Hexcel Corp (HXL) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Hexcel Corporation Fourth 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.

Thank you. Well, good morning, everyone. Might I welcome you to Hexcel Corporation's 2006 Fourth Quarter Year-End Conference Call on January 25, 2007.

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 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 2005 Form 10-K and today's press release.

Might I also remind you that this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

With me today are Dave Berges, Hexcel's Chairman, CEO, and President, and Michael Bacal, our Communications Investor Relations Manager.

The purpose of the call is to review our fourth quarter earnings and full-year results detailed in our press release last night.

First, Dave will cover the highlights, and then I will go over some of the financial detail before returning to Dave for some strategic perspective. We'll then be ready to respond to your questions.

So may I start by handing the call over to Dave.

Thanks, Stephen.

The fourth quarter was another strong one for our core growth engines -- commercial, aerospace, and wind energy. The A380 delay impact was clearly evident in the quarter, but top-line growth of 7.5% over last year was better than our guidance nevertheless, thanks, in part, to the diversity of our aerospace offerings and also ballistics. While ballistics sales were down over last year, as expected, new funding and the resultant late quarter surge in orders improved the outlook sooner than we'd expected.

Gross margins for the quarter increased to $65 million, up from $58.6 million last year, for a 30% rate on the year-over-year incremental sales.

During the quarter, we completed the sale of our interest in our TechFab joint venture for $22 million, which was a necessary first step in our potential divesture of some of our reinforcement assets.

The reported earnings per share for the quarter were $0.20 per diluted share, but if you exclude a $10.2 million gain on the sale and the new restructuring program, we're at about $0.14.

Turning to revenue trends, the dollar has shown weakness this quarter versus last year, so I'll comment in constant currency comparisons to last year's fourth quarter.

Commercial aerospace sales were up 17.3%, or $22.4 million, for the quarter. Our best estimates of A380 shipments in the quarter indicate they were at the lowest level in four quarters, resulting in a flat Airbus result, but increases in production at Boeing and their subcontractors drove the quarter's performance.

I'd also like to remind you that last year, we were negatively impacted by the first A380 delays, as well as last year's machinist strike at Boeing that disrupted many subcontractors in the fourth quarter.

For the full year, increases in production of legacy commercial aircraft programs at Boeing, Airbus, and the regional aircraft producers plus growth at aircraft engine and the cell manufacturers drove year-on-year sales up 16.5% versus 2005 on a constant currency basis, a pretty good bad year.

We are encouraged by the strong airplane order rate of 2006, not too far off the unprecedented pace of 2005, but we are thrilled that to better compete with the composite 787, the relaunch of the A380 -- A350 has not only composite wings but also a composite fuselage. Both major producers now committed to a 50% composite aircraft, and this is a watershed event for our industry.

In industrial, wind energy revenues grew 29% for the quarter, or 16% for the year. Capacity increases are underway at our customers, and the strong ending to the year adds confidence to our projections for continued double-digit growth in this market.

Ballistics' revenue growth of 36% over the third quarter ends a yearlong period of sequential declines. With the new personal protection funding authorized by Congress, we expect this segment to continue to show improvement in 2007 compared to '06. With the President's proposed short-term increases in troops deployed in Iraq and long-term increases in the size of the Army and the Marines, the longer-term demand picture should brighten further.

Sales to space and defense markets in constant currency terms were down 4% compared to last year's fourth quarter. Our analysis indicates this is still primarily the result of inventory corrections at certain rotorcraft customers, but there are signs of an improvement going forward, and we expect this segment to return to its historic average growth rate of 10% this year -- next year -- this year.

Now, let me turn the call over to Stephen for a number of potential financial modeling issues.

Thank you, Dave.

Well, first topic I'd like to tackle is earnings per share. You know, our earnings this quarter, to say the least, were somewhat complicated. There were a number of discrete reporting events that make analyzing our EPS a complicated task.

Reported net income from continuing operations for 2006 was $18.8 million, or $0.20 per share. This included, as Dave has discussed, the after-tax gain of $10.2 million, or 11% per share, associated with that sale.

Reported net income also includes $7.6 million of pretax business consolidation and restructuring expenses related to our new action to realign Hexcel's organization, to integrate all elements of our composite offerings, as well as the reduction of stranded costs that may well result from our divestitures associated with our portfolio review. We estimate that on an after-tax basis, the cost of this new program in the quarter was approximately $0.05 per diluted share.

So if you exclude those two items, we were around $0.14 per diluted common share for the quarter, though also embedded in the results is $1.1 million of transaction costs related to that divestiture activity, so we're probably closer to $0.15 per diluted share if you exclude these sort of unusual items.

Now, some of you may want to try to compare to the fourth quarter of 2005, and if the fourth quarter of 2006 was complicated, this story gets more complicated still. I'm actually not going to try and give you a number, but I would tell you the things to consider if you wish to try. I think everybody would take a different approach as to how to compute this.

First of all, if you look at the fourth quarter of 2005, that was the quarter in which we released a significant portion of the valuation allowance against our net U.S. deferred tax assets. That reversal resulted in a non-cash gain of $119.2 million, or $1.26 per diluted common share.

Now, that wasn't the only tax thing you have to think about in looking at that fourth quarter. Most of you will recall that prior to the reversing of the valuation allowance, we basically did not provide for tax on U.S. pretax income and losses. That was adjusted in the net tax balance sheet accounts. As a result, the effective tax rate on pretax income in the fourth quarter for 2005 was only about 12%, whereas if you look at the fourth quarter of 2006, we were around 37%.

While you get a big change in book tax rates between the two years and the two quarters, I would note that if you sit and look at the cash taxes, the cash taxes payable in the two quarters or in 2005 and 2006 are comparable and substantially lower than the book tax rates.

Another factor to consider, business consolidation and restructuring expense, $1.1 million in the fourth quarter of 2005, $9.3 million in the fourth quarter 2006, and then the last year-on-year component -- and this is the last time I hope we have to talk about this -- is FAS 123R. Like all public companies, we adopted FAS 123 on the first of January 2006, and as a result, our stock compensation expenses in '06 have been substantially higher than '05, so we go into '07, everything will be on a more comparable basis because you'll be comparing against '06. But for this last quarter, the expense this quarter was $1.6 million compared to $500,000 in the fourth quarter of 2005.

I'd also remind everybody that our stock compensation expense isn't equal each quarter. Tends to be higher in the first quarter and then decline progressively over the remaining three quarters of the year.

Just to talk about taxes specific to 2006, if you look at the fourth quarter of 2006, we had an effective tax rate of around 37%. If you look at the year as a whole, our tax provision was $33 million, or 35.3% of pretax income. However, that number includes the benefit of the reversals of about $4.5 million in valuation allowance against the deferred tax assets related to our capital losses. We didn't release those valuation allowances last year simply because there wasn't a transaction at that point that could utilize those capital loss assets. Well, the TechFab transaction, as you now see, gave us that opportunity, and so released $3.6 million in the third quarter of '06 and $0.9 million in the fourth quarter of '06. If you back out those sort of nonrecurring benefits in the tax provision, the provision for the year was about a 40% tax rate, driven a little higher than we'd originally guided simply because of some of our restructuring expenses.

Cash taxes -- if you look at cash taxes for the quarter, $2.6 million, obviously, substantially lower than the provision, $9.8 million for the year. And you see there the benefit of some of these deferred tax assets, and we will see more benefits in 2007 as we utilize those assets.

Next subject I wanted to touch on is total debt and leverage. Net debt was decreased this quarter by $32.2 million down to $386.6 million, a new low in recent years. The decrease occurred despite highest capital spending. The capital spending for 2006 was at an all-time high. It actually was higher than we'd originally planned simply because our guys did a great job in accelerating the carbon fiber investments in the United States and completing the construction of those facilities in the fourth quarter.

If you look at the net change, that $32 million, obviously, $22 million came from the disposal of assets; $10 million came from the underlying business performance.

Now, capital spending for the quarter was $38.2 million as we completed those U.S. elements of our carbon fiber expansion ahead of schedule. Production trials have now commenced, both at the new precursor line in Decatur, Alabama and our new carbon fiber line in Salt Lake City. Meanwhile, construction of our Spanish carbon fiber line remains on schedule for completion by the end of 2007.

In looking at cash flow, I know many of you have questions about working capital. And if we sort of define working capital as accounts receivable, inventory, accounts payable, and accrued liabilities, if you look at the quarter, we had an in-flow of $23.4 million, but if you look at the year as a whole, we used $17.6 million.

If you think about the components, the receivables in our business, given the nature of our customers, basically track revenues.

Inventory is driven by revenues, but there are two other factors that have driven inventory in the last 12 months.

One, as the raw material supply chains tightened, as demand has increased, that requires we end up having more inventory in our system so that we're able to supply our customers when they require their goods.

Secondly, we have impacts on new programs and products associated with new airplanes that are sort of permeating some aspects of our operations.

If we look at this quarter specifically, there are a couple of additional things to think about because normally we might have done even better in terms of working capital reduction in this quarter, and that's usually because of the fact that December is the seasonally low point in the year for working capital. Many of our customers shut up shop early in December, and as a result, your sales are lower, your inventories are lower.

Well, this quarter, December was stronger than we've seen in recent years, and so inventories and receivables were up a little bit higher.

Secondly, with that last portion completing those carbon fiber facilities, while we recorded the capital expenditures, some of those expenditures, probably about half of the increase in accounts payable, remained in accounts payable at the end of the year.

Turning to our portfolio review, Dave's described that we completed the divestiture of our TechFab joint venture. You've also seen that we reached agreement in principle to divest what we call our architectural business, which is based in France. The transaction is proceeding as planned and is expected to close in the first quarter.

Now, as a result of where we've reached in that transaction, you see in our financial statements that we now treat it as a discontinued operation, and so that means that the architectural sales and costs and profit contribution are no longer in the full P&L and balance sheet there; they're put down in a separate summary line, and we've restated prior periods, so when you're looking at 2005, you're now looking at 2005 as if architecture had been a discontinued operation all year.

In terms of comparing sales, therefore, if you look at last year's earnings release, you'd actually see the sales were higher last year. And if you look at this year, we reported $299.2 million. Had discontinued operations treatment not been applied to architectural, we would have been at $304.8 million.

So the revenues associated with architecture, as you have seen in the footnotes, $5.6 million in the quarter compared to $4.7 million last year, or $23.8 million for the year versus $21.9 million in 2005.

In terms of the other assets that are under review, revenues from the electronics, ballistics, and industrial portions of our reinforcements business segment were 380 -- $38.7 million -- no hundreds here -- $38.7 million in the fourth quarter compared to $46.4 million in the fourth quarter of '05, and for the full year, $155 million versus $200 million in 2005, that reduction reflecting the impact of the ballistics shrink we've seen during the year.

Now, the specific assets and associated revenues subject to this divestiture process will obviously -- what will be the final outcome will depend on what are the related transactions that we conclude in the year.

Well, that's probably enough financial detail for everyone for the moment, so might I return the call to Dave to provide some concluding comments on our strategic perspective.

Thanks, Stephen.

Just as we wrap up the year, I wanted to make a few other comments.

You know, 2006 was a year of accomplishment and transition in our minds despite the short-term disappointments of the A380 delays and the decline in ballistics revenues. As important, the long-term outlook for our target markets has improved significantly in the last 12 months. The actions coming out of our portfolio review -- to tighten our strategic focus and to strengthen our organization -- lead the foundation to attack these target markets with increased vigor and provide the platform for sustainable top and bottom-line growth.

We completed the U.S. portion of our carbon fiber capacity expansion ahead of schedule and are encouraged by the early material test results. The expansion of fiber capacity has become all the more critical now that both Boeing and Airbus have baselined their newest planes on a very high percentage of intermediate modulus, or IM, carbon fiber.

Hexcel was the inventor and is and always has been the leader in IM fiber production. The dramatic shift to IM-based carbon by both airframe manufacturers plays to this strength, and we will continue to invest as necessary in fiber, our most strategic asset.

Sadly, external events made 2006 a bigger challenge than we expected, but I think Hexcel responded well. We took some risks to do the right things and managed to deliver a pretty good year despite the hurdles. We, like you, are disappointed to think about what 2006 could have been, but make no mistake about it; we are more excited than ever about the potential for the future.

And now we'd be happy to take your calls.

Thank you. [OPERATOR INSTRUCTIONS]

From Bear Stearns, Steve Binder will have our first question.

Yes, Dave or Steve, can you maybe touch on -- looks to me like your SG&A when you back out incrementally the growth in 123R expense and the transaction cost was essentially flat. So can you maybe touch on 2007? Are you looking for kind of SG&A excluding any nonrecurring items to be relatively flat? And, also, touch on R&T, research and technology, expense. We saw a nice bump this quarter. Maybe can you just review again what are you expecting for '07.

Let me try to answer those questions, Steve.

First of all, in terms of SG&A, you're right in the conclusions that if you back out those two sort of year-on-year changes, it was fairly flat.

If you look at the year as a whole, it's up a little because there's always some frictional drivers from salary increases and whatever. But our goal remains to keep the growth in SG&A low. You can see absolute SG&A obviously changes as we divest assets. But we're trying to continue our basic philosophy, which is to constrain the growth in our fixed costs way below the growth in our sales, and so I would expect SG&A modestly up in 2007 but not any dramatic changes.

With respect to R&D, there are basically two elements to our R&D spending. There's the basic spending that we have that's fairly level loaded for the professional personnel that we have that develop our products and work with our customers, and there, we're not expecting any dramatic changes. That's a fairly steady burn rate. We provide -- it's not a place we'd under-invest in, but we have the resources, we think, in place to serve our customers and our technology development.

On top of that, though, we layer the expenditures related to the development and certification of new products to new programs, predominantly aerospace, but there are expenditures there, also, associated with our other markets, and they tend to be lumpier. You've seen a couple of quarters this year where you've had total R&T spending above trend because it's project driven. It's associated where we are with a customer in the development of products. I think you will see in 2007 that the sort of spending levels as a percentage of sales that you see at the moment; I don't think we'll go above that, but you might see some lumpiness between quarters depending on the pattern of when we have to accomplish certain tasks with certain customers. So I'm not expecting a dramatic expansion in R&T spending, but you will still see some of these lumpy quarters.

All right. And for either one of you, in the past, Dave, you've touched on kind of the puts and takes in gross profit performance, whether it was expedite costs or overtime costs, a variety of different issues that affected Hexcel the last couple years, energy costs. Can you maybe touch on trends that you're seeing as we enter '07, favorable/unfavorable?

Well, just to talk about the quarter -- you asked about next year, but to talk about the quarter, I feel pretty darn good about the leverage we've got given start-up of the fiber line and a number of other issues. You often ask about the sequential, and I always respond that it's too seasonal and you shouldn't look at it sequentially. But sequentially, expecting that question, I did a little homework, and it's the best third to fourth quarter increment we've had in some time, I think. Last year was down in the low teens, as I recall. So I feel pretty good about how we performed in the fourth quarter and feel pretty good that with volume, we'll continue a good track record.

I think we really focus on trying to make sure we get the leverage here and that operating income -- and I expect near year, as we disclosed in December, if you take out the portfolio review parts of the business, we should have an improved mix when we've got the businesses for the portfolio aligned, we should have some help from the carbon fiber start-up, which will continue -- will contribute next year, and then we've also got the savings that we hope to accomplish through the restructuring that we announced in the fourth quarter. So we have set higher targets on gross margin leverage next year than what we delivered to you this year.

And I'd be remiss if I didn't ask a standard question about the 787, if you'd like to give us any update at all with respect to capture rate on that program?

I don't have any particular news, but we are starting to see sales to the 787. We do now have in place a reasonable attempt at tracking them so that we can better answer some of the impact questions that we had when the A380 was pushed out last year and some of the special products that we're doing clearly are impacting our R&T spend, and to a lesser extent, inventory for some tooling. So I feel pretty good about where we are. Of course, we're not where we'd like to be, which is the full primary freight brake supplier.

All right. Thank you.

Thank you. Howard Rubel with Jefferies has our next question.

Thank you very much. Dave, I'm trying to understand whether you can give us a little more color concerning the portfolio review, whether there have been any hitches in the road, or whether this is progressing according to schedule.

Howard, we're at a pretty sensitive time, and we'd like to stick with what's in the release and what we just said before, and I'd really like to pass on that if you'll allow me.

Well, I'd like not to, but I figure if you feel very comfortable about how this is going, then I'll live with that.

One other thing. If you can talk for a moment about the structurals part of the business, it continues to shine, and is there any opportunity there for increased penetration?

We are doing very well with structures, and usually people don't look at the subsegments. A lot of great work has gone -- I mean, first, over recent years, we had to absorb all of the transition of work to our joint ventures in Asia, so there were some very painful years that didn't accurately reflect the potential of the business, but we now have some new products and some participation on some new programs that look very good and that are getting started in nice form. So we feel great about the year they had, in fact, the last two years that they've had. They're a solid contributor to the rest of the organization now. We've got some good integration plans as we go to this new organization, where we think we'll be able to continue those gains.

And then, finally, with respect to the line in Salt Lake and the capacity or the options near term, how -- I mean can you talk about how well the business has been sold out and what the transition plans are and whether you're getting your expected pricing?

Well, the demand is still very strong. Some others in the industry who also have capacity that they're trying to bring on line seem not to have performed quite as well as our operations team, so I don't know how long the demand will continue to be tight. So with that, pricing is pretty good. And as you know, whether it's down or up, we're okay because we sell it if it's up and we buy it if it's down. And there's no shortage of interest in any pound of fiber we get off the new line.

I mean is it -- and it's obviously going to markets other than aerospace. Could you just address that, and then I'm done?

We really just started up, Howard, and we've got a good deal of proving to go to verify that it's performing exactly as we want. We don't want to get started and start a qualification until we've absolutely had a good shakedown, so we actually plan on that for a few months. In the course of doing that, we do deliver -- do end up with some fiber that can be used in markets that don't require big qualifications. But right now, we are still in the midst of a shakedown. We're just further ahead of the schedule than what we had expected.

Thank you very much.

Thank you. Richard Safran with Goldman Sachs has our next question.

I thank you. My question's been answered.

Okay. Thank you, Richard.

[OPERATOR INSTRUCTIONS]

We'll go next to Nigel Coe with Deutsche Bank.

Thanks. Good morning. Stephen, you mentioned the high CapEx is because you accelerated some of the buildout in the fourth quarter. Does that mean that we can expect CapEx to come down by, say, $20 million next year to maybe about $18 million?

Good morning, Nigel.

Morning.

If you look at our guidance for 2007, we said that capital expenditures in 2007 will be comparable to the levels of 2006. Now, we ended up obviously high in 2006. The reality is that what we actually spend in 2007 will be event driven.

Okay.

There are expenditures like finishing the carbon fiber line in Spain. We talked in the guidance release about the need to invest in wind energy capacity because that's growing. So there are certain plans and projects in place, but in giving that sort of non -- we didn't give you a hard number simply because depending where we come out on a sequence of programs, we could have more or less spending over the course of the year.

Dave mentioned in his comments that carbon fiber -- we will invest in carbon fiber if the demand is there for our products. And so I think you have to sort of bear with us that we will give guidance as we see how the things develop, but the actual amount that we spend in '07 will be subject to wins that we make during the course of the year.

Okay, that's fair enough. And the TechFab proceeds, it seems quite a nice lump of cash there. Can you give us some sense on the multiple, how the valuation wrapped up for that JV? [Inaudible] in terms of --

How with respect to our JV partner?

Yes, EBITDA multiple, also.

I can't really get into that in detail. I would say, though, qualitatively, it was a good, fair value for the business that reflected its future potential as much as its current performance and that we're very comfortable with the transaction. You know, it was a good business. It didn't fit anymore with our new strategic view, and our partner gave us fair value for it.

Okay. And then just finally for me, just to follow-up on Howard's question, is it [inaudible] then that you're starting to ship fiber to industrial channels from Salt Lake on the new Salt Lake line?

I think we'll talk about that more on the next call, Nigel, because as I said to Howard, we really did just start up. So --

Okay.

-- our very first priority is to make sure we do whatever we need to do to the equipment to tune it, to get it ready to start the aerospace qualification. That's why we built it, our aerospace qualification. So I don't want to predict about whether or not we'll want to do more tuning through the quarter or whether we're close enough that we can just start to run it, but we'll let you know at the end of next quarter.

Okay. Thanks a lot.

Thank you. Next, we'll go to John McNulty with Credit Suisse.

Yes, good morning. Just a few quick questions. The $7.6 million of costs that were tied to the realignment and restructuring tied to that, can you give us a rough idea of how much longer we should be expecting to see charges tied to this specific restructuring and what the magnitude might be?

Good morning, John. In our outlook for 2007 that we published in December, we gave you a range of 5 to $6 million for total restructuring costs in 2007, and that's composed really of two blocks of activity. One is the balance of these restructuring actions that we took the charge for in the fourth quarter, and secondly, it's completing the Livermore process. The Livermore plant will close this quarter, but then as we disclose in various of our documents, we have to pay the cost of demolition to get it ready for sale at the end of the process.

And so those expenditures split between those sorts of activities in 2007, so you will continue to see business consolidation restructuring. And then at the end of the Livermore process, then eventually you'll see proceeds from the sale of the facility, which more likely than not, is a 2008 event. So there is a burn, but we've given you that sort of parameter to think about.

In terms of how you think about it in the quarter, again, it's another of these event-driven things, so I tend to sort of look to it being either sort of fairly smoothly distributed or maybe slightly loaded to the front end of the year, but that's the probable pattern of business consolidation spending in 2007.

Okay. That's helpful. Second question, with wind power being as strong as it is, can you give us a rough idea now of what the current percentage of industrial it makes up at this point?

We're not ready to completely lift the [inaudible] on that, but it is now the largest part of our industrial revenues. Ballistics is number two. During the first quarter of 2006, they sort of crossed. Ballistics used to be the bigger. You've seen ballistics shrink by sort of 30% since then. We used to say that the two of them represent more than half of the total industrial revenues, so you could do some simultaneous equations to solve that one. But it is the largest piece. It's growing fast at the moment. It's not to say that we don't have some other parts of our industrial portfolio that either are or have the potential to grow at the same rate. It's just they're not of the same magnitude.

I think, again, if you go back to our guidance in December, we also talked about recreation, which is the third biggest component within industrial. Recreation is a market that's been supply constrained because carbon fiber has not been there to help these guys build bikes and hockey sticks and golf shafts and all the other things. They've not grown as much as they can. I think as you see in '07, not so much necessarily just our own supply but other supply coming to the market as new facilities become available, that will pick up pace, too.

Okay, great. And then the last question. There's been a lot of talk across the industry on the military side in terms of some problems in getting helicopters kind of built and out the door, and I'm assuming that that's one of the -- that's the large part of the rotor blade issue you've been dealing with. Can you give us some rough color as to how much rotorcraft make up of your military and defense business?

It's become a pretty big segment. I think we talked a couple of quarters ago that when we started adding the growth trends of all of the major Helicrafter makers, including Europe, which is, I think Eurocopter's leading share, we have very strong positions in each of them. So all of them are growing, so it's become a grouping that is pretty darn relevant for that segment right now.

I mean is it -- can you give us a ballpark in terms of size? Is it 25% of the business, 10, 50?

It's less than half but more than a quarter.

Okay, great. That's very helpful. Thank you very much.

Thank you. Next, we'll hear from Al Kaschalk with Wedbush Morgan.

Morning, sorry.

Morning.

On the wind energy side, if we could talk about that for a moment, it was -- it's extremely lumpy business in '06, and with the strong Q4, how should we think about '07, or what are you doing internally to prepare yourself to sort of manage what has been a very lumpy business for you?

Al, I think actually it's been lumpy for as long as I can remember. I think it's getting better actually, but if you go back three or four years, it seems to me their sales, our customers' sales, would be 25% in the first half and 75% in the second half, partly just how they operated and partly because of the starts and stops of the production tax credit and other such things that create year-end madness. So I wouldn't say it's because of us, if I could excuse ourselves.

However, this year's been a little bit constrained just because of capacity of components for them. I think all of them have tried to get their pace a little more orderly because they had warranty issues, so I feel like this year was a pretty good repositioning year for them. We also needed them to start adding capacity because everybody is running at their limits. They're running into limits of their tools. I think the fourth quarter is sort of a preview of what we hope will be a stronger year, and it's looking strong enough to us that part of the reason we talk about increased capital spending, from what we said six months ago, is that we're going to have to start stepping up our capacity to keep up.

Okay. So I guess the takeaway is whether we see a low end of 5% growth in a quarter or a high of 30, it won't be your fault, but you're going to supply as best you can?

I think, based on this year being sort of uncharacteristically soft, I mean if we had two years of 50% growth --

Right.

-- I would expect double-digit growth throughout.

Okay. And then just an expansion on that and tying into the previous questions about capacity and outlook, is there a new effort on your part to expand more dollars in the wind energy side in terms of capacity, or has that remained consistent where you've been the last six to 12 months?

Well, we did a very large capacity increase a number of years ago. We've made tremendous strides at improving the output of a highly automated facility through some great Six Sigma work. So each year, we've sort of had a plan that would require significant capacity increases, and we found a way to get more capacity out of our existing facilities and in working with our customers. We now believe we're reaching the point where we've got to start stepping it up, and so, again, one of the reasons we've taken up everybody's outlook or suggested that you take up the outlook on cap spending is that we're getting to the point where we're going to be putting some significant funds into the next block of wind capacity.

Okay. And then, finally, maybe this is more Stephen, but in terms of cash taxes for '07, can you guide us a little bit more? Should it reflect the level you had in Q4, or how should we think about that?

I think the answer is that cash taxes you will start to see creeping up. It's not to say that it's going to get anywhere close to the book rate, but the timing of when you can use some of the deferred tax assets and the fact that our underlying business profitability as a whole is growing means that we will start to push ourselves to the point where in some jurisdictions, we will pay some cash taxes each year. So I don't have a good single number to give you, but if we were at $12 million last year, you'd expect it to creep up into the teens somewhere in 2007.

Great. Congratulations.

And, of course, if we do better, then it will creep up faster.

Right. Congratulations on a good revenue quarter.

Thank you, Al.

Thank you. [OPERATOR INSTRUCTIONS]

We'll move next to Steve Levenson with Ryan, Beck.

Good morning, David and Stephen.

Hi, Steve.

Good morning.

Can you tell us where you stand or if there's been any movement on some of your new projects like the tooling products or some of the offshore gear?

Boy, we just talked about it two weeks ago. I don't have any big orders for you yet.

Well, you're doing so well, you know.

The tooling is a product that there's a lot of interest in, but it's sort of brand new to everybody. So we're working with a couple of tooling partners, and there are a number of customers who are putting it into serious trial mode to run it through its paces, run them through their paces. It's a pretty big change in thinking for most of them, so I don't expect real short-term results, but a lot of good interest and activity. And the oil business is definitely a longer-term thing. We've got some developmental programs that we are working on, but they're pretty risk-averse, and that's a longer-term project.

Okay, thanks. Having completed the Salt Lake City stuff ahead of schedule and with demand hopefully creeping up or more than creeping up, do you see any reason that you might accelerate work in Spain?

You know, once you start spending that money, acceleration is always in our interest because, of course, we can always sell the fiber. So, yes, but even if the demand wasn't creeping up, we'd be trying to accelerate it.

The bigger question is if we're successful, do we do more? So, again, we're indicating that the change in the aerospace market to all IM fiber by both airplane makers has us trying to set expectations that you're going to see more, not less fiber in the future.

Okay, thanks. And do you have a timetable as to how things are going to go in Salt Lake as far as a plan timetable on the testing, the shakedown, the testing, and when it becomes salable for aerospace use?

Well, we've been saying a year, and that sounds pretty general, but it's really hundreds and hundreds of trials and tests for hundreds of customers, thousands of samples. It's a massive project. Some will maybe clear quickly, and some won't, so we say a year, but as with acceleration of the fiber line in Spain or anywhere else, that year is not our friend. So we're doing a lot of work to try to find a way to bring that in, to get it done more quickly. Not only that, we want to find a way to have a process that allows us to do it more quickly next time and next time and next time. It's an important part of the return on capital calculation.

Okay, and, last, Boeing's out there saying that the 787 is still on schedule. Are you a believer?

I always listen to my customer if I can.

Thanks very much.

Sure.

Thank you. Our final question today will come from Tony Rizzuto with Bear Stearns.

Thanks for taking my question. I'm the metals and mining analyst for Bear, and I was wondering how you gentlemen see the supply/demand outlook for aero quality carbon fiber playing out over the next three to five years. Do you see the market being adequately supplied?

I sure think we're all trying like heck to make that happen. I mean this is a dream for all of us in the high-end carbon fiber business, and I'll speak to -- I think I speak for my competitors who are also my suppliers; the last thing in the world we want to do is not be able to keep up. I would hope that with the lead-times of new airplanes, we'd all be able to always stay within the demand.

We got a little caught in the last couple of years because of the sudden surge in aerospace that kind of came back more quickly than anyone thought. On top of the 787 decision being all carbon, a couple of sort of traumatic decisions. At the same time, wind energy, people started using carbon fiber, and they were already at a volume point that sucked up a lot of demand.

So I think we're all a little bit late in getting cranked up, but we're all going like hell trying to make sure we stay ahead. So I hope three years from now, we'll say we got 'er done.

Thank you. What types of growth rates in demand do you generally assume for your own planning purposes?

Well, we don't give out a number like that, but I mean it is an important thing to remember that new airplanes take a long time to get into production and then get into the mix. So even if you take -- if you know aerospace, I mean take a 787, the most successful launch, I think, in history of a new aircraft, going to ramp up as fast as they possibly can, but the fact is probably in 2010, it will be 15% of production. So these aircraft phase their way into the mix, and you still have a lot of metal ones in the mix. So I don't think your metal accounts are going to see -- drop off a cliff nor are we going to have to climb a cliff. It's going to be a steady drumbeat of secular growth on top of whatever the build schedule puts as a baseline.

All right. I appreciate your insights. Thank you.

Sure.

Thank you. That does conclude our call today. We'd like to thank everybody for their participation. Have a great day.