Hexcel Corp (HXL) 2007 Q1 法說會逐字稿

Good day, and welcome to this Hexcel Corporation first quarter earnings conference call. As a reminder, today's call is being recorded.

And now, for opening remarks and introductions, I would like to turn the conference over to Mr. Stephen Forsyth. Please go ahead, sir.

Good morning, everybody. Might I welcome you to Hexcel Corporation's 2007 first quarter conference call on today, April 24?

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 may involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially of forward-looking statements today. Such factors are discussed in the Company's SEC filings, including our 2006 Form 10-K and today's press release.

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

Well, with me today are Dave Berges, Hexcel's Chairman and CEO, as well as Wayne Pensky, our soon to be CFO and Senior Vice President, along with Michael Bacal, our Communication and Investor Relations Manager.

The purpose of this call is to review our first quarter results detailed in our press release last night. First, Dave will cover the highlights; then Wayne will cover some of the financial details. Then we'll all take on your questions at the end.

So, might I hand the call over to Dave? Thank you.

Thanks, Stephen. As I'm sure you're all aware, after a long and distinguished career at Hexcel, Stephen has accepted a CFO position at Chemtura and leaves us at the end of this week. He'd like to share some personal thoughts at the end of the question and answer session, if you'll be able to stay on the call. Stephen Forsyth, the voice of Hexcel, will be missed. I'd hate for his reading of the safe harbor provisions to be the last you hear from him.

Now, for the numbers. First quarter was a nice start to the year, with solid execution in our core growth markets. As we expected, the impact of the A380 delay knocked a great commercial aerospace growth quarter down to low single digits. Nonetheless, top line growth of 9% was consistent with our prior guidance and reflects the strength of our other markets. Of note was an unusually strong space and defense market, up almost 17%, as well as strong growth in wind and ballistics.

Gross margins for the quarter increased to over $78 million, or 23.8% of sales, the highest quarterly rate in over nine years.

During the quarter, we completed the sale of our French architectural business for $25 million, which was the next step in our potential divestitures of some of our reinforcements assets. The after tax gain on the sale was $6.8 million.

The reported earnings per share for the quarter were $0.24 per diluted share, but if you exclude the gain on the sale, we were at $0.17.

Turning to revenue trends, the dollar has shown weakness this quarter versus last year, so I'll comment on the constant currency comparisons to last year's first quarter. In the past, we've converted this-year actuals into last-year dollars. We've changed our convention now to leave the current year as actuals, and instead convert last year's sales to this year's foreign rates.

Commercial aerospace sales were $144 million, up 3.3%, or $4.4 million in constant terms for the quarter. A380 shipments were down heavily from the strong first half ramp up rate last year. For the last two years, A380-related sales were estimated to be between 5% to 10% of our commercial aerospace sales. This quarter, they were well under the 5%, and we face another tough comparison in the second quarter. But, we still had aerospace growth in the quarter due to double-digit gains on all non-Airbus sales, which make up more than 60% of this segment. Boeing, engines, nacelles, regional and business aircraft-related sales were all strong. In fact, for the second quarter in a row, Boeing-based sales exceeded Airbus.

As the first Boeing 787 is expected to fly this summer, we'd like to provide a little more detail on this program. Until certification, things can change. But, we now expect that early versions of the aircraft will average in the range of $1 to $1.3 million per airplane for Hexcel's sales. The range is in part caused by the engine selection, which is determined by each airline. The GE engine offers a higher composite content. An extensive range of Hexcel products, such as prepregs, specialty reinforcements, honeycomb core, fibers, resin systems, as well as structural components, including new HexMC products, have been selected by a diverse group of suppliers. We hope the new products will provide the opportunity for increased participation in future variance of the aircraft as weight-reduction projects are implemented. We now expect that the annual revenues we recognize from the 787 will be as significant as those we'll recognize from the A380 when they're both at the planned maximum run rate.

Hexcel's content on the new engines and nacelles for the 747-8 will breath composite life into Boeing's competing offering in the jumbo class, so certainly less than the 23% composite A380. The Airbus A350 XWB, the response to the Boeing 787, is now expected to be 50% plus in composite materials, and development has begun in earnest. We have high expectations for our role in this program, and, as with the jumbos, good positions on both OEMs assure Hexcel participation in the rapidly expanding global interest in new fuel-efficient, twin-aisle aircraft, regardless of the airframe selected. Of course, underlying the secular growth story, we continue to be encouraged by the industry's order strength, amid long last signs that the legacy carriers from the United States are finally looking at refreshing their fleets, as evidenced by American Airlines recent announcements.

In industrial, wind energy revenues grew almost 20% for the quarter, but more than half of that was due to exchange rates. GWEC, the Global Wind Energy Council, reported in February that the installations grew 32% in 2006, despite supply chain constraints. The growth was led by the U.S., followed by Germany, India, Spain and China. And the European council of 25 EU-member states last month signed up to the world's most ambitious target for renewable energy, 20% by 2020, with binding targets recommended for each member country. For Hexcel, capacity increases are underway, and we still expect mid teens volume growth for the year.

Ballistics revenue bounced back strongly as expected, showing double digit growth over a reasonably strong first quarter last year. The comparisons get even easier starting the second quarter, so with the renewed funding and the proposed troop increase, we expect the year on year growth to continue.

[Sales for the] space and defense markets in constant currency were up a robust 14.6% compared to last year in constant dollars. We saw strong sales growth in materials for both fixed wing and rotorcraft airplanes-- aircraft. Last year's inventory adjustments at certain customers will make the year over year comparisons a bit easier for the balance of the year, so we expect the double digit pace to continue in the near term. Looking ahead, we are encouraged by the DOD's recent decision to approve low rate production for the F-35 joint strike fighter. Additionally, EADS reported continued progress on their A400M transport program, with the first major components delivered for final assembly. The wing includes both composite skins as well as an all-composite outer wing box, and Airbus believes it to be the largest composite wing ever made.

Now to cover some of the financial details, let me introduce Wayne Pensky, our new CFO. Wayne joined Hexcel after a distinguished career in public accounting and has had a series of expanding roles over the years. Most recently, he's led the financial integration of our former global business units into one advanced composites organization. His former involvement as the corporate controller and then as head of finance for our largest and most strategic business unit gave him an invaluable experience base. He's been number one on our succession chart for every one of the six years I've been here, and I'm thrilled that he's agreed to leave his beloved Golden State Warriors to join me in Stamford. Wayne, would you cover some of the financial details, please?

Yes. Thanks, Dave. We did make several significant changes to our reporting that I'd first like to discuss. Effective January 1, we revised our operating segments to reflect our strategic and operational realignment and focus on advanced structural material business. As most of you know, we have eliminated our three former business units and consolidated all our composites-related activities into a single organization. The reinforcement product lines for which we're exploring strategic alternatives are being managed as a separate business. We will now report our business in three new operating segments.

The first and largest segment is the composite materials, which will include all of our carbon fiber activities, reinforcements for composites, honeycomb and matrix products. This segment is more capital intensive and typically has long product development and qualification cycles. Our operating income margins were 15.4% for the first quarter compared to 15% last year.

The second segment is the engineered products segment, which includes our activities around finished and semi-finished structures manufactured from composite materials. Our previously reported structures GBU is included in this segment, as well as HexMC parts and our new AcoustiCap noise dampening system. This segment is more labor and inventory intensive. Our operating income margin was 9.2% this quarter versus 11.8% last year, and the decrease is primarily due to increased R&T spending and qualifications for the 787.

For our third segment, we have created a four-letter acronym that I'm pretty sure no one else has used before, and that is EBGI. EBGI reinforcements includes U.S. operations related to electronics, ballistics and general industrial reinforcement product lines.

We have revised the 2006 and 2005 actual results for the new segments, as well as the 2006 by quarter, and we have posted those new statements on our website.

The second change we've made this quarter is that we've reclassified certain of our reinforcement for composite product sales between market segments to reflect improvements in the tracking of sales to the end market applications. The woven fabrics we manufacture for use and reinforcement for composite applications are raw material inputs for our customers, and it is often difficult to determine what end market application a customer may use these materials. Historically, we classified all these sales as commercial aerospace, as that was the predominant application. Over time, the application for these products has diversified, and our ability to determine the end market application has improved. In the process of developing our revised operating segments and the identification of the market application to which they sell, we concluded it was more appropriate to classify these sales as industrial market applications, unless we can directly identify their end use in the commercial aerospace or space and defense applications.

We've also reclassified the 2006 and 2005 sales by market, as well as 2006 by quarter, and have posted those results on our website as well. You'll find a reconciliation of the reclassifications among the materials we have posted to our website.

I also want to clarify that none of these changes impact the Airbus or Boeing commercial aircraft sales we have previously reported. The operating segment information of sales by market numbers in yesterday's press release reflect these changes.

Next, let me take you through a couple of nuances in the current quarter's earnings calculation that require some further clarification.

SG&A costs were $3.1 million higher than last year with two items contributing most of the increase. The largest component of the increase was the stock-based compensation FAS-123R expense, which was up $1.5 million over last year. Much of this was due to the technical requirements of 123R itself, where certain non-cash, equity-related expenses are accelerated to the quarter of grant due to recipients being retirement eligible, creating a timing issue. Our total first quarter stock compensation expense was $4.9 million, but we continue to expect the full-year expense to be in accordance with our previously provided guidance of $11 to $13 million. Naturally, this implies that the 123R expense should be lower in the remaining quarters of the year, as they were in 2006.

Secondly, about a third of our SG&A costs are incurred in Europe; and, with the euro and the pound about 9% to 10% stronger this quarter than last year, exchange rates accounted for about a third of the increase. Our R&T spending increased $2 million in the quarter related to new product development and qualification costs for new aircraft programs. Most of this increase was in the engineered products business segment as a result of certification testing of 787 components from our HexMC system. Our business consolidation restructuring expenses were $1.6 million compared to $3 million in the first quarter of 2006.

Our tax provision for the quarter was 41.5%, as compared to 39.4% for the first quarter of 2006. The increase in effective rate was primarily driven by the adoption of FIN48. We expect FIN48 to increase the volatility of the effective tax rate. You should note that our cash taxes for the quarter were only $2.6 million, and we continue to expect cash taxes to be lower than the tax provision in 2007 as we continue to benefit from our U.S. deferred tax assets.

Our net debt increased slightly by $1.5 million in the quarter to $388.1 million. The increase is lower than we traditionally experienced in the first quarter, thanks in large part to the proceeds from the architectural sale and lower capital expenditures.

Working capital showed the usual seasonal growth we see in the first quarter of each year, however the growth in inventory is more pronounced. Inventories as of March 31 grew by $17 million in constant currency compared to yearend, and $31 million compared to March 31, 2006. The growth in inventories have been driven by a number of factors, including building tools, tooling to mold finished parts using the new HexMC materials and processes for the 787, bridge inventory for the closure of the Livermore, California plant, increases in aircraft production and normal seasonality. While we do have requirements for additional inventory, we do need to continue to focus on improving our inventory turnover.

Capital spending for the quarter was $16.3 million, which has [been] a lower run rate than we are expecting for the year. The construction of the Spanish carbon fiber line remains on schedule, with completion expected by the end of 2007. Also during the quarter, we worked on expanding prepreg and honeycomb capacity to meet our growing customer demand.

Lastly, let me give a brief update on our portfolio review. As Dave previously mentioned, in February, we sold our French architectural business for $25 million, and we recorded an after tax gain of $6.8 million, or about $0.07 per diluted share. This gain is reported under discontinued operations. Our non-core assets under review include the electronics, ballistics and general industrial product lines that are now separately shown as the EBGI operating segment. This segment had revenues of $46.1 million in the first quarter of 2007 compared to $40.9 million for the first quarter of 2006. We still target a conclusion on the remaining elements of portfolio review this quarter. I should remind you that the specific assets and associated revenue subject to potential divestiture may change as we complete our review and any related transactions.

We'd be happy to take your questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Steve Binder with Bear Stearns.

First of all, Steve, I want to congratulate you on your next move. You'll be sorely missed. Dave and Wayne, whoever wants to answer this, I guess, two questions, first with respect to the portfolio review being concluded by the time period that Wayne just touched on later in the year. Can you maybe touch on--? Are you--? Is there change of thought on the potential divestiture plan? Might you decide to retain these assets?

I think that's always a consideration, Steve, but we don't have anything particular to add to what we've said in the past or what we said in the release.

All right. And then, with respect to capacity, and given the role you hope to play on the A350, the expanded role there, coupled with what you've acknowledged on the 787, obviously you've got growth on the space and defense side as well. Can you maybe touch on capacity additions and everything you've planned for for the next two years? Is it really sufficient, given what this expanded role could mean in the aerospace side over the next couple years?

No. I don't think it is. We suggested in the December discussions that we'd expect the CapEx to look more like last year than prior year's if we're successful. So, as we talk about a position on the A350 (inaudible) 787, and we've also indicated that wind energy capacity expansion is underway. I'd expect that we'll regularly be adding capacity as this industry grows.

So would possibly '09 capacity capital spending possibly, if you get that role on the A350, be more than we've seen the last couple years?

I think it's a little early to go out that far, but I think it would be safer to assume triple digit numbers than double digit numbers if the recovery keeps going at the pace that it's going and we win our fair share.

And, Wayne, can you maybe just touch on the payables this quarter? I know that part of that-- if I'm not mistaken, the decline in payables was related to the capital spending prior in 2006. But, I mean, what did payables do if you back that out? How much did they-- did they match the increase in inventories, or were payables relatively flat?

Yes, Steve. You're correct in that most of the reduction in payables was the result of-- we had a lot of capital expenditures at the end-- in the fourth quarter of 2006, and there was-- a lot of that was still sitting in payables at yearend, which we did pay off in the first quarter. If you back that out, payables was generally flat. That's because our inventory buildup in the first quarter started fairly early in the quarter, so a lot of the big increase has already been paid for.

I see. Okay. Thank you.

Thank you, and moving on, our next question comes from Al Kaschalk with Wedbush Morgan.

Just a quick question on the comments, Dave, that you made about the 787 and 380 run rate. When do you expect those to equal in terms of a run rate. Or, said differently, how are you adjusting operations today to achieve that at some point, I assume, 12 to 18 months down the road?

Well, we have visibility, I think you're aware, to the month-by-month bill rates at both Boeing and Airbus. Both are confidential, but they both have in mind to get to full-rate capacity over the next 24 to 36 months.

Okay. And then to follow on Steve's question, I'm not sure that I-- at the rate you went this quarter, which I realize there's a timing issue on CapEx, it seems you're well below or we should be expecting some big dollars in the second half of this year in terms of capacity as well as next year to get to plan. Are you able to--? I know you've made comments that things are ahead of schedule. But is that really the case, given the way you've spent money in Q1?

The first fiber line started ahead of schedule. It started in the fourth quarter instead of the first quarter. So, you'll note that we had a very big fourth quarter. We would likely have had some of that come into the first quarter. What we're working on now is the Spanish line. The building's foundation is up, and the sides are going up on the building. And all of the major equipment for the line is scheduled to be delivered throughout the year. So we certainly will see stronger quarters going forward through the year.

Okay. How does that translate for gross margins, because it seemed like it was a very strong gross margin quarter. I don't know if a large portion of that was mix on the revenue side or just an inline expectation on the sequential gross margin that you posted of 30%.

Well, it was a combination of a lot of things. But, as for fiber, we did run the fiber lines significantly in the first quarter. The first order of business is to get aerospace qualification, get the fiber lines running exactly how we want them - to spec before we start those qualifications. But, in between trial runs, we have been running industrial fiber. I would say, roughly speaking, that the margins that we got from the incremental sales of fiber offset the startup costs and development costs and extra hiring and training that we've had. So, I think the gross margin was just across the board performance on the volume that we had to work with.

Okay. Then, finally, are you able to share any comments about-- I'll call it the sequencing of revenue, but maybe it's more production related for the 380, given that I think, largely, most folks are expecting minimal to nil on the 380 for the balance of this year. Can you shed any light on that thought process?

Not a lot, unfortunately. As I've said before, we've got about 30 customers, tier one, tier two, tier three, all around the world that we ship materials to. In many cases, the material that we ship can be used on more than one program. So, it's not a precise science identifying what's happening on the A380, nor do we know exactly what their plans are. So, we've assumed for some time that some of the sites might choose to keep running at a low rate, just to keep their employees. Others might cut back. Others might have shortages of inventory, and others might have excess. This first quarter was an indication that it's closer to a cutback and shutdown than maintaining some pace for training purposes. The result will be a quicker ramp up when it does come as opposed to building of excess inventory is the way I think about it.

Right. Thank you. And, Stephen, best of luck, and thanks for your efforts.

And now moving on to Howard Rubel with Jefferies.

Let me echo those comments. It's been a lot of fun, Stephen. Good luck. Could you talk a little bit about the tax rate? I mean, you talk about it being volatile. Does that mean that we've seen the highest level of volatility we'll see in any given quarter?

Howard, it's probably still a little bit too early to really truly understand the impacts of FIN48 on our rates. We gave guidance of 38% to 40%. Obviously, the first quarter was a little bit higher than that guidance, but it's probably-- maybe we'll probably finish the year at the higher end of the guidance, but it's really too early to tell.

Just to follow up on that, could you give me a little bit of sense of what some of the puts and takes are? Is it asset sales? Is that the major item, or is it jurisdiction profits?

Yes; it's probably more jurisdiction related in terms of what items we have to set aside to meet the requirements of FIN48.

David, could you talk a little bit about the pricing environment for carbon fiber and also raw material costs and inputs?

I'd say they've stabilized compared to a year ago at this time. Carbon fiber ran up pretty seriously down at the industrial levels a year or two ago, as the shortages caused a bit of a pinch. I think there's been a lot of settling out. Some new capacity has come online. So I think that's calmed down a bunch, and oil prices kind of drive a lot of the resins that we deal with, and that stabilized a little bit from the big ramp up, which I think was October of '05.

So, you're able to recoup your-- based on what we're seeing with gross margins, you're able to adequately recoup your raw material costs.

Well, as we've described before, we always try to have back to back contracts. So, most of the business that we do doesn't-- we don't see that volatility until a new contract comes up. So, to the extent we've got new contracts opening up with our customers, we try to align with what's happening to ongoing supply. Generally, we do a pretty good job of balancing those risks.

A couple more things. One is - how sure are you that the 380 rate is going to hold at these high levels? I'm just teasing you a little bit on that.

You notice I didn't say the high levels that they will go to; I said the full rate for which they've planned their operations. I was only trying to get you some calibration. I think their intent is to run at as high a level as they can as soon as they can to catch up the backlog. What's beyond that depends a lot on orders and how the market receives it in service.

And when you talk about some of the new products, are you seeing-- this R&T spending that we've seen increase-- I realize some of it's 787 qual related, but are you also able to find some additional penetration at tier-one suppliers, whether it's on older platforms or on planes we've yet to see, for example, in the business jet world?

On the new products, Howard, the HexMC and the AcoustiCap-- those products are incremental to things we've done before. So, as you look at our history, it's sort of raw material development, qualification of those raw materials on new platforms, and that's sort of always been our baseline as well as regular research and development. What's unique about these two new ones is that they-- in the case of HexMC, we're designing parts that can be molded and finished as a detailed part replacing machined titanium or machined aluminum. And it's got a very different look from what we've done before in raw materials. So we're designing and building these parts and building the tools to go with it. Each of those has to go through a-- each part number has to go through a certification and qualification process, so it's sort of a profile that we've never had before, albeit a small start. In AcoustiCap, it's got potential for some retrofit to quiet existing engines in the fleet. Whether or not it goes there, it's a little early to tell. So they're both a little bit different from our historical raw material profile, but what it does provide for us is what was-- in our currently labeled engineered products department, it will help us move away from a little bit of the competitive nature of the build to print, you don't own the design, structural business that we've had for the years.

Thank you very much for your help.

Our next question now comes from Steve Levenson with Stifel Nicolaus.

On the startup costs for the new U.S. lines, are those largely now incurred, or are there still more to run?

I don't know that I track it in that level of detail. We're definitely offsetting it. There is certainly some training that will go on for the Spanish line during this year, even before the line is going. And we certainly will have qualification costs. So we'll be running materials and doing testing of thousands and thousands of (technical difficulty) and qualification. I wouldn't call that startup, startup being training and hiring and double staffing. We'll continue to have incremental costs in those lines, but they'll be, I think, covered by the margin produced by what we sell.

And therefore we won't start to see that incremental margin begin to drop to the earnings line until late this year or next year some time?

I think we'll see some drop this year; it just won't be as much as when it's aerospace qualified.

Okay. Thanks. And, in Spain, are you running into any environment problems or environment activists who are causing any problems in the construction of the plant there?

We had quite a bit of learning that we had to go through, we and the local Spanish authorities in this technology. There are some things that they'd never dealt with before, so the licensing procedures and reviews and discussions took a lot longer than what would take in Utah, where they're very familiar with the effluence and the nature of carbon fiber production. I would say we had tremendous support in Spain with the authorities. They're pretty excited to have this kind of technology in their aerospace region.

Okay. Thanks very much. And, Steve, thank you very much, and good luck in the new spot.

We'll now move on to our next question coming from Deutsche Bank's Nigel Coe.

Dave, you talked about some-- the carbon fiber pricing environment. You said it stabilized. As more capacity comes on stream in the next 12 months, would you expect the price of carbon fiber to continue along its long term decline? And can you maybe make some comments on what sort of impact that might have on your margins, given that you do buy more than you build?

I really can't anticipate the pricing. I probably wouldn't even be allowed to do it without looking like I'm signaling. I think there was clearly a surge from the shortages of recent years. And on the lower end, I'd be surprised if that's sustainable. But it really has to do with the whole pace of supply and demand. There still are people who would like to use more carbon fiber, particularly in wind energy. It's a good question as to whether supply will ever overshoot the growing demand. I think, as you point out, it doesn't matter a whole lot to us because we buy more than we sell. So, my main interest in our position at Hexcel is that there's plenty of supply and that we don't constrain the growth and the expansion of the carbon composite industry.

Okay. I think in the past you've said that the ratio between buy and build is 4 to 1. Where does that go to once we get the Spanish facility fully up and running?

It's not 4 to 1. If I said that, I misspoke. It's probably more like 2 to 1, and it will probably-- over time, it will shift to a lower ratio as we start incorporating prepregs that are based on our carbon fiber.

So it goes more like 50/50?

Well, at some stage, it could. I don't know. I mean the trend will be-- I would think the trend will be down from the 2 to 1 ratio that it is today. It takes some time before that would really see movement, though.

Okay. Two more quick questions. First of all, thanks for the revenue guidance-- sorry, the revenue per the 787 guidance. That's really helpful. How much variability is there? Taking away the engine choice, how much variability is there on that revenue per platform number? Does this represent material where you've been approved and everything's been ticked off, or does this represent some probably wins? How much variability is there on those numbers?

We finally give you a range, and you want me to narrow the range on the first call.

Why not?

As I've mentioned before, we have a long, long list of opportunities that we've been working in. And, as I think I've told you before, I have a spreadsheet that has a low, medium and high range of what we're chasing. And it changes every week. It changes less now than it did a year ago or two years ago. But we tried to give you a range that would give you an idea of how to think about things. Essentially, I think what we're sort of suggesting you all do is that-- if you look at our 10-Ks, you find our average sales per airplane is pretty much $0.5 million per airplane, both at Boeing and Airbus. In the new generation of airplanes, they're going to be $1 million or more, just roughly speaking. So, it's just sort of a big block shift that is the [sequitur] penetration story.

Okay. Thanks for that. And just one more. You mentioned that you expect to get the U.S. lines up to full [absorption] by the end of the second quarter. Any sense on where that's going to go? Is it going to be to recreational markets, wind markets? What sort of step up will we see in revenues from 1Q to 2Q as that happens?

Well, you don't even necessarily see the revenues as it changes the make/buy equation. If it's a make/buy decision, it hopefully is a margin difference. If it is a sale, it could be of prepregs, so it could be an enhanced sale. Or it could be just straight fiber. This is a small but essential part of the company. If that line can do $1 million or $1.5 million and if you were to sell it in the teens in the industrial market or in the 20s or 30s in aerospace, that would give you sort of the size of the pie. But, we don't really have a lot of clarity on exactly how you're going to see it come out. But we'll try to keep you informed as to whether it's contributing or not.

Understood. Thanks a lot.

Moving on, taking our next question now from John McNulty with Credit Suisse.

Just a few quick questions. The first one-- with regard to the R&T expenses, should we be-- I know you're doing a lot of testing. You did a lot in the first quarter. Should we be thinking about this as a decent run rate for the rest of the year, or do we see it kind of slip back off a little bit? What kind of a normalized run rate, if there is such a thing, for this part?

I don't think we've spelled that out because I'm not exactly sure how that's going to work. It would be a little easier to answer if it weren't for the success of the HexMC parts design and development. In that product line, there's sort of a race to get as much on as we can for the certification airplane. So we've got a lot of interest in it; it's just a question of how much we can get on before the window closes. So it's not real clear to me.

Okay. Fair enough. On the wind business, it seems like or it sounds like the organic growth there may have been a little bit lighter than what it's been, I guess, over the last year or so, kind of toward the low teens instead of mid teens. Should we be reading anything into that, or was it just--? Were there any supply issues like there may have been in the past few quarters, or what's kind of a normalized run rate? What should we think about for the rest of this year in that business?

Well, essentially-- what I would point to is capacity constraints, be it [Bestos or Gamesa] or their suppliers, or ours, for that matter, though I think we're a little bit ahead of the race. So they have to bring more blade molds online for us to get the growth going again. So, it's kind of a capacity constraint right now, and we do suggest that we're going to continue with teens growth. So, we expect that we're going to have some capacity come online in the not too distant future, and you'll start to see double digits.

Okay. Great. And then the last question, just on the 787. Again, the guidance there is definitely helpful. Now we've heard Boeing's going to be using a block insertion method here. If we were going to kind of think big here, how much bigger could that business be? I mean you said you kind of have a low, mid and high kind of dream range. What would be the high?

You guys are insatiable. I don't know. I think a high that we are more excited about is in the A350, which is a blank sheet of paper. The 787 skins being Toray prepreg is what we lust for. Whether there would ever be a change on that, that would make a significant opportunity for change. But, otherwise, I think we'll see growth as different dash numbers get introduced, particularly around things like this HexMC product, which is really a little bit late to the party on the 787. So, to the extent they allow block changes and that product is still as attractive to them as it is today, we'll get some growth there.

Just one last thing on the HexMC side. This is obviously-- or, it seems like this should be a much higher margin product, just because it's kind of like a machined carbon fiber piece, basically. Is that correct that this is kind of a higher margin type product, and while it may not be huge in terms of sales at this point, the incremental margin on it's going to be much bigger going forward?

It's got R&T to build into it. It's got tooling built into it that would later be amortized. It's highly engineered and a proprietary product. And we would expect the margins to be commensurate with that.

Okay. Thanks a lot. And, Stephen, definitely good luck to you.

Thank you. We'll now move on, taking our next question from Steve Binder-- actually, a follow-up from Mr. Binder.

I just want to address-- Howard's touched on the A380 before. But, when you look at passenger delivery of the wide body aircraft in 2006, they had roughly-- call it 160 planes from the two manufacturers. When you look at the 787 and you look at what Airbus is doing with the A330 line or when you look at the 777 line, A380-- right? And just leave it at that. We're going to go to over 300 wide body deliveries by the 2010 time frame. Right? And then you layer onto that the A350, right? At the end of the day, there's probably a pretty good chance we're going to see over capacity sometime in the next three to four years on the wide body market. When you look at your-- you touched on how much you buy outside versus what you plan to produce inside. But, at the end of the day, are you--? From a planning process standpoint, are you tracking to the build rates that guys like Airbus and Boeing are signing up to on those wide body programs, or are you being more conservative?

Well, we have a-- our lead time is so long. It's shorter than their lead time. So, the A350 we know if we win certain amounts of the business or a certain share, we know exactly when we would have to layer the capacity in. The A380, of course, is a known, and we do expect that they're going to hit their big ramp. But, of course, we already put that capacity in place before. Would the A380 stay at that peak level? I don't think our internal planning would factor that in. But we'd have time to react. We'll have plenty of visibility to make adjustments. Again, in our case, if we got more carbon fiber than we need to use for intermediate modules fiber, we can always manufacture high strength fiber or even industrial fiber.

So you think there's enough flexibility in your planning process that, from a profitability standpoint, you would not be impacted if wide body rates didn't materialize like they're hoping-- the manufacturers are hoping for them to be.

Yes. If they grow more slowly, I think we'll keep pace for it. If they go to a peak and then drop, we'll, of course, have to make adjustments.

Okay. Thank you.

Our next question now comes from [Peter Grodin] with OSS Capital.

Two things. First of all, thanks for the increased disclosure. It was definitely very helpful. And, secondly, you had given guidance that, this year, you're going to be on track for sort of 11% to 12% operating margins. Obviously, you came in just a hair below that. I'm assuming that probably had something to do with the extra R&T spend. Was there anything else there that you can give us color on? Do you still expect those generally to come to the 11% or 12% number?

Yes. Our guidance of 11% to 12% sort of assumed kind of a lackluster growth year because of the A380. As we disclosed last year, rather than wait for growth, we're in the midst of a pretty aggressive restructuring program. We closed two plants recently. I've sold two businesses off now. We've got the strategic review going of two others that are lower than average margin. Those things should help our mix going forward. The reorganization to a single organization in composites is, to a great extent, a European reorganization, which takes a little more time. But we should start to see the payback on that soon. And then, now that carbon fiber is-- that new line is starting to run and we're able to get-- to the extent we're able to get some sales out of it while working the qualifications, that should enhance our margins. So our target to increase margin was sort of independent of any significant growth. If we can get some growth going, especially at the latter part of the year, I don't expect to have any problem clearing those hurdles.

I'm just looking at the press release. The language around the assets that are up for divestiture-- I think you said something to the effect of you expect a conclusion at the end of Q2. Any more color that you can add there, or it's kind of-- it is what it is in terms of the statement. That's it. Thanks.

It's a delicate time, Pete. I need to leave that as written, if you could understand that.

Fair point. And, actually, one other thing. Steve, good luck. Thanks for everything.

Gentlemen, we have no further questions in our queue at this time.

Okay. If those of you who have stayed with us to hear from Stephen, I do want to just take a moment to publicly thank the man seated across from me for his 26 years of service to Hexcel. He's been with the Company through good times and bad times - and good times and bad times, as I think about it. He's definitely leaving on a high note, as we're in the best financial condition of our history. Just a little more than five years ago, our debt was over six times EBITDA, and our market cap went below $50 million. Today, we're approaching two times leverage and $2 billion of market cap. Stephen's worked tirelessly to put us on that footing, and we now can focus on growth unconstrained by fragile capital structure. Stephen?

Thank you for those kind comments. Well, as everybody's aware, at the end of this week, I leave Hexcel to join Chemtura as CFO. Chemtura's a $3.7 billion a year global manufacturer of specialty chemicals. And, while I'm obviously excited at the prospect of some new challenges and opportunities, it will be no surprise to all of you if I say it's very hard to leave Hexcel at such an exciting time in its development.

If we look at Hexcel today, it's probably stronger than it's ever been in its history. First of all, the composite dream is coming true. The penetration of composites are moving up from being a specialty material to the material of choice of many engineers. We've seen the penetration in large commercial aircraft, but we're also seeing the emergence of real durable opportunities and industrial applications. Wind is obviously one that's most visible to everybody today. But just within the energy sector alone, there's a number of places we can look to where we can deliver [into] the composites industry durable economic and performance benefits over traditional materials.

Hexcel today is a market leader. We have higher revenues than anybody else in the field with advanced structural composite materials. We have the broadest offering of products. We have a level of vertical integration which enables us to engineer high performance systems without going to the extreme and making everything yourself and losing efficiency and creating excess costs. We have a natural balance there. The foundation of that vertical integration (inaudible) in our intermediate module is fiber capabilities. We really have found our place in new all-composite aircraft. We're a global company with equal presences with the European and U.S. aerospace industries, and we will have a comparable presence with whatever happens in Asia in terms of the development of their own industry. If you just look at the nuts and bolts of what makes us operate on a day to day basis, we have more certifications and qualifications than any other aerospace composite supplier in the world.

As Dave mentioned, our balance sheet is in better shape now than it's been, certainly, since the mid '80s, if not earlier than that. And our margins-- operating income and net income margins today, just it may be for changes in accounting over the years, are higher than at any point in my history with the Company. We were actually delivering a return, and we want to keep improving that delivery on our sales on our assets.

So, while it's tough to leave, it's good to know that I'm leaving at a point in time when the Company's in great shape.

Just a touch on my successor. I've known Wayne Pensky for 14 years, and he never fails to impress me with his energy levels, his judgment and his technical abilities. I have every confidence that he will provide strong financial leadership for Hexcel in its next phase of development. And he's always been there behind me making me look good over the last few years.

So I'm now going to move to the position as a Hexcel shareholder. I will be a listener to the quarterly calls and a reader rather than a critic of the earnings releases and filings. Before closing, I would like to thank all of our investors and all those that have done analysis on the Company over the years for their interest in our company, their support and encouragement, both for the Company and me personally. In recent years, we started to reward their confidence by delivering growth and improved financial performance, and I think with the secular trends in composites and the leadership and focus on execution within Hexcel today, we'll continue this improving trend and continue to create value for our investors.

Lastly, I'd like to give recognition to the employees of Hexcel. This is a company that's been built first and foremost on technology and innovation. Since it was founded in 1946 by Roger Steele and Bud Hughes, it succeeded through technological innovation combined with a focus on customer needs. Those abilities have been nurtured by generations of talented CEOs, directors, managers and employees. These core performance attributes are rooted in the talents and commitment to our employees and are critical to the continued success of our Company. Over the years, we've expanded those abilities through the talents of employees of the businesses with which we have combined. It's always struck me, the nature of these transactions. We've gained employees with a common singular focus in delivering the full potential of composites. The fact that we're able to take position on these large new commercial aircraft programs is a testament to all of their contributions over the years.

So, our employees will continue to deliver individual products that will give flight to the ideas of our customers and drive the continued long term, sustainable growth to our Company. And it has been a privilege for me to serve with them. Thank you.

Thank you very much, Stephen, and good luck.

Thanks.

That concludes today's conference call. Thank you for your participation. Have a great day.