Hexcel Corp (HXL) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the Hexcel Corporation First Quarter 2006 Earnings Release Conference Call. Today’s call is being recorded. With us today are Mr. Stephen Forsyth, the Executive Vice President and CFO 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.

Good morning everybody. Might I welcome you to Hexcel Corporation’s 2006 First Quarter Earnings Conference Call today, April 25th. With me today are David Berges, Hexcel’s Chairman, CEO and President and Michael Bacal, our Communications and Investor Relations Manager.

The purpose of the 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 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 our 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 2005 10-K and today’s press release. Lastly, might we also remind you that the 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 for, to give an overview. Then I will fill in some of the details and finally Dave will return with some concluding remarks before taking your questions.

Thanks Stephen. The first quarter produced revenue growth and margins that were right in line with our January guidance. We saw the return to teen growth rates in commercial aerospace and wind energy we anticipated, which more than covered the expected decline of the ballistic material sales. While the stronger dollar reduced the value of our Euro and British pound sales, the impact on our margins was less pronounced due to the smoothing of our FX hedging programs.

We had a 23.2% gross margin rate in the quarter with incremental gross margins of 32% on the sales growth versus last year. The operating margin trend was also solid but needs a little work to understand the year-on-year improvement. This is the quarter we adopted FAS 123(R). And the non-cash expense related to stock compensation was $3.4 million in the quarter compared to $0.5 million in the first quarter of last year.

In January we announced we are taking further actions to rationalize our electronics manufacturing capacity, which includes the closure of our Washington, Georgia plant this summer. The cost of this program and the ongoing actions to close our Livermore, California plant resulted in business consolidation and restructuring expense of $3 million this quarter compared to $0.4 million in the first quarter of 2005. Lastly, we had a $1.2 million transaction cost charge related to the third and final secondary offering of the common stock by our former private equity investors.

If we exclude the year-over-year impact of these three items, operating income of 12.2% of sales represents incremental leverage of 22% on the revenue growth versus last year. For the first time in years, we had normalized, a normalized tax rate and no accounting related to preferred stock. And net income for the quarter was $0.15 per diluted share. The impact of the transaction costs, restructuring and FAS 123 accounting treatment was about $0.04.

Turning to revenue trends, let me as usual give you the comparisons on a constant currency dollar. For a change, the dollar was quite a bit stronger than a year ago. Total sales grew 9% in constant currency compared to the first quarter of, compared to the first quarter of 2005, in line with our expectations.

The big growth story for the quarter was our performance in commercial aerospace markets where sales were up 19.1% in constant currency or $25 million for the quarter. Increases in commercial aircraft production at both Boeing and Airbus drove the year-on-year sales growth. And the impacts of the push out of the A380 program seemed to be behind us as Airbus sales for the quarter were much stronger sequentially then we saw in the third and fourth quarter of 2005, particularly in the latter part of the first quarter.

Industrial market revenues reflected the trends we’ve seen for a few quarters, growth from wind energy applications being offset by the steady reduction in ballistic revenues from the surge levels of 2004. This quarter for the first time, wind energy sales exceeded ballistic sales. Wind is now moved from the fast growing niche to the biggest sub-segment of our industrial market.

Revenues from wind energy applications were up 17.6% in constant currency compared to the first quarter of 2005. Our customers picked up their growth pace after their slow fourth quarter.

Sales to ballistic or soft body armor applications were down 18.8% compared to 2005’s first quarter and down 15% compared to the fourth quarter. We continue to see revenues from these applications settle back to sustaining levels from the surge levels of 2004 when the industry struggled to equip our forces in Iraq.

As most sales to wind markets are in Europe and ballistics are in the U.S., the constant currency mix of our industrial revenues has shifted somewhat. The 6.4% actual top line decline translates only to a 1.6% decline after FX adjustments.

Sales to space and defense markets in constant currency were up $4.2 million or 8.5% from last year’s first quarter, driven by a wide range of programs in the U.S. and in Europe. We continue to be encouraged by our prospects in helicopter sales, as both U.S. and Europe build rates are on the rise. And as with most of our markets, they’re seeing an increased penetration of composite materials for weight reduction.

Now let me turn the call back over to Stephen for some of the financial details.

Thanks Dave. Well I have a few matters I’d like to discuss in more detail this morning. First of all, I draw your attention to our R&T expense in the quarter, which was $1.8 million higher than the first quarter of 2005. This reflects our spending on product qualifications as we work to qualify our products on many new aircraft programs.

As Dave has mentioned, our taxes reflected for the first time in a number of years a full tax provision, with the U.S. deferred tax asset valuation allowance behind us, we now are providing for taxes on our earnings from U.S. operations. The tax rate for the quarter was 39.1% of pretax income, which was at the high end of the range that we had indicated. If you look at taxes though from a cash perspective, cash taxes for the quarter were only $2.4 million reflecting the benefit of the company’s substantial U.S. deferred tax assets. We continue to expect cash taxes to be substantially lower than the tax provision this year as we continue to benefit from those U.S. deferred tax assets.

During the quarter, total debt net of cash increased by about $30 million. If you look back over time, you’ll see that traditionally we do use cash in the first quarter of each year, partially due to the timing of annual benefit payments and also because of the seasonal working capital build coming off the slow end of the fiscal year.

For the year as a whole, we still continue to expect cash flow to cover the costs of our capital expenditure programs and that we will generate modest free cash flow to repay debt over the balance of the year.

Working capital usage was a little up this quarter. We had provided details again by line item in our statement of cash flows. As monthly sales grew as the quarter progressed, our account receivables peaked particularly in Europe towards the end of the quarter. We’d expect this effect to normalize as the year progresses.

On the inventory front, we did much better this quarter with inventory growth much more modest and lower than the rate of growth in sales, which is where we’d want to see it.

As Dave has explained, like all calendar year end companies, Hexcel adopted the new accounting standard on stock-based compensation FAS 123(R) as of January 1st. For the quarter, we incurred a non-cash expense of $3.4 million compared to the $0.5 million we incurred in the first quarter of 2005. This amount for the quarter was higher than the guidance that we gave in our year end earnings release as we determined that it was required that the expense associated with a fair value of certain awards should be accelerated under the provisions of the accounting standard. The impact of that acceleration is to increase the total stock-based compensation guidance that we had for the year by approximately $2 million. But it will also result in the expense bearing from quarter to quarter. And as a result, we’d anticipate that the stock-based compensation expense that we incur over the next three quarters will progressively decline from the level that you saw in the first quarter of 2006.

Well those are my comments. Let me return the call to Dave to provide some concluding observations.

Thanks. The first quarter was a good start for an important year for Hexcel. We are focused on meeting the current growth demands of our core customers in aerospace and wind, while at the same time making investments in plants and new products to support these same customers’ needs in the years ahead as composites become the baseline material of choice. The investments we are making today will drive the revenue and profits of the future.

The global market for air travel continues to grow relentlessly with revenue passenger miles increasing each quarter. Their current high cost of fuel only makes new composite-rich, fuel efficient models more of a necessity for the airlines of the world and should help sustain the long term demand for the new planes currently in development.

In the short-term, we are focused on execution, winning positions on these new composite aircraft programs, continuing our improvement in margins, generating cash, and accelerating our carbon fiber expansion.

Looking ahead at the calendar, I want to point out a few milestones that are quite meaningful to us. By the end of 2006, we’ll see the delivery of the first two A380s with at least triple the dollar composite content of any aircraft in production. The A400M, a turbo prop military transport aircraft with composite wings and propeller blades, will enter into initial development production in the late 2006. By the end of 2006, Boeing will start building the first 787, an aircraft with over 50% composite content and the A350 will follow. Beyond 2006, we see the upgrade of the Boeing 747 with GE’s next generation engines having significantly increased content of composites.

Beyond aerospace, we continue to be excited about the prospects for wind turbines, as the world seeks to reduce its dependence on fossil fuels and the oil prices only improve their attractiveness. In the last few years, I think Hexcel did a good job minimizing the financial down sides in a very difficult market. We expect to apply the same disciplines of maximizing our performance in this wonderful environment of secular and cyclical growth.

Now we’d be happy to take any questions you might have.

+++ q-and-a

Thank you. [OPERATOR INSTRUCTIONS] And our first question today comes from Steve Binder from Bear Stearns.

Good morning.

Morning Steve.

Dave can you maybe just give us an update on the 787 program and any advances you’ve made in the most recent three months? What are you willing to share? Obviously your competitor made another announcement today.

The competitor made another announcement that I don’t quite understand because I think it’s the same as what was announced a number of years ago. But the primary prepreg as we’ve disclosed for a number quarters or years probably is base lined on the 777 tail, which is a Toray material. I can’t quite make out what the dollar content that they’re projecting on that aircraft, but I’m sure it’s a significant position. I expect the same will happen with Hexcel.

As we’ve talked about in the past, we’ve got quite a number of materials that are being developed and qualified at this stage. But we don’t announce or declare any specifics on that nor do we have full confidence on any one of them until the full airplane is certified as a number of things have changed over the years.

So I mean as far as kind of laying out kind of definitive, well you’ll never provide us I’m sure with definitive content, but give us a very strong sense of what you will be doing on the aircraft that won’t be until the plane gets certified?

That’s correct though I think we have said consistently we expect it to be our best Boeing aircraft.

Right, right.

In fact, Steve I’d also say the 777 where that tail material is made mostly with Toray material, it is our best Boeing aircraft as well. And it’s probably true of the other players in the field.

All right and can you, your year-over-year incremental margin performance obviously was more standard, more standard to Hexcel levels, maybe you can just kind of on a sequential basis you had issues all throughout 2005 including labor productivity and commodity costs and carbon fiber availability and expedite costs and so forth. Maybe you can just give us some sense sequentially on the progress on those different cost pockets.

Well I think we, I think we characterized the second quarter of last year as having been a little bit disappointing from a productivity standpoint as we ramped up so dramatically in aerospace. Of course the third quarter strike, Boeing and the A380 push out and oil price spike made the third quarter difficult as well. This quarter I feel good that we got over 30% incremental gross margin. But I will admit we were helped a little bit by mix as Ballistic tends down and Aerospace tends up. The reason I think we didn’t get bigger leverage is it was a slow start to the year. I think we suggested in the release that sales grew pretty dramatically as the quarter went through. So January was a little softer than what we would have liked, a slow start to the year and of course we had to absorb the year-over-year increases in other costs. But I still feel good that we got, got to 32% leverage in the quarter.

Okay. Thanks very much.

Moving on, our next question will come from John McNulty from Credit Suisse.

Yes good morning guys. A couple quick questions. On the wind power front, I know last or toward the end of the year one of your customers had some pretty difficult bottlenecks from some other suppliers that they had. Was that remedied or throughout the quarter and are you kind of back up to a more normal run rate or are you still being held back a little bit by your customer’s ability to actually put out product?

I can’t say I know exactly how they’re doing at their output level and it does tend to be pretty seasonal for some reason where there’s a lot of buildup early in the year and a big push at the end of the year, that’s what disappointed us a little bit in the fourth quarter last year. We did notice a pretty significant step-up as the quarter progressed. So I think they must have made good progress on their difficulties.

Okay great, also on the Sikorsky strike, can you tell us if there was any impact that you had as a result of that or one that might lag and come in, in the second quarter or are you pretty much through that and it really didn’t impact you at all?

It was a pretty significant strike being six weeks long. We didn’t see a big impact in the first quarter. I would expect that there’d be some lag in the second quarter.

Okay. That’s helpful. And then the last question is on the ballistics front, I mean I think we all have known and you guys have made it pretty clear that that business was going to slip back down a bit from the kind of initial war period. But I was a little surprised to see it fall as much as it did. Is there, is there something else going on there or is this just kind of a gradual slide and you just happened to see a big incremental drop but maybe it doesn’t stay quite this extreme for this, for very long?

Well I think you, if you go way back in history, we don’t, you know we don’t break that out. But you can see industrial segment level sales in 2000, 2001, 2002 that were, that were, I’m sorry, and ’03 that clearly stepped up but it pretty, the incredible increment in 2004. And I think that’s not sustainable and there’s some drift that we expect will continue this year until it’s stabilized at the sustaining level. So I don’t, it’s only a question of do we get it over with quickly or does it trend down? It seems to this stage to be trending down in steps. And I don’t have any information that suggests the first quarter was an anomaly.

Okay. And then the last question, we saw a little bit of lumpiness in, it looks like in the, in the first quarter tied to options and you clarified that that’ll, that’ll mitigate itself a little bit throughout the rest of the year. Is there anything else on a sequential basis that we should be thinking about either as an incremental positive or negative when we’re trying to model you guys? I know you don’t put out quarterly guidance per say, but if you can help us out if there’s anything that we should really be aware ahead of time that would be helpful?

Well let me have a go at answering that one John. You reserve the correct fact that the stock-based compensation expense will decline over the next three quarters. I think the same is true of the business consolidation and restructuring expense. We took the larger portion of the costs related to the Washington plant closure this quarter. And you’ll see it sort of come down over the next three quarters. I think if you look at interest expense it’s a little higher this quarter for some technical issues but that too will trend down as the, as the year progresses. So no dramatic changes. But a number of things that sort of below the operating line that are going to progressively decline and obviously will help the earnings numbers.

And on the top line, I’m sure you’re familiar with the usual seasonality with respect to heavy European participation that we have third quarter generally softer, second quarter generally stronger.

That’s, yes that’s right. Okay, that’s great. Thank you very much for your help.

Sure.

And our next question is from Howard Rubel from Jefferies & Company.

Good morning gentlemen.

Hi Howard.

Thank you. Could you address first with respect to our reinforcements in ballistics, whether there’s anything you can do with those systems or those, the weaving rather than selecting set idle given a fall off in the business?

There’s actually a lot Howard that is done with that, with that technology. It just doesn’t have the high volume, steady run, one style, kind of velocity that this huge OTV contract had. That are, they’re up armoring hard, of Humvee vehicles, advanced combat helmet, side protection vests, police vests. But it’s got a very different profile than the enormous run that we had with the Iraqi buildup.

So there’s some mitigating factors. Are there other things that you can do to continue to sort of go out and offset this decline or--?

I think, I think it’s pretty limited. I mean the magnitude of this buildup is not something that I would envision being able to replace in the short term Howard. There is a good sustained level of ballistics that we’ve seen over the years that spikes when there is an upgrade to the military vest programs. And that’s what we went through and it’s just something we need to absorb with the growth of our other market.

In fact an added comment Howard, if you look at this business, I think we’ve long observed that because this is a very high value raw material that we process quickly, the margins on these products are lower than you’d expect on a lot of the other things that we do. And so the impact of step downs in revenue levels are less pronounced then it would be if it were in another segment of the business. It’s also a business where we have a pretty lean cost base. And so in terms of you may have looms that you’re not using but the real impact of that excess capacity is much less again then it would be in other parts of the business. So it’s something we can manage our way through.

I appreciate that. In talking about capacity, could you talk about capacity utilization in the, in the composites business and whether and then the, and how that’s influencing pricing?

Well carbon fiber is tight everywhere and we’re expanding capacity. And I’m happy to see most everyone else who makes carbon fibers increasing capacity. So I’m encouraged by that that we won’t stifle the long-term prospects for composites industry. On prepregs, we’re very highly utilized but we have additional equipment and capacity coming on stream that what we hope is the right pace to meet customer demand. Wind Energy has been requiring steady capacity expansion as you might imagine. So those markets that have been growing for long period of time like wind are almost always at a very high level of utilization and we keep adding capacity as we go. Aerospace capacity is now probably back to high utilization rates after the long lull from September 11th. But we have capacity coming on line to match.

So how do we get additional volumes from here, for example, seasonality in the second quarter given sort of the state you’re at right now?

Well it’s the incremental capacity adds that we talked about, that I just talked about.

And two other questions. One is the R&D level seems to have stepped up a little bit. Is that an indication that you’ve received some additional qualifications on some new products or is this in anticipation of trying to get new qualifications?

Well the actual qualification work that we go through gets booked in there as well as development on some new products that we think have some great promise.

So the answer is yes to both?

Well your question as I understood it was, is it high because we got qualifications? It’s because we are working on qualifications. So until qualifications are complete, you could expect to see higher numbers in that line.

But that, as opposed to being told to go home, thank you very much, your solution doesn’t work. You’re being told to continue to work the solution with some promise in the near future that we think you’ve got the right answer?

Correct.

And then last on, you talked about the trend in business improving as the quarter unfolded. Is April following that trend? Are we continuing to see improvement in April versus March?

I don’t really have any comments on April. But the second quarter is typically strong in part because of buildup for summer shutdown. So I don’t know any, I don’t have any news to report on April other then I would it expect it to be a good month.

Thank you gentlemen. Thank you David.

Wait a minute, gentlemen and David?

I didn’t mean that. It came across wrong.

Thanks Howard.

Moving on, we’ll hear from Steve Levenson from Ryan Beck.

Good morning David and Steve.

Hi.

Morning.

Could you give us a little progress report on the capacity expansion and the timetable?

The carbon fiber line in Salt Lake is looking good and on schedule as is the precursor line Decatur, Alabama, both we hope to power up somewhere around the end of the year and then start to work on the prove out and ultimately qualification for aerospace. The Spanish line is, land is acquired and working on a ceremonial groundbreaking next month.

What kind of shovels will you use for that?

I’m not sure, carbon I hope.

Lately there’s been discussion of a replacement for the Humvee to carry more troops, but it’s got to weigh the same 6,000 pounds as the old one. What do you think the opportunities are there for composites in the armor?

Well we have developmental program that we’ve, that we’re working on for all sorts of structural members for future combat systems, lightweight armor, lightweight vehicles, lightweight military, most everything in what is the new future combat system scheme requires that variable to transport quickly on aircraft equipment that otherwise went by land. So we’re encouraged by it. I sure don’t see it as a short-term boost. As the world goes light, we want to be there.

And back to Toray’s press release that Steve Binder alluded to before, one of the things being mentioned is that they have concerns about the possibility of an insufficient supply of carbon fiber. They think that’s a good problem. Do you see that as an opportunity to step in and is that why you’re still including the 787 as part of where the R&T expenses are?

Well I, first off, I don’t ever say it’s over until it’s well over. Our 787 activities quite frankly though are not to take primary prepreg. We expect that that’s the baseline right now and until something changes, we’re working on improved systems that can enhance other parts of the aircraft. And there are lots of combinations of materials that are needed on this aircraft and will be needed on future aircrafts. So we’re happy to work on those areas of the aircraft that still have need for weight reduction. I don’t, I don’t of any particular decisions by Boeing to move away from their baseline case because of concerns about capacity.

Okay, thanks very much.

And we’ll go next to Al Kaschalk from Wedbush Morgan.

Hi David. Good morning Steve.

Morning Al.

Most of my questions have been answered so I won’t belabor them cause you won’t answer them. On the 380, can you talk about how you exited the quarter in terms of the ramp? I know it’s still gaining speed from what your comments indicate, but is it higher then you had hoped or where does that reflect your views?

Well I wasn’t really clear on how we were going to see the A380 come back because again we deal with so many subcontractors and not knowing necessarily what the full supply chain inventory is of parts that had been made when, you had delay took place. I had hoped that with the six month delay we’d have two bad quarters and then we’d see a strong first quarter. We definitely got the two bad quarters. And we saw strength at the end of the first quarter. I think I probably had hoped that we’d see it sooner in the quarter then we did. But I’m happy with the pace now.

Okay and then on a follow-up on the Ballistics side, the comments you made in response to Q&A here. Ballistics had continue to trend down through ’06 before it levels off heading into ’07?

Well I just don’t know whether it’s going to be a gradual or a bigger step. We had indicated in our guidance last quarter that we thought ballistics would be down and that we’d offset it with other markets. I still believe that to be the case. We still have some year-over-year and if you’re looking at it on a year-over-year basis, I would expect that it will stay down throughout the year.

But that is built into the guidance that [Brett] gave. So if you see what we commented on in terms of our revenue guidance for the year, it remains unchanged. That we expect Wind and Commercial Aerospace to be in the teens. And when you take the impact of Ballistics that knocks the total company growth rate down to around a sort of 10% rate. And so we factored into those outlooks, you know these impacts of Ballistics. So it wouldn’t lead me to believe that we’ve seen a dramatic change in how we see things, it’s pretty much moving as we’d expected it to move. That does mean that you’ll see it on a year-on-year basis Ballistics lower as we report through the year. On a sequentially basis though, the changes may be less pronounced.

Are there opportunities there to redeploy resources in this area and growth opportunities? Or is it one that Wind is going to certainly lead the charge but Ballistics is just kind of flat line here for several quarters?

I’d be happy to see Ballistics flat line because we’re still at a pretty good pace. It’s still the second biggest submarket in Industrial. And there is sort of a stabilized rate that we experience historically before Iraq but as we get into a much more diverse set of applications, the high volume, high velocity kind of sales rates that we saw in 2004 are just not sustainable.

Okay.

We haven’t given up on Ballistics as Dave mentioned earlier, because there are lots of opportunities for the future where you might use these materials. It’s just that for those odd things that are likely to sort of step up this year to substitute the effect of just the sampling to the sustaining level.

Thank you very much.

And next we’ll go to Nigel Coe from Deutsche Bank.

Good morning. Thanks guys. Just want to talk about your, our guidance to teens growth in Aerospace. You did 19% in the first quarter ex FX. You had a challenging couple of quarters at the end of last year. So it would appear that Aero growth should accelerate from here. Is that the right way to think about it?

Well the Boeing build rates I think they are public statements are up about 30 something percent and Airbus is talking about up 10%. The thing to factor in there though is that a lot of the Boeing growth is on the 737 or pretty metal-intensive aircraft. So that knocks it down some. We have the plus of the A380s. That’s why we feel pretty comfortable with the teens growth. We certainly did have some, we do have some easier comps to look at in the second half. So I’ll let you speculate our guidance is teens at this stage.

But perhaps the high teens perhaps?

Perhaps.

Okay. You, in the past you’ve given us what the portion of when the Ballistics is as a portion of the total Industrial segment, can you give us an update on that please?

We’ve said it’s more than half and it still is.

Okay, great. And just picking up on Howard’s comments on R&D, we’ve seen that picking up Q on Q over the last five quarters, is it now at a level where we should expect it to plateau or should we expect it to go up a little bit further from here?

It will vary quarter to quarter because by the nature of these qualification expenses, they can be lumpy. The way I would focus people on it is that the higher qualification spending is a good barometer for what we’re accomplishing in terms of getting positions with customers. And we clearly are not going to, if we have an opportunity to put a product on a plane, we’re not going to choke back on the spending even if we get it there. That being said, for, given the nature of our business, the spending that we have to spend in getting our product certified is fairly modest, relative if you look at the cost of other industries incur in these sorts of activities. And so whether it’s a million or so higher or lower in any given quarter doesn’t really affect our overall performance trend. But we will invest what we need to invest to get those positions.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS] Our next question today comes from Lionel Jolivot from [Park Lease] Capital.

Thank you very much. Just wanted to go back to Wind Energy for a minute. I know you don’t really break out Wind Energy as a inside Industrial segment. But can you just talk in broad terms about the profitability of this business, particularly how it compares to the overall profitability of the business?

Wind is a profitable product line. It’s a product line where proportionately we’re investing more as Dave has mentioned. It’s a product area where it’s growing. We’re needing to add capacity and those things. So it’s, it consumes resources. But it’s one where we’re very comfortable with the performance and the profitability of the business. And it stands up quite nicely compared to some of our other product lines. And we believe there’s every prospect for that to continue to grow.

Okay and then it seems that most of the sales in Wind Energy are still coming from Europe. Can you talk a little bit more about the U.S. market and the potential recovery in this market?

Well today most of the wind turbines are manufactured in Europe, which is why our sales are there. They, the sales of the turbines are global. China and India were in the, in the top ten last year on growth. U.S. is obviously very big. And in most of the turbine manufacturers are now starting to put facilities in China, in the U.S. So I’m sure the sales will migrate as our customers do. But the only reason our sales are mostly in Europe is because that’s where the turbines have been made to date.

Okay. And last thing in the, in terms of working capital, when you burned a little bit of cash in the first quarter, which is, which is just the impact of the seasonality. Given the growth that you are expecting in terms of sales for ’06, what have you budgeted for working capital changes in ’06?

Well we’re not going to obviously give you our budgeted numbers. We obviously use quite a bit of working capital in the quarter. I wouldn’t anticipate the total usage will increase much more as the year progresses that we’ll normalize that receivable level and that will offset any incremental change in inventories and other working capital lines. Our goal with working capital in total is, it shouldn’t be growing faster than sales. We’d actually like to see it grow a little slower than sales because inventories you should get some efficiencies as you grow. You shouldn’t have that dollar for dollar. So I wouldn’t predict significant incremental working capital usage unless you got a very large surge in revenues. So I think we’re okay with the current usage as it stands.

Will the launch of the A380 have an impact at the end of the year? Should we, should we expect a buildup in--?

Well it’s going to progressive as Dave mentioned. You started to see it pick back up as the quarters progressed. And you’d expect that to continue. But you know we have, the production is already within our total supply chain. And it’s just going to incrementally grow as the year progresses. So it’s not going to have a sudden dramatic impact on working capital usage.

We normally talk about a six month that our materials on average ship six months before the actual delivery of the aircraft. Of course with a new aircraft, it’s very different. We’ve been shipping materials now for years as they’ve built developmental aircraft and so forth. I was over in Toulouse last month and there were 13 A380s in some stage of assembly in Toulouse. So while we talk about two deliveries to Singapore at the end of the year, we, we’re well beyond that with respect to Hexcel materials.

Okay great. Thank you very much.

Our next question is from Peter [Grondin] from OSS Capital.

Morning gentlemen. Just a quick question. Can you provide any color if there is any on the, whether the 737 retrofits going to come on board any time sooner then the end of the decade? I’m hearing some rumors in the market. Just wanted to get your thoughts. Thanks.

I think what my advice to you would be, don’t believe anything you hear until there’s something announced. It’s, there’s an awful lot of gainsmanship that go on and I have no knowledge to share on that subject. But we’d love to hear it.

Great, thank you.

[OPERATOR INSTRUCTIONS] And that’s all the time we have for questions today. Mr. Berges, I’ll turn the conference back to you for additional or closing remarks.

Thanks very much Kim. I don’t have any particular closing remarks. We’re excited about the prospects and hope to talk to you again shortly. Thanks.

That does conclude our conference call today. Thank you all for your participation.