moment in terms of revenues, even though the second half will be lower than the first half, you could still have a small usage. But, you'll have the benefit of improved operating performance. And so you’re reporting net net to hedge. So, in some respects I hope we have a usage because it will be indicative that the business has done better. We just have got to see how the year plays out.

Okay. Thanks very much.

Once again, that's "star" "one" if you would like to ask a question. Again, it is "star" "one" for questions. And we do have a question from Mittal Shah (ph) with Goldman Sachs.

Hey, guys. Could you talk about the integration of the Livermore facility, and how that's going today and is it completed?

Oh, no. It's -- that's a two or three year project. We just announced it at the, I think, the day before last quarter release, wasn't it, Stephen? And it's a very long process of -- approved – updating qualifications, getting the customer support, moving equipment, starting it up, going through the whole qualification process one piece at a time. We have had very good results in discussions with the workforce and the union. We've got good support for what we need to do from our customers. So, we're encouraged at the start of the process, but it's a very long process.

Okay. Thank you very much.

Sure.

There are no further questions at this time. And this does conclude today's Hexcel Corporation conference call. Thank you for your participation. You may now disconnect.