Hexcel Corp (HXL) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Hexcel Corporation second 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, Chief Executive Officer, and President. At this time I would like to turn the call over to Mr. Forsyth. Please go ahead, sir.

Good morning, everyone. Might I welcome you to Hexcel Corporation's second quarter 2004 earnings conference call today, July 22. With me today are David Berges, our 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. Specifically, certain statements contained in this call may constitute forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that can 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 of 2003 Form 10-K and today's press release. Lastly, I like to remind you that this call is being record by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed 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. For the second quarter, we again achieved year-over-year revenue growth in every one of our four reported market segments, both in actual and incomes in currency terms. And again we were able to deliver good operating leverage on the incremental sales resulting in margin rates that have been seen from the Company since the late 1990s. Improved operating trends of profitability translated to second consecutive quarter in which we have reported net income. And thanks to good cash performance we continued to opportunistically reduce our outstanding debt through open market purchases. In the quarter, sales were up 16% by $38.1m to $272.2m. On the constant 2003 currency basis, sales would have been $33.1m higher than the second quarter of last year. So, we had 14% real volume growth. Gross margins were up $13.9m and as a percent of sales up 230 basis points over last year. Operating income was $27.4m for the quarter, up 46% over the last year and included $13.2m of depreciation and $0.9m of business consolidation and restructuring expenses. Operating income reached 10% of sales for the first time since the third quarter of 1998. Net income for the quarter was up over 80% to $8.8m compared to $4.8m for the same period last year.

After the $3.1m accounting treatment of deem dividends and accretions, net income available to common shareholders is $5.7m or $0.10 per diluted common share as compared to $0.05 in the second quarter of 2003. Aided by $6.5m in the sale of surplus real estate, net debt decreased by $23.5m in the quarter to $422.8m. The company used surplus cash to purchase a $11.8m, in principal of our 9.75 senior subordinated notes in the period. Now, I would to cover trends in our market segments during the quarter normalizing for exchange rates. On a constant currency basis, commercial aerospace revenues for the quarter were up $11.5m over the last year, thanks to stable OEM build rates and growing sales for the new A380 program. Since our last call, Airbus is formally indicated that there will increasing production rates for their narrow body aircraft next year, by 25% and recent Boeing announcements have also discussed higher aircraft deliveries in 2005. With Hexcel deliveries typically four to six months ahead of built schedules, we would expect to see some good comparisons in this segment in upcoming quarters. Industrial market revenues showed tremendous strength in the quarter, up 27% in constant currency terms over the last year, driven by another strong quarter of ballistic reinforcement sales and increases in our sales for wind energy. The demand for ballistic materials continued to surprise with sales up sharply year-over-year, as well as sequentially. Three providers of ballistic fibers have recently announced capacity expansions and although this capacity will likely take over a year to come on line, this combined with our customers significant order book suggests that the strong production levels will continue for sometime.

Wind energy revenues demonstrated the growth we anticipated, due to the continued market growth and new product introductions and we expect this trend to continue. Sales of Space & Defense of $49.5m remained strong, up almost 1.3% over last year's period on a constant currency basis, despite the termination of the Comanche helicopter program, which contributed $4m to last year's second quarter. The gain for broad-based reflecting higher military aircraft production, particularly the F-22 Raptor and many US and European helicopter and blade replacement programs. In constant currency, electronic revenues for the quarter were $15.3m compared to $13.5m last year. In both US and Europe, we continue to focus our product mix for its higher-end applications as the ongoing migration of the commodity type products to Asia continues. This focus on advanced technology materials and specialty applications together with some recovery in the industry demand is contributing to enhance performance in this segment. So, in summary, with the company's strong performance year-to-date and the commercial aerospace market just beginning to recover, we now expect full-year revenues to exceed the high-end of our $1b revenue guidance. And for the half, despite the fact that over 50% of our growth came from our lower margin industrial segments, we have managed to expand operating margins by almost two points demonstrating the earnings leverage we can obtain from higher sales revenue. Now, let me turn the call over to Stephen before we open it up to questions.

Thank you Dave. Well, let me fill in a few very brief details this quarter to complete the review of the quarter, the advantages of a strong quarter. As Dave has noted, total debt, net of cash decreased by $23.5m to $422.8m at the end of the quarter. interest expense during the quarter was $11.9m as compared to $13.9m in the second quarter of 2003 and cash interest expense was $10.8m compared to $12.7m in the prior quarter. Last year's refinancing and the subsequent continued reductions in our debt balances have driven these reductions in both book and cash interest expense. Table C on page 13 of the release provides a break down of the components of the quarterly interest expense and of course Table E details our outstanding debt balances. Equity and earnings during the quarter from affiliated companies were $500,000, primarily reflecting gains from our Tech-Fab joint venture and the decline in the losses we recorded by our Structures joint ventures in China and Malaysia, as the ramp up of that aerospace composite production continues. This is a $900,000 year-on-year improvement over last year's equity losses for the same period. Well, this completes management's comments for our second quarter results. If I am able to turn the call to the conference call operator, we will be happy to respond to your questions. Thank you.

Thank you. The question and answer session will be concluded electronically. If you would like to ask a question, you may signal by pressing star one on your telephone keypad at this time. If you are using a speakerphone, please make sure your mute button is released to allow your signal to reach our equipment. Once again, press star one for a question. We will take our first question from Steve Binder with Bear Stearns.

Good morning. Dave, will the fourth quarter aerospace sales actually be the high point of the year as far as when you look at quarterly progression?

The fourth quarter result is a little tricky to predict because of year-end inventory maneuvers, but as bill rates go up we clearly should get some better year-over-year comparisons whether or not it comes out stronger in the first or second quarter, I am not clear.

And then may be, when you look at sequential from the first to second quarter to show the incremental gross profit base, looks like it, incremental margins is 73% just taking incremental, gross margins against your incremental sales. And all that growth came on the industrial side. May be can you touch on what happened there if this, for the next version rates were incredible?

Well I don't know if sequentially is good the way we look at it as may be year-over-year where, if there are any timing issues, but I feel good about the incremental margins that we are recovering, and it's mostly just trying to hold fixed cost and get the top line growth - I am sorry it is lower margin business in that industry, its significant enough to increase and we managed to hold the cost that will flow through very nicely.

The reason I asked you on a go forward basis kind of using second quarter is kind of your foundation - - it looks to me like good jump to the growth is going to come over in the next couple of years of the Airspace side. And I am just wondering whether 30% kind of incremental margins are what we should expect from Hexel?

Well it's what I would like to expect. I think what you find if you look at the first half this year versus the first half last year incremental operating income was in the net rate of 20% or 21%. So to the extent I mean if you were to say that kind of tracks gross margins, seeing that get through would be a good baseline I would think.

From your SG&A the level where you think do you need to grow SG&A at all going forward in light of the ramp in the Aerospace, think you can hold that pretty stable?

I am not sure of that SG&A necessarily have to go up with Aerospace. You've seen that it has gone up year-over-year. It has more to do with regulatory changes than it has commercial Aerospace sales. I think the things you more likely expect to see start to creep up our capital expenditures and other things that are volume related.

And then if you look at the industrial side, do you expect industrial sales to - you mentioned touched on the ballistic side in the. What I mean is, is this a kind of steady run rate going forward or does it have two or three quarters of prosperity and it comes back down in '05 or what do you kind of see if it's going forward?

Well I can't really say, and if you looked at previous statements you still have been wrong every time in the past, I kind of thought we were as high as we could go and we continue to manage to get more out of our facilities as fiber suppliers. I think the order pattern is stronger than we would have said six months ago, continued to be very large orders place on the industries that's fiber capacity limited. So I think we are more optimistic about the duration of the strength than we have done in the past.

One last thing if you look at the last five years, when Q2 historically , and you have a different kind of revenue progression now than you did in the last five years sequentially, but now typically receivables and inventories are also stabled if not lower in Q2 than Q1, and they are both up this quarters I mean is that is there anything there to kind of worth note or is it really just the sales ramp or maybe just touch on that?

I think receivables is clearly sales ramp, I don't think the inventories moved in much especially if you could adjust that foreign exchange rate changes over the period. I am actually pretty feel pretty good about how we managed to hold the inventory despite the increases.

Okay thanks very much.

If you know the spot rate on the Euro was higher at the end of June and at the end of March.

Okay thanks again.

And as a reminder press star one for a question. Our next question comes from Shelly with Jimmy Credit.

Good morning you touched on this a little bit in response to the last question. Could you talk a little bit more about the capacity coming online in the ballistics business that's supply capacity correct from --?

Supply for fibers there is some announcements that you can find if you go look for them DuPont has announced increase in Kevlar capacity I believe 10%, and I think they have indicated a year to 18 months, sorry don't remember exactly. Honeywell Spectra announced an increase recently I think also at 10% and who provide just I think last week announced an increase. So all of the major suppliers of Aramids and Para-Aramids that go into ballistics have indicated increasing capacity.

Okay, thank you.

We have no further questions at this time. I' d like to turn the call back to Dave Berges for any final or closing comments.

Okay, thank you everybody. We are happy with the progression of the year and, particularly encouraged that all the strength comes even before we've seen the impact of commercial recoveries. So, we look to forward to some good quarters, going forward. Thank you very much.

And that concludes today's conference call. We thank you for your participation. You may now disconnect.