Hexcel Corp (HXL) 2006 Q3 法說會逐字稿

Welcome to the Hexcel Corporation's third quarter 2006 earnings release conference call. This 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 now like to turn the call over to Mr. Forsyth. Please go ahead sir.

Good afternoon everyone. Well might I also welcome you to Hexcel Corporation's 2006 third quarter earnings conference call on today, October 26. Before beginning let me cover the formalities.

First I would like to remind everybody 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 2005 Form 10K 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 express permission. Your participation on this call constitutes your consent request.

Well with me today are Dave Berges, Hexcel's Chairman, CEO and President; and Michael [Backel], our Communication Investor Relations Manager. The purpose of the call is to review our third quarter earnings release, released last night. First Dave will cover the highlights and then I will go over some of the financial detail before opening the call up for your questions. So might I hand the call over to Dave?

Thanks Stephen. The third quarter sales were, as usual, seasonally down from last quarter, due to the European summer holidays. But revenues of $289 million were 4.5% above last year, or 3% on a constant currency basis, which is consistent with the revised guidance we issued in late June.

But as was the case last quarter, the decline in the ballistics business muted the growth in commercial aerospace and wind energy. Gross margin of $60 million included a $2 million environmental accrual for a plant that closed in the early 90s. Excluding this charge, the gross margin leverage on the incremental sales was 29%, in line with the last 10 quarters.

Net income of $15.7 million translates to an EPS of $0.16 per diluted share for the quarter or about $0.14 if you exclude the impacts of the environmental accrual and the valuation allowance change.

Turning to revenue trends, let me, as usual, give you the comparisons in constant currency for the quarter, even though the dollar was almost flat year-on-year. Commercial aerospace sales of $150 million were up 19% in constant currency, or $23.5 million over last year's third quarter. Thanks to increased production rates at Boeing, Airbus and other aircraft producers, and an easier comparison because of last year's Boeing strike and the first A380 delay.

Despite the bad news of the additional A380 delays from Airbus, our best estimate of A380 material sales were still up over last year, as our customers adjusted production more slowly than we had assumed. Materials for the A380 go to over 30 customer locations in 11 countries, and in some cases are common with materials for other programs. So we can only estimate the impact of the program shift.

We indicated in our release that the sales related to the A380 have ranged from 5% to 10% of our commercial aerospace sales in recent quarters. We're trying to get more clarity on our customers' plans; this should give you the dimension of the hurdle we may have to overcome in the next year.

Assuming the program proceeds at the pace currently projected, the delayed ramp up may be superimposed with the 787 for a very different growth profile in 2008 and 2009 than we had imagined. Beyond the A380 news, the growth in this segment was strong and widespread. In addition to increased line rates at Boeing and Airbus, we had good sales gains from regional aircraft, such as from ATR and Hombre Air, as well as business jets.

The secular penetration of composite materials for engines in the cells are also making a substantial contribution to our positive trend in this market.

Sales to space and defense markets of $50 million were down 3% on a constant currency basis, compared to last year's strong third quarter. As we've long observed, revenues in these applications tend to vary quarter-to-quarter, due to the nature of how our customers manage their manufacturing campaigns.

In addition, our analysis suggests that the last two quarters have been impacted by inventory corrections with certain rotor craft customers, who are attempting significant production ramp ups.

As you are aware, our space and defense revenues come from a diverse range of programs. Beyond these inventory corrections, no one program stands out as influencing our 2006 revenue trend. The sales to support fighter aircraft are growing nicely. We are still encouraged by the rise in rotor craft build rates in the U.S. and Europe, which, as with most of our markets, are using increased levels of composite materials for weight reduction.

Industrial revenues of $76 million were down 15.8% in constant dollars this quarter versus last year. Ballistics revenues declined almost 24% from the previous quarter, and almost 50% compared to the third quarter last year. We had expected a decline from the surge levels of 2003 through 2005, but certainly not such a step function.

The recently approved defense spending bill authorizes $1.1 billion for additional body armor and personal protection equipment, so we expect a recovery from these levels by the end of 2006, and as we move into 2007.

Wind energy revenues grew 12% in constant currency compared to the third quarter of 2005. Industry associations continue to project that 2006 will be another record year for turbine installations worldwide. And the longer term outlook remains bright, as evidenced by the recent $4 billion contract that Gamesa signed to supply turbines in Europe and North America.

Growth this year has been paced by capacity constraints, but expansion plans are under way to support the growing backlogs. We are slightly ahead of plan on our carbon fiber capacity expansion, and with some available capacity due to the [inaudible] delay, we hope to deliver some growth in other industrial markets next year.

As we mentioned in the release, we are in the midst of our planning cycle and will give you better clarity on our outlook later this quarter. Now let me have Stephen cover a few of the less obvious financial details before we take your questions.

Thank you Dave. As the first subject, let me talk about taxes. As you are aware, the company's providing a full provision on its pre-tax income in 2006, following the reversal of the majority of the company's valuation allowance against its U.S. deferred tax assets as of December 31, 2005.

In 2005 our tax revision essentially just reflected the tax revision on our European pre-tax income. As a result, the tax provision for this quarter was $4.2 million compared to a tax provision of $1.4 million in the third quarter of 2005. That being said, the tax provision this quarter did include an unusual item. We reversed $3.6 million of the remaining valuation allowance against the company's U.S. deferred tax assets.

This reversal related to our capital loss deferred tax assets. The reversal had been made due to the probable sale of an asset associated with our portfolio realignment, which will result in a gain that is now expected to utilize the capital loss to which the valuation allowance had been previously applied.

While our book tax provision is now a full tax provision, our cash tax rates continue to be significantly lower, due to the benefit of those deferred tax assets. As a result, our cash taxes for the quarter were only $1.7 million, and year-to-date $6.4 million, compared to the book provision of $23.5 million.

Now let me turn to our total debt, net of cash. Despite the higher capital spending related to our carbon fiber expansion, total debt, net of cash, remained constant for the quarter. The U.S. elements of that carbon fiber expansion project are now ahead of schedule and the Spanish plant is on schedule. We now anticipate production trials at the U.S. carbon fiber facilities will commence before the end of 2006. Hexcel expects to continue its pace of capital investment to support its growth outlook in the coming periods.

Cash flow from operating activities this quarter were $31 million compared to $33.3 million a year ago. Accounts receivables reduced, as they do each year in the third quarter, due to the seasonal impact of the European summer vacation period. By the same measure, inventories increased, as they do each year, for the same seasonality factors. However, capital expenditures, net of deposits, were $31.7 million this year compared to $15.8 million in the third quarter of 2005, and so the free cash generation was lower.

Year-to-date we have used approximately $20 million of free cash flow, a modest increase when you consider capital spending is up about $49 million year-to-date.

Next might I cover stock compensation. As we have discussed in prior quarters, like all U.S. public companies, we adopted FAS123R as of January 1, 2006. Our expense is not evenly spread over each quarter, but peaks in the first quarter of the year, and then declines sequentially over the remaining three quarters. So this quarter we incurred a non-cash stock compensation expense of $1.7 million, compared to the $500,000 a year ago, prior to the adoption of FAS123R.

This reflects our prior guidance as to equity compensation expense for the year, which we said would be in a range of $9 million to $10 million.

Lastly, let me talk a little bit about our reinforcements business segment and our portfolio adjustments. As we announced in July, Hexcel is exploring strategic alternatives for portions of its reinforcements business segment, including the ballistics, electronics, and architectural product lines. The company's retained Merrill Lynch and Company as the company's financial advisor to assist with the potential disposition of some of these non-core assets. This process is underway, and we anticipate it should be completed within the next six months.

Now revenues from ballistics, electronics, architectural and general industrial applications, the portions of the reinforcements business segment we anticipate divesting, were $38.8 million in the third quarter, compared to $52.7 million in 2005, reflecting the impact of the decline in ballistics revenues.

If you want to tie those revenues to our quarterly reporting, you will see, if you look at the segment report that shows sales by market and by business segment, that if you look at the electronics and general industrial revenues in those segment reports for reinforcements, you will identify they're the same as the numbers disclosed here.

On the same basis, revenues for the nine months ended September 30, 2006 were $134.5 million compared to $171 million in the third quarter of last year. In the course of actually completing any potential disposition the revenues associated with the divestiture may change based on the final structure of the transaction or transactions that occur.

As we indicated last quarter, in the event of the sale of some or all of these businesses, we anticipate the first use of the proceeds will be to repay debt, strengthening the company's balance sheet, but providing it the flexibility to then invest in growth projects in the advanced composites area.

Lastly, the company will have to incur some business consolidation and restructuring expenses in the course of consolidating the remaining business operations of the company. While progress has been made on developing those actions, we're not at the stage yet where we're ready to share the full estimate of the cost and benefits, but will reach there at some point this quarter.

Well with our comments concluded, might I now return the call to the operator, as we are now ready to take your questions.

Thank you sir.

[OPERATOR INSTRUCTIONS]

Sir, our first question comes from Nigel Coe, of Deutsche Bank. Please proceed with your question, sir.

Good afternoon; thank you. It's like you've got a quarter headwind coming through in the first half, you know, when you start lapping the A380 comps. Yet, you said you expect to grow in aerospace in 2007. What about the first half of the year? I know you haven't formed any of the plans, but would you expect there would be some growth in the first half of 2007?

Well, you're right to say we haven't formalized the plan. Let me just say that the lapping issue is one that is of concern in the first half. So, if there's a difficult two quarters, it would be the first two, obviously. But we haven't laid it out quarter-by-quarter yet.

Okay, great. And secondly, I noticed last year defense picked up from Q3 to Q4. Based on what you're seeing so far, would you expect that trend to continue this year?

I don't have a projection on the fourth quarter and it's not clear to me when the inventory correction takes place. I do expect the long-term trends should continue to be positive.

Okay, and just finally, it looks like Rotocraft is the real bright spot in the defense segment. How much, roughly, of the segment would be related to Rotocraft?

We don't break that out, but I think we did indicate in the last quarter that it's becoming a significant part of the segment.

Okay, great; thanks.

Our next question comes from Mr. John McNulty, of Credit Suisse. Please proceed with your question, sir.

Good morning guys, just two quick questions. You had listed what the sales were in the assets that it looks like you're going to be divesting. I was wondering if you could give us any color as to what the earnings power of those assets actually might have been.

Hi John let me try and respond to that question. We've not yet, obviously, disclosed independent financials for the assets to be divested. And obviously, at some point that's a step we would complete and share with everybody.

But one way you can sort of think about the reinforcements segment and its margins is to look at our segment financials. You know, they're on table D of our earnings release. Now, you'll see if you compare the revenues that the revenues that we derive from the pieces we're looking to potentially divest are a little bit more than half of the total revenues for that segment. So, one could sort of look at the segment as a whole, as a proxy for the performance of the assets that we're selling.

And so, if you look at the EBIT margins on a year-to-date basis, they were 7-1/2%. Now, if you back out the business consolidation and restructuring expenses incurred in the Washington plant closure, to get a sense of what maybe an ongoing rate is, it's an 8.9% EBIT margin.

If you wanted to look at an EBITDA perspective, you do have depreciation there too. And that would move you into the teens in terms of an EBITDA margin.

So, it gives you a way of thinking about those businesses, but we actually have to go through the process of developing the carve-out financials consistent with the various accounting standards on these matters before we can really give you a sort of what the standalone P&L looks like and thereby what will the ongoing Hexcel look like.

Okay, that's helpful. And then, another kind of longer-term question; I know you guys were ready for the A380, and I'm sure you were planning on being ready for the 787. With them now being shifted so that they both may be ramping up at roughly the same time, and you may even at least have some of the beginning of the M400 ramping up, I'm wondering if you need to think about how you actually structure yourselves, or if you have the right manpower for those initial ramp ups? I'm sure you'd have the capacity, but do you have the people in place for potentially three major ramp ups at the same time?

Or, is there something that you have to change in terms of how you think about that going forward?

I think the ramp up is fairly tactical and not that difficult to envision. Fortunately, this industry has long lead times, so we've got plenty of time to save carbon fiber to get capacity in place. And hiring operators is not difficult. The real effort comes in trying to get our products qualified; selected and qualified on the aircraft.

So, the big load has been going on for a number of years in the A380 and is sort of at a peak level as we start development work on the 787. Once it goes into production, making more of the same is actually probably less of a problem than making little volumes.

Okay, no, that's very helpful; thank you.

Thank you, Mr. McNulty. And our next question comes from Mr. Al Kaschalk, of Wedbush Morgan. Please proceed with your question, sir.

Good day, David and Stephen. Dave, if we could just follow on with that question, my question is, as the 787 ramps and the 380 ramps, sort of in that second half of '07, early '08, you probably now have a little bit of a gap from what you formerly had with the A350 being stretched out into the 2012. Do you see any - I want to say leverage issues or opportunities to gain more share, as a result of not having the 350 there and aggressively moving forward on the 787?

Well, I would say we certainly aren't holding back on the 787 because of the A350. We want to get as much on every program that comes out and we think we're applying the appropriate resources to do that. So, I wouldn't say a delay in the A350 helps our odds on the 787, or vice versa.

I would say that delays aren't a good thing for us. We want new plans flying, for sure. However, delays do tend to increase the opportunity for composite products. I think I've told you before that the A380, when I joined five years ago, was targeted to be an 18% composite airplane by weight. And I think they now advertise it at 23%.

In the early version of the A350, they talked about 39% composites; the last version, they talked about 45% and if it does get launched, it might be higher than that.

The 787 they labeled as 50%-plus and I would suggest that it's going to be plus-plus. Not because, you know, weight is always an issue in these programs. And any delay gives us more time to have more products considered to convert things that are sort of secondary and focus on programs.

So, I would see any delays as improving our odds of getting more products on the program, which, of course, lasts for 30 years. But, on the other hand, we would love to see the programs go off on time.

Thank you. Then following up on that, R&D expenses were down from at least what I had modeled and I was looking for relatively consistent with the year-over-year levels. I would've thought that they would've been higher, naturally, because that's how I had modeled it. But, from your perspective, were the dollar levels where you thought they would be? And how do you see that finishing up for '06?

Well, I think year-to-date - I don't have this in front of me, but I think year-to-date, we're up maybe 20% from the prior year, or a significant number. I think the way to think about this, Al, is that we have a - sort of a sustaining rate or a development crowd that are working on new materials all the time. And that's a pretty steady state.

What we have in here also, though, are specific qualification costs, which can surge and have large ups and downs. A lot of it is done in outside labs, for instance. So, the billings can be a little bit erratic.

So, where maybe it used to be pretty stable in prior years, now that we have qualification costs incorporated into the R&D line here, I think you'll see a little more volatility. But, I think the rate, year-to-date, is generally appropriate.

And while I am sure you're not prepared to add any additional color because of where you are at in the cycle, would a teens rate seem reasonable as we move into '07, relative to '06?

In what area?

Same, R&D expense.

Oh, R&D; I'm sorry - (two people talking). I sort of generally look at it as a percent of sales. I would think that the R&D effort that's gone into the A380 is pretty much behind us, despite the delay. But, the 787 will certainly take some resources and you have to make your assumption on what happens on the A350. But, I would think, as a percent of sales, what you have year-to-date is probably a safe proxy.

Thank you.

Thank you, Mr. Kaschalk. [OPERATOR INSTRUCTIONS]

Our next question comes from Mr. Steve Levenson, of Ryan Beck. Please proceed with your question sir.

Good afternoon; glad to hear our questions will be answered.

No; we're going to give you more information whether or not your questions will be answered.

You mean, we can talk about wind a little bit and, while the turbine makers have seen some problems in their supply chain, non-composite related, when do you think that will catch back up? And, can you give us an update on what's going on over at GE and your relationship there, how they're blade technology might be revised from where it's been; and how that will affect Hexcel?

Well, first on the subjects of capacity, I would think, as long as the wind turbine market grows at this pace that it's been growing, in the 20% and 30% from an installed megawatts basis; and as it goes around the world, I think we'll probably always have capacity problems. So, they add capacity and things create problems and we fix the capacity constraints.

It tends not to be composites related right now, but it's only because the others are doing more poorly. We are having capacity pressures ourselves in acquiring carbon fiber where it's needed and we will be adding capacity in our wind markets.

Our customers had reached a sort of capacity of blade manufacturing and now they're building new plants in the U.S. and in China, as well as adding more capacity in Europe for blades. So, I think it will be sort of a constant capacity battle as long as we have these kinds of growth trends.

Second question, on GE; the GE designs are still the older designs of the old Enron assets. Their current production is still infusion based blades, so we have very little participation with them. We do, obviously, monitor GE and all of the other big turbine suppliers for their next development program and hope to influence them to consider the pre[break] technology for the improved performance they can bring.

Okay, thanks. Do you have lobbyists participating in any activities to make sure the energy tax credit gets extended?

We do lend our support to the associations that encourage that extension, yes.

Okay, thanks very much.

Thank you, Mr. Levenson. Our next question comes from Mr. Howard Rubel, of Jeffries Company. Please proceed with your question, sir.

Thank you very much. I want to go back to this tax - release of the tax reserve. And, it appears as if it's going to be related to the asset sale. I was under the impression that you had a fairly large tax basis on this business. Is it because they're in different jurisdictions, the businesses you may or may not be selling?

Good morning, Howard; yes, let me try and give some clarity. You know, the tax attributes and how they are applied, do vary by the nature of the assets. So, some of the assets - we'd be able to use some of our existing assets that are - tax assets that are on the balance sheet to offset any gain.

But, when you go through, as you're required, under the accounting standards to look at this from a probable perspective, we also identified that there are certain elements which would utilize some of these capital losses that we didn't previously have a view that we could utilize. And that caused us to release the valuation allowance on that portion in this quarter.

But, you know, while one could never sort of totally call these things, much of any gains that we generate here will be sheltered, certainly in the U.S., by the fact that we have these significant deferred tax assets.

Okay. The second thing is, with the - and I may - I apologize a little bit on this question. With the slowdown in the - well, with the absence of volume on the 3380 for the next year or so, how do you - do you have to adjust overheads in any way to deal with that, or product mix so that you can do a little bit better on your gross margin level?

Well I think the first thing that we looking at is whether we can redeploy the capacity elsewhere. You know we indicated that the carbon fiber expansion project is going well, may even fire up a little sooner than we'd expected. This creates a little extra carbon fiber capacity; we certainly will have, at least for the short term, some [inaudible] capacity. So what we'd like to do is see if we could put those two together to create some additional growth in the industrial segment.

There are markets, submarkets in industrial that have not received as much attention as in the past, just because we were so capacity constrained. So I would say that would be our first focus, Howard, and we hope to have a little clarity on that when we do have our follow up meeting later in the quarter.

Otherwise we have a number of overhead adjustment projects that are underway, and one of the things I think about as we talk about the gross margins we had this quarter and last quarter, is these were despite the normal sort of cost pressures that everybody has. But also, we're in the midst of two major plant closings, Livermore California and a plant in Georgia.

The sudden drop in ballistics and the sudden drop in the [H-rad] is a tough thing to adjust to from an overhead standpoint. We have had inefficiencies from capacity pressures with the constraint fiber and also wind capacity. And of course we've had the distraction of a large sale process and reorganization underway in addition to the start up costs for the two fiber lines. So I feel like we've got an awful lot of moving pieces that could have created some problems, but I feel good that the operations people really did a good job of keeping their eye on the ball and delivering solid market expansion.

And the last thing is, there was a recent award by Boeing of the floor panels on the 787 to one of their subcontractors. Are you going to be supplying the fiber to that supplier?

The award was given for assemblies; those assemblies will require floor panels, which generally are made by somebody the next tier down, one of whom could be us. So we are hopeful to participate in that, but we haven't declared a victory yet.

So they're doing a run off? I mean this is structurals to some degree, and that plays right into your sweet spot, and it's in the same neighborhood.

Well again the floor assemblies have been awarded to a customer of ours; those floor assemblies require a number of components, including the floor panel sections, which are honeycomb core with prepreg materials on top and bottom. So it is a target market for us, yes.

Just trying to box you in a little bit. I'm not sure I succeeded, but at least I got you to acknowledge they were a customer. Thank you.

You're welcome.

Thank you sir. Our next question comes from Mr. Bob Batch of Lord Abbett; please proceed with your question sir.

Thank you, good morning. In regard to, going back to wind power for a second, Siemens just announced a $400 million plus order, would you be supporting that?

We've indicated before that our favorite customers are those who use prepreg blades, blades manufactured with the materials that we specialize in, that would be Vestas and Gamesa. We do sell materials to almost all of the wind manufacturers, so I haven't looked at the specifics of their order and which turbine blades they'll be requiring. I would expect that we'll have some participation. But if it's not prepreg, it's not as exciting to us as say the Gamesa [inaudible].

And then just a follow up on the summation of an answer you just had a moment ago with Howard regarding the results you produced with a lot of moving parts, including expansion and the sale of assets and so forth. That would tend to assume that things only ought to be somewhat smoother and somewhat easier to deal with, I guess, on a going forward basis.

Well we always hope so, but we try to adapt to whatever the market delivers to us. While I'm sure everybody would love just regular steady growth and earnings expansion, down beneath the surface it never is quite that easy. I would certainly hope so, but if it's not, we'll deal with it.

And looking back at the last quarter or two, it would seem as if with the -- what the market has had to deal with and discount over the last six or nine months, that it would almost take some other event like the A380 to cause another wrinkle. So in the absence of such a similar type of event hopefully the road ahead is a lot more visible and controllable.

I hope so Bob, I really do. I did just look at the earnings release we did a year ago, and I was pleased to announce the A350 launch which had just been announced in the Farnborough Air Show and the A380 delay was probably behind us. So you can't ever really predict the future, all you can do is respond to the cards you're dealt.

And in that regard with the stock, even looking back where it was a couple of years ago, a lot more progress has occurred and the backlogs are clearly a lot more full than they were then and with the stock here kind of suggests that the company hasn't made any forward progress, when in reality, including the balance sheet and so forth, significant progress has been made.

Well thanks Bob. I think the way I look at today's situation is, we're sort of at a turning point where we're working on really focusing on the advanced composite materials. Before we were sort of interested in all of the pieces and parts we had. After September 11th we had to get growth wherever we could get it, and ballistics provided that.

As we go forward the focus on composites, and carbon in particular, and even as a subset, intermediate modular space carbon fiber is really encouraging to me and I really want to get the whole organization focused and redirected toward those things that are advanced carbon fiber composite in nature.

So in addition to all of the aerospace opportunities that you just pointed out, and the improved composite penetration of space and defense, there are lots of opportunities in the industrial arena, and I'd hope that over the next two or three years we could develop even a broader range of products that have the kind of characteristics that the wind turbine market has for us.

Well I think a lot of companies out there would love to have your demand issues you've got to deal with. So good luck.

Thanks Bob.

Thank you sir. Our next question comes from Mr. Nigel Coe of Deutsche Bank; please proceed with your question.

Thanks, I don't want to get too greedy, but I have two more questions. You know we saw Boeing yesterday coming out raising R&D expense on the 787; can you just give us some color on where you think the weight problems are the worst on that plane, and what opportunities that creates for you from here?

Well after seeing Boeing say the 787 was on time and the stock go down six points, I don't know if I want to touch that at all. What I would say is we've got more ideas for weight reduction than most of our customers have time to implement. So if there are weight problems, we will be there to help. If there aren't weight problems I still think additional opportunities are there and will be considered. Because if you think about a weight savings for an airline, you're selling an airplane, you're going to fly it 15 hours a day for 20 or 30 years at the current cost of fuel, it's an enormous benefit.

So you know I think what we have is the solution to the biggest problem in new aircraft.

Okay. Leading on to industrial, the industrial stuff, you've given us what ballistics did, you've given us what wind did, but maybe in very general terms, the industrial steps, did that decline? Because I know that there is some capacity issues there.

Well we have pretty good recreational business that has been fairly flat in recent years. Thanks to pricing through the shortages there are a lot of other diverse products that have done well. We had a couple of programs in automotive that kind of come and go, and are a little less consistent.

I think the opportunities, short term, clearly are to start to grow a little more quickly on recreation again, thanks to carbon fiber coming online. And there are other opportunities in pressure vessels, nuclear fuel enrichment tubes, composite tooling, oil risers, and I think you'll hear a lot more from us in the next couple of years as we direct some focus to these industrial potential markets.

Okay, thanks Dave.

Thank you Mr. Coe. Our next question comes from Mr. John Schaefer of Hahn Capital Management. Please proceed with your question sir.

Thanks guys. My question, I have a couple of questions. One is, can you tell us anything more than you've already told us about the prospect for a wind blade redesign program at GE? I mean what you said before, not to be critical or anything, didn't really say very much. And I was hoping that you could tell us whether in fact you've gotten any indication from GE that they are even considering redesigning their wind blades? And if so, what the timeline might be, or when you might see an RFP or anything more about that process, if there even is one.

And then my second question is, if you had to handicap what the prospects were for Boeing implementing a second line for the 787, you know over the medium term, what would those prospects be? Thanks.

Unfortunately I really can't share development programs. I can't think of a customer that we have who let us participate in development programs without signing some sort of confidentiality or proprietary agreement, or have need to know sort of partitions and rules. You could imagine between Boeing and Airbus this debate about 737 or A320 going to carbon, all those things are highly confidential programs. We try to be intimate with the advanced groups in all of our customers, space and defense as well as commercial aerospace and wind. It's highly competitive and we really can't share that John.

On the 787 second line, I don't have any more visibility than you do. I mean I read discussions of it, I certainly see a huge backlog. I also know it's a very difficult, scary ramp up program. So it's something I'm intrigued with. What I try to focus a little bit more on is ultimate demand; is the ultimate demand still growing and if so, how is it going to be served?

So if the 787 goes to a second line, of course we know how it will be served. If it doesn't how will that extra demand be served? Will it be served with older aircraft or newer aircraft, or an A350 or will prices go up and the customers be stronger? Same on the A380, the A380 so far I haven't seen any cancellations, and now you read articles of what these big customers are doing with the demand.

They were expecting the A380 sooner, so Emirates and Air France are thinking about either leasing or pulling out more 777s, so it's a little bit of an offset for us. Lufthansa is taking a few more A330s, so that's an offset. Others are looking at the 747-8 freighter program to cover some of the gaps that the A380 delay might cause. The 747-8 has new composite intensive engines on it. So that will be a bit of an offset.

So again as long as the demand continues to create this great growth story, I'm pretty certain we'll end up with a good piece of the action.

Thanks, I appreciate that.

Thank you Mr. Schaefer. Our next question comes from Mr. Stephen McBoyle of Lord Abbett; please proceed with your question sir.

Yes, thank you. Two questions; on ballistics could you just refresh me what the revenue base is currently? And to the extent that I think it continues to decline at a faster rate, you did make reference to additional body armor funding. I'm curious as to how you expect that business to migrate over the ensuing quarters here.

And then on the second question, with regard to the fiber - carbon fiber expansion coming up earlier, can you just talk to how much of that would you be booked at this point in time and how we ought to think about the incremental margins on that industrial type business? Thank you.

So, I got three questions here. I'll take the first two and let Stephen handle the carbon fiber one. On ballistics, we don't break it out specifically for you, though if you were to replay some of the things we've said over the last six or seven quarters, you could probably get in the neighborhood. We've said that last year it was the largest part of our industrial segment, which, I think, was about 33% of our total sales last year. We said wind was second and that the two combined were more than 50%.

In the first quarter, we said they crossed paths; so wind became first and ballistics became second. That should get you in the neighborhood of what the size is and obviously it has declined pretty dramatically since then. So, you could track it down from there.

As for the funding every September, that the funds for these things that are sort of short cycles, such as soft body armor, tend to be spent early in the year, the fiscal year for the defense department; and, sort of run out of funds at the end of the year.

So, I haven't looked at every year but it seems to me every August and September we're sort of all idling, waiting for the next release of funds. So that probably exacerbated our downturn in this quarter. There was a big slug of increased body armor funding in the budget that was just signed at the end of September. Typically, that gets awarded pretty quickly and the suppliers will then deal with their sub-contracts for the weaving contracts. So, I would expect that - I'd be surprised if we didn't start to see some order activity yet this year. Certainly, we will in the early part of next year.

Carbon fiber, Steve?

Carbon fiber; there were two parts to the question. The first part was, where are we on the spend? You know, the carbon fiber expansion project has three components to it; two in the U.S. and one in Europe. In the U.S., we're adding a carbon fiber line and we're putting a comparable carbon fiber line in Spain.

And then also in the U.S., we're building the raw material plant, what we call precursor. We're expanding our production facilities in Decatur, Alabama to serve those two new lines.

The two new U.S. projects, the precursor plant and then the carbon fiber line itself, will be pretty much complete by the end of this year and we're going to start commissioning activities. And so, you can anticipate, therefore, that the spend on the U.S. assets will pretty much wind down as we get to the end of this year.

The Spanish project isn't slated to be completed until toward the end of 2007, so that portion, you're going to see continuing spend over the balance of 2007.

Now in terms of what the impact is of them bringing that capacity on line, we are building this capacity predominantly to serve aerospace applications in not just commercial but also military aerospace, in terms of the view of our customers' expanding needs over the next years. The capacity though, once you've actually commissioned it and start producing, fiber has to be certified before it can be used in aerospace applications. And that's a fairly time consuming process and we've previously estimated that to be on the order of 12 months.

So, for most of 2007, the production that we get from those U.S. facilities, once they come on line, we'll channel that towards non-aerospace applications where those certification requirements aren't as demanding. But as soon as we can start to switch it to aerospace, as we get those aerospace certifications, we will do that and reduce the amount of non-aerospace activity.

We expect a fairly prompt commissioning process so that sometime in the first quarter, we'll be in a position to start consuming some of that new carbon fiber output, either to substitute for fiber that we would maybe have bought for our own recreational or industrial applications, or sell it to others that expect that. So, while we will pick up some fixed costs, you know, the pre-staging of the assets and some of the incremental costs of bringing those assets on line, we're expecting that very rapidly we'll cover those costs initially. And then, we'll start contributing to margin. So as next year goes forward, we will start to get incremental margin benefit from these investments, even though they're not yet, you know, the rich area of aerospace.

So, over '07 and then into '08, we'll get continuing margin improvement as those assts get vetted down and start producing and switch and make some industrial to commercial production.

What the impact is in the first quarters that bring on line, that's going to be a question of the speed at which you commission these assets. These are large facilities with complexities in bringing these things on line. But we anticipate that, if you look at it in proportion to our total business, it's unlikely to have a material disruptive influence and may well actually have a benefit in that period.

So, I hope that responds to your questions.

That was very helpful and what follow up questions I would have had, you answered. Thank you.

Okay, thank you.

This concludes the Hexcel Corporation third quarter 2006 earnings conference call. Thank you everyone for joining. You may now disconnect.