Hexcel Corp (HXL) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Hexcel Corporation fourth quarter 2008 earnings conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. Wayne Pensky, Chief Financial Officer. Please go ahead, Sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2008 fourth quarter earnings conference call on January 22nd, 2009.

Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained on 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 bit 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 2007 10-K and last night's press release.

Lastly, 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 bit request.

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

The purpose of the call is to review our 2008 fourth quarter and full year results detailed in our press release issued last night. First, Dave will cover the markets and I will cover the financials and then Dave will return with some comments on our outlook.

So let me hand the call over to Dave.

Thanks, Wayne. Fourth quarter sales of about $290 million were well below our original expectations, almost 9% lower than last year, due primarily to the impact of the Boeing strike; and income from continuing operations of $28 million is more than double last year aided by tax benefits recorded in the quarter.

Excluding onetime items in both '08 and '07's fourth quarter, adjusted net income was down 18%, again primarily due to the sales and margin loss to the Boeing strike.

For the full year, we saw sales grow by about 13% or 11% in constant currency, in line with our expectations, led by strong growth in each of our target markets. Net income for the year increased over 75%, reflecting our higher sales levels gain on the sale of the joint venture and the recognition of certain tax benefits. Excluding onetime items, adjusted EPS were $0.82, up 15% for the year.

I'm sure you are more concerned about our outlook for sales going forward. But let's first cover the quarter just closed and I will come back after Wayne with some thoughts about the future.

As usual in talking about markets, I will use constant dollars to comment on the trends. For reference again, our reported topline sales for the quarter were down 8.8% from last year as reported, but only 5.1% on a constant currency basis. So the apparent sales decline of about $28 million was $16 million in real terms for the quarter.

Commercial Aerospace sales were about $143 million for the quarter, down 13% in constant dollars from last year, due again to the Boeing strike. In fact, our sales to Boeing and its subcontractors were down 40% as compared to the fourth quarter of 2007.

In the second half of 2008, Boeing Commercial delivered 107 fewer airplanes than in the second half of 2007. If you assume an average Hexcel content of $400,000 to $500,000 per plane, the damage to our revenue should total $40 million to $50 million in the September to February time period. We are now returning to prestrike levels of activity and legacy programs.

Sales to Airbus and its subcontractors were down slightly for the quarter, as the fourth quarter of 2007 was particularly strong. Some of our customers had year-end inventory initiatives.

In our Other commercial aerospace grouping, a submarket that has been growing by over 20% for two years, sales were flat compared to last year for the quarter, principally because business jet activities have slowed. For the year, sales to the entire commercial aero market were up over $88 million or 13.5% on a constant currency basis.

As a result of the strike, sales to Boeing and their related subcontractors were only flat as compared to 2007 levels, losing all of the significant growth they generated in the first nine months of the year. Airbus and other aerospace sales were up over 20% for the year thanks to a very strong first half.

Sales to Space and Defense markets were about $77 million for the quarter, up 10% in constant currency. For the year we had growth in excess of 16%, well above our historic 8 to 10, as we've benefited from a broad range of programs in the US, Europe and Asia, including rotorcraft, fixed wing attack, transport, and satellite programs.

Constant dollar sales for our industrial markets of $69 million were essentially flat for both the quarter and the year versus 2007. The last prepregs for wind turbine blades continued strong, growing in the high teens and constant currency for both the quarter and the year.

As expected, wind finished the year at more than half of our 2008 industrial market sales. We have now begun regular production at our new China wind plant and started construction on our new fiber -- new glass prepreg facility in Colorado.

Sales to the rest of the industrial market, which includes recreation, auto and other general industrial were at multiyear lows for the quarter, reflecting both [meet] markets and selective portfolio printing. On a positive note, we did make our first carbon fiber shipments to the American Centrifuge program during December. We expect sales from this roughly $100 million contract to continue in 2009, and then ramp up in 2010 and 2011.

Now let me turn the call back to Wayne for some additional comments on the financial performance.

Thanks, Dave. Gross margins of about $62 million for the quarter was 21.4% of sales, a decrease from the 23.4% gross margins for the fourth quarter of 2007 and slightly less than the 21.5% for the third quarter. Lower production volumes resulting from the Boeing strike along with incremental fixed and start-up costs at our new facilities in Europe and China were the leading contributors to this year-over-year decline.

For the entire year, gross margins declined by about 240 basis points, due to a variety of factors, including about 125 basis points of incremental fixed and start-up costs associated with the new facilities. We expect margins at our new facilities to continue to improve throughout 2009, though they will remain below our average until production expands to support higher sales volumes.

Also for the year, we estimate that the extraordinary volatility in exchange rates, energy- and oil-based input material cost cost us at least another 125 basis points in gross margins. But these issues have the most part now subsided or have been offset by pricing actions.

Selling, general and administrative expenses were well-controlled, down $5.1 million, or 18%, to $24 million for the quarter. The decline reflects cost actions taken in response to the Boeing strike, reduced expectations for incentive compensation and exchange rates.

For the year, SG&A expenses were $1.1 million less than 2007; so they were down to 8.5% of sales versus the 9.7% the previous year. We've invested a lot of energy this year in implementing tax planning strategies to use more than net operating loss and foreign tax credit carryforwards that we have available, as well as to lower our effective tax rate going forward.

The total one-time tax benefits we recorded this year were $26.2 million, including $12.6 million this quarter. We do have additional foreign tax credit carryforwards available against which we have recorded valuation allowances; but we will not reverse these valuation allowances until such time that we believe is more likely than not that they are realizable.

So excluding these one-time benefits, our effective rate for the quarter was 38.2% as compared to 37.7% last year's period. And for the year, it was 37.8% as compared to 38.2% for 2007 and we expect further improvement in 2009.

Our net debt decreased by $3 million in the quarter to $344 million. For the year, net debt increased by $56 million as a result of increases in capital and spending and working capital usage to support business growth. These increases are partially offset by $22 million in proceeds from the joint venture sale last quarter.

So we ended the quarter with almost $51 million in cash on hand and we had no amounts outstanding under our 25 -- under our $125 million revolver facility. After considering the outstanding letters of credit which reduce our available borrowings under our revolver, we had about $162 million of cash and available borrowings at year-end, up about $20 million from the beginning of the year.

As a reminder, our lead banks and revolver are Deutsche Bank and Bank of America.

Program delays and softness in certain of our markets have allowed us to delay some of our capacity expansion projects and we now plan to limit capital spending to $100 million in 2009. Much of 2009's capital spending will be front-end loaded with the funds going towards the completion of our latest carbon fiber expansion and Colorado wind projects.

At this reduced spending level, we expect to be cash flow positive for the year, although we will be negative in the first half of the year as a result of the timing of the capital spending and seasonality factors.

Before Dave further discusses 2009, let me add one more item that will help. As you know, we have a fairly active hedging program for our Euro and British pound exposures. At the operating income line, we have about 75% of our 2009 estimated exposure hedged at rates comparable to our 2008 hedge rates.

For the fourth quarter, the 2008 hedge rates were slightly unfavorable compared to the 2007 rates. Remember, a strong dollar helps us so that if the dollar stays where it is currently, it will provide a small tailwind compared to 2008 on the 25% portion that is not hedged. Roughly every 5% strengthening of the dollar in 2009 adds just over $1 million of operating income; so it does reduce our sales by about $24 million.

Now let me turn the call back to Dave for some comments on our current outlook.

Like many other companies, we are currently providing only limited 2009 guidance due to global economic volatility and the potential effects on our customers. I'm hopeful that things will call down as the year progresses and that we can provide more insight with a greater degree of confidence.

But I can share with you that our current 2009 sales plan assumes total revenues to be flat or slightly up on a constant currency basis. And if that holds true, we are targeting modest growth in adjusted EPS to continue our seven-year streak of improvement.

In Commercial Aerospace, as most of you know, our materials for Boeing and Airbus legacy programs are typically delivered six months before aircraft assembly. So while we feel confident about the first-half sales to these, our largest customers, our second half of 2009 is dependent on their forecasts for 2010.

While neither currently has indicated a significant decline in 2010, they are being more cautious until financing and backlogs are thoroughly reviewed with the airlines and leasing customers.

In addition to legacy programs, new programs could be a factor in the next two years. As delays for new programs such as the 787, 747-8, the 8380 and 8350 have, unfortunately, been the rule rather than the exception recently, our plan assumes no growth in this area for 2009. We hope that any upside can offset the impact of any legacy softness in the second half.

We remain excited about the order book and potential of these new programs, as well as the ongoing mix shift of more composite intensive wide body aircraft.

Beyond Boeing and Airbus, our Other commercial aerospace submarket has a five-year growth rate of over 20% and now represents almost $200 million. We expect this submarket to decline in 2009 as medium and small aircraft OEMs have clear signs of pressure and smaller backlogs to buffer them.

Turning to Space and Defense, 2008 16% growth rate was well ahead of the historical pace. While we still expect growth, our plan assumes a return to single digits.

In our other core market, Wind Energy, we continue to believe 2009 sales will grow at double-digit rates. While there are obvious concerns with respect to end customer financing, most growth forecasts were starting from very high rates. We expect that the continued global move towards renewables, plus incremental capacity additions by our customers, will allow Hexcel to grow through these troubled times though perhaps at a lower rate in the short term.

The rest of our industrial markets, including [wreck] automotive, are clearly seeing the impact of the global economic weakness, but are now less than 15% of our total sales. Sales to the American Centrifuge program should offset any further weakness in these submarkets.

While the current global recession is making it much harder to deliver growth for the short term, I feel compelled to remind you of the things that Hexcel has going for it over the long term. Boeing and Airbus have backlogs in excess of 7400 orders; and many of these planes will ultimately need to be built over the medium term.

Backlog increased again in 2008, even in the second half, as they still took in almost 70% more orders than they delivered for the year. Within that order book, we are seeing a major shift in newer wide body aircraft. Our content in wide bodies is typically two to five times larger than that of current narrow bodies.

Military aircraft demand looks good for years with rotorcraft driving the short term and new composite intensive aircraft driving the long term.

In our Industrial markets, the global focus on climate change, oil independence and government subsidies have only gotten stronger in recent years. And demand for our projects for both wind and uranium enrichment tubes should continue well into the future.

It's hard to find any good economic news of late, but I still feel great about Hexcel's positioning for the long haul. Prudence, patience and persistence are the themes for the year.

We would be happy to take your questions now.

(Operator Instructions). Howard Rubel.

Thank you. Good morning. Nice gross. I mean, gross margins were okay, all things considered. You seem to have done a nice job of being able to eliminate some of the operating leverage that's hurt you in the past with sales declines. What did you do and then related to that, Dave, you kind of talk about normal margins there? Are we sort of targeting 24 to 25%?

Let's see, the first question, what did we do? Strike or sudden stoppage is pretty difficult to shed costs when you know things are going to come back, and it's unexpected, and it was longer than we expected.

But we took out a bunch of people on a temporary basis. We tried to globally cut back on all the usual things that anybody does when they are in trouble. And we've had some improvements in play performance. You might recall in the second quarter we were talking about having a pretty big past due position or backlog to our customers because of capacity constraints.

Capacity, gradually, has been coming online. The strike helped us work down the backlog so some of the premium cost that we've been punishing ourselves with over the last nine months diminished. Obviously, a little bit less pressure on some of the oil commodity in materials prices.

So things started to look a little better in the fourth quarter, but it's real hard to tell exactly what the net within with the anomaly of the strike in there.

Your second question, Howard?

Well, kind of related to that is you talked about sort of at some point normal kind of -- you talked earlier, your comments about normal gross margins and it would seem to me that you are trying to target in the 24 to 25% range. Is that still a fair --?

Well, it certainly sounds like an interesting target. I would think for 2009, that would be pretty aggressive if we don't have the growth, principally because the incremental operating costs of the new plants. So we have obviously got the three that we talked about before and now in addition we have China and by midyear we'll have Colorado.

Until those plants are up to serious volumes, some of them even require additional lines to support the future growth. They are going to be a bit of a drag on our margins.

So if you go back to 2007, there were a number of things that happened in 2008 that have cleared or otherwise have been adjusted via pricing that are -- those are things like commodity costs and energy costs and some of those. So those have moderated, but the new plants will continue to be a drain in 2009.

So I would think we should expect to be somewhere between 2007 and 2008 as we go forward for this year.

And then one longer term question. I mean, you've seen the backside of -- you inherited the backside of a commercial aircraft downcycle when you came to Hexcel in '01, I guess. And tell me how it feels today. I know it hurts, but tell me how it feels and what you think you've got in your tool kit to sort of deal with some of the uncertainties that you see before you?

I would say the difference now, Howard, is that on September 12 of 2001, we all knew that there had to be a drop. In fact at the time, we thought people may never fly again.

So we really at that time realized we were going to be a smaller company for a very long time. At least that is how we felt then. It obviously didn't happen. It wasn't that bad. Things went down, but it was nine months later that the Boeing dropped their line rates. Airbus is in the midst of a growth cycle, so they just sort of stopped their growth.

So we had pretty good advance knowledge of what needed to be done and we could move out well in advance.

What's a little that different this time is, if you look at the analysts' expectations of build rates, they vary wildly and nobody is certain. So I don't know for certain that there is going to be a decline in airplane bills. So we have to play it by ear. We just have to be conservative and cautious. I don't know there is going to be a drop so I don't see taking big, big cuts in anticipation of the drop.

Another thing that is different is the shift of bigger aircraft and these new aircraft that are coming online and still have a tremendous interest in the marketplace.

This is way oversimplified, but since you bring up 2001, I just happened to notice that aircraft deliveries by Boeing and Airbus in 2008 were just about the same as they were in 2001. But our sales to Commercial Aerospace are up 35%. That is not because I've done a good job selling, that's secular penetration.

So we've got a benefit that a lot of our peers don't have. And while I would love to be excited about our absolute growth potential, and I am less so, I am encouraged by our relative growth potential in the industry.

Thanks.

John McNulty from Credit Suisse.

Good morning. With regard to your CapEx, I know you've dialed it back pretty dramatically because you're through a lot of the near-term plant needs. When you look out over the next few years and you've got this big A-350 contract, when do you have to start ramping up CapEx again, do you think, in order to get ready for that contract?

Admittedly it is out a few years, but it also takes a couple of years to get these plants up and running and qualified.

I think you know what we had hoped to do is sort of steadily increase the capacity in blocks. It is efficient. It's an efficient way for our team to be able to add capacity. I still think we would like to do that. So we need to see a few more cards on what is going to happen in the marketplace.

I think by midyear we will have a better view of what '10 and '11 are going to look like. We need capacity for more than just be the A350, but I would hope that we will see signs enough that everything is going to be okay; and we will start layering it on again in 2010, if not the latter part of this year.

Okay. Great. And then with regard to the USEK business, can you just give us some color as to how steep the ramp up is for that in terms of when you start to see the revenue coming in? I know it's -- 2010 is supposed to be the first big year, but can you give us a little bit of color as to how steep that ramp up actually is?

I don't have real good visibility on that because it's principally going into one contractor who then sent it to another. And I don't exactly know what pace they want to increase.

I would just guess that 2010 and '11 -- the contract goes through 2011 -- that those will be the bigger years, but '09 will be sort of a steady contributor versus 2008.

Okay. Fair enough. And then just a last question, with regard to your raw materials and energy, I know you -- actually I think Wayne had said even earlier what the exposure or the damage was there or impact in 2008.

How quickly as energy prices come down and as raw materials come down, how quickly do you have to pass that through to your customers in the form of price? Or is it something that is sticky, just based on the type of contracts that you tend to sign?

Most of what we do are longer-term contracts. A short contract for us is a year and a long contract for us is infinity. So we don't have the quick impact and reaction either way, on the way up or on the way down. Many of our supply contracts are also matched up or go for a year, oftentimes a calendar year.

So during the summer, those commodities that were tied down did float up and not all are tied down. Those that were not floated up and caused some pressures, we started positioning for our new contracts that were coming due with our customers to start getting some recovery, and so sort of has a way of normalizing all of the action.

I think we are getting -- we are clearly getting some benefit now for some things like [acrylonitrol] that hurt us earlier in the year. But I think the swing is likely to stabilize a lot in 2009. And I hope we won't be constantly talking about those variables.

So just when we think about the margins overall, or particularly your operating margins, you've got raw materials and energy coming down. You've done some restructuring there or at least to limit the people cost side; you had had some plant issues in 2008 that at least shouldn't be quite as big of a headwind; and you had the strike impact in '08. At least shouldn't be too much of one in 2009, certainly the shock value of it won't be.

So how should we think about the operating margins? How much bigger can they get in 2009 versus 2008 with all those things having worked against you in the past? Even in assuming 2009 is going to be a flat revenue type environment?

Well, if 2009 was flat and steady, it would be easier to answer it and we probably would have give you more thorough guidance. I think my big hesitance to getting that specific is, first half, second half is a question mark.

I know everybody would love a little more visibility, but a couple of our biggest customers are saying they are going to declare on 2010 in the spring. So it's just not real practical for me to take a stand on exactly what the full year will look like.

I think our gross margin should be better than this year. I'd even throw out the fourth quarter because you don't know what the strike impact, what it would've been without the strike. But I think we should certainly have better gross margins than 2008, but I don't think they will be as good as 2007 because of the new plants.

SG&A, I think we did a good job holding it this year. Obviously in this environment, we are not planning to run away on that. We have always sort of set the goal to cover inflation, wage increases with productivity. We did that in 2008; and I would like to do it again in 2009.

If we don't have the benefit of growth, that doesn't give us the leverage that it has in the past.

Thanks very much for clearing it up.

Richard Safran with Goldman Sachs.

It's okay. I had my question answered, thank you.

Nigel Coe with Deutsche Bank.

Thanks. Good morning. Dave, you mentioned the CapEx that you deferred looks like it might come back in 2010 or maybe the back end of 2009. What is the key determinant of that phasing? Is it 350, is it 77, is it a combination of the two?

I might say it is everything because it also includes wind. It includes what happens on JSF. It's -- we've got -- if you were to break our sales, if you threw out the Industrial, Other industrial which is less than 15%, you could break our sales into big buckets. Airbus being one. Boeing been one. Other aerospace being one. Space Defense being one. Wind being one.

And over five years, every single one of those has got a CAGR that is double digits over a five-year period. So our capital spending isn't just about the A350. It's that we've got a significant set of businesses here that have a compelling growth story.

And I think they will over the long term, we have a bit of a lull or a question mark here for a short period; and we just need to get our bearings and credit markets need to loosen up. Because there's just darn little that our end customers do that aren't affected in some fashion by credit markets.

Sure. A little bit concerned about all capacity being brought online, (inaudible) capacity being brought online. You know potential for supply and demands in balance, and hence, prices come down. Can you just talk about what you are seeing in that market? And maybe just confirm that falling carbon fiber prior prices, is that a net benefit to you or net detriment?

Falling carbon fiber prices would be a net benefit to us because we buy more than we make. Most of what we make goes into proprietary products that have difficult approvals in long-term contracts.

So as we've said before, we just try to provide ourselves and customers with the real high end of that market. So the lower end clearly are seeing some signs of strain. I've heard and/or read of some fiber suppliers in the industrial arena stopping lines, mothballing lines or plants as they have had to in the past when there was a temporary excess.

I don't have my fingers on exactly what has happened to price recently, but I can't help but think they will have calmed. Availability -- from my chair, from my viewpoint, availability is something I always like to see because it accelerates the move towards carbon fiber composites.

And in those years of shortages, there were a number of projects in recreation and automotive and other that pretty much got stifled because carbon wasn't available and prices were going up too high. So I see it as a net plus for the short term.

Thirdly on Space and Defense. I know you participate in lots of programs, and no one program is really a key driver, but is there anything in any of the major programs you participate in that we should be thinking about as far as maybe facing is concerned or for the whole of 2009? I'm thinking here about maybe [A400M] or maybe C17.

Some of the big programs, I think you are aware of, would be the Joint Strike Fighter [C17], F-22, F-18, A400M had potential to be big and did have an impact on us this year as they are doing development work and, obviously, that has been delayed. A question you have to ask yourself on any one of these programs is, if one gets slowed or canceled or funds move away from it, where do those funds move to or what takes its place?

So for example, the A400M. Do the Europeans need to lift capacity and will they go to a C17 or to an A330 variant to get it done, in which case that is an offset for us. In the case of -- I often see debate about moves between Joint Strike Fighter versus F-22; and I don't know what the net is but those are offsetting for us. So if they move from one to the other, we aren't necessarily hurt. We may actually gain. The same is true of F-18.

In helicopters, we participate with all of the biggies and they are all growing very well. And one's win is another's loss, but not for Hexcel. Again we are pretty balanced between US and Europe. We have a very strong position with European helicopter makers as well as the US helicopter makers.

I think the only one -- the [V22] is another one that's a significant program for us. I think the only one that could -- well, any of them could impact us, but the C17 has been speculated on for years that it is going to drop off and it is an important program for us. We've sort of always been prepared for that eventuality. But so far it seems to still be dribbling along.

So far so good. And then a quick one, a quick one for Wayne. Any color on D&A in 2009?

Sure. We are looking probably another $8 million to $10 million in depreciation in 2009 versus 2008.

Thanks a lot.

Al Kaschalk from Wedbush Morgan.

Good morning. Sorry about that.

Most of my questions have been answered. I have two that I would like to try and clear up.

First, can you comment on the American Centrifuge Project in terms of the funding concerns or visibility that you have on that project? I realize your ramp visibility is limited; but are there any broader macro concerns about funding for that project that you could comment on?

I've always been a little concerned about the funding for it. I think there was -- I would have -- I would feel a lot better if there was support from the Department of Energy and/or some sort of a government backing for it. I'm not really aware of what that funding status for the program is. Sorry to say.

Okay. Secondly, on the wind business, I guess it's assumed you have a vote of confidence for what you are seeing, but the double-digit growth was certainly a surprise for me in 2009. Could you comment or add some additional color on the degree of comp that you have there, greater than 10%? Because I think you said double digit.

Yes. Double digit now goes all the way down to 10%. I think we said our worst growth year was 15 or 16% on a current dollar. I don't know about constant dollar, but on a current dollar, we've averaged well over 15% over the last five years. Of course, we're on a bigger basis now so that percents are harder to get.

I am concerned about credit availability and what it might do to wind. There clearly are some signs of softening, but from a frantic pace. I mean there are many who are projecting that if there weren't capacity constraints that the turbine, the MW installation pace could be in the 30 to 40% rate.

So my hope is that if it slows down, if it has cancellations, that it will drop to some nice teen or 20% rate. I see signs like a couple of third party blade makers who are indicating some softening. Third party blade makers typically would be aware excess capacity is achieved and work, hopefully, within instead be brought in-house, so where our customers would use our materials.

The two things that really go against this just to be clear, are the cost of capital is about 70% of the cost of wind energy. 70%. Whereas in fossil fuel plants, obviously, fuel is the huge variable.

So fuel has dropped dramatically. Will it stay there? I doubt it. But fuel has dropped dramatically because capital has gone up dramatically. So that sort of turned the wind equation upside-down, temporarily at least.

On the other hand, renewable energy pressures, interest in climate change, government assistance, jobs, all are going in the favor of wind.

In December, the EU Parliament passed a law that commits the EU Committee (technical difficulty) 20% renewable energy by 2020. That is not just electricity, that's total energy.

Each EU country has now signed up to a national legally binding renewables target. The EU directive also tackles obstacles related to new power lines; and in transmission and distribution systems operators must give priority or guarantee access for renewable energy. Those are all very good signs for the long term. Just not exactly sure whether it will have an impact in 2009.

In the US, clearly, there are some grid capacity issues with the frantic pace of installations in the last year. T. Boone Pickens has withdrawn his big Turn The World To Windmill project.

On the other hand Wal-Mart has got a goal to get 100% of its electricity from renewables, and is negotiating with utilities for some pretty big deliveries going forward. In China, in November, there was a significant finance package of various wind-related subsidies.

So I feel great about the long-term trends. I am a little bit concerned about the short-term impact of the credit markets.

I certainly appreciate the details. Is there a way to frame the double-digit growth with 10 being on the low-end and 99 on the high, a little bit tighter than what you're seeing?

Because it sounds to me, Dave, that the shorter term in the next six to nine months, that this business could be working off of backlog. And the new order book may not be so strong for the back half of the year and into 2010.

Having said that, I understand there's also some things that could come through the government in terms of subsidy and economic stimulus that could help out here.

Yes, well this year, I don't want to get too specific because actually I haven't looked this morning at the number. This year was in the high teens. And I'd be thrilled if it were that high, but I would expect it to be inside that.

Great. Thank you very much.

Steve Levenson from Stifel Nicolaus.

Good morning, everybody. Just to follow on this wind situation. The credit issues, financing issues that you are talking about, are you relating those both to US and European and Asian programs? Or is that mostly US?

I would say those places that have more government-assisted it's less of an issue. But those places that are a little more free market-based, it's probably a greater issue. I'm not really certain of the funding in Asian markets, but clearly the US is worrisome.

So I assume there are other parts of the world that are constrained by credit markets.

Okay. Thanks. In terms of where you're operating as a percentage of capacity, China we know is new, but do you think you'll be sold out once you get to the year and the European plant?

It's both plants are -- both Colorado and China are designed with very close collaboration with our customers there. In the case of wind, our customers set up plants first and we followed. So they will hopefully be utilized a little more quickly and a little more fully than our satellite prepregs plants in Europe.

Satellite prepregs plants for carbon in Europe are sort of the opposite. We build them in advance of the program, the A350 in advance of the ramp up as a part of getting qualified, helping us win the program and so forth. So in one case we are chasing demand and the other we build it and hope that they come kind of a thing.

Thanks. Are you getting any more interest from other manufacturers who are not yet customers as turbine sizes get bigger and blade problems have been cropping up?

We have activities with quite a number of turbine makers. But the vast majority of our sales are on the two that you are aware of, [Estes] and [Gamesa].

And just back to Commercial Aerospace, have you heard any updates from Airbus? I know there are some people saying the A330 line is going to go from 8 to 10 and then Airbus has been saying we are considering going 8 to 10. And how might that help you if it does go up that two per month?

Well, bigger planes are always better, almost always better. 740 -- old 747 being the exception. Bigger planes are always better. And an awful lot of the talk of vulnerability of backlog seems to me to be around A737 and A320 which are less worrisome to us.

So if the A330 steps up, that would be good. I assume that the A340 prospects don't look as good and that would be an offset.

This sort of gets back to what I was saying about A400M or other military programs. The delay of the 787 has increased artificially, maybe, but demand for A330s and 777s that take on that capacity.

I'm sorry, one other one back on wind, what are you hearing on Obama initiatives? Do you think that will alleviate any of the financing issues or drive people to build more?

I see a lot of different people speculating on what is going to happen and of course Congress has got to make things happen too, not just the Executive Office. They all sound favorable, though, for wind and other renewables.

So I like what I hear with respect to how it will impact Hexcel. I actually would expect that both with a credit markets and the near death, yet again, of the production tax credit that we would likely see a cycle of short-term decline in installations what we have every other time that we went up to the eleventh hour on the production tax credit. You always have this surge of people trying to install to get under the wire and then a little bit of a lull as the PTC is renewed and people start to reorder for their next tranche.

So I would be surprised if the first half of 2009 on an installation basis is anywhere near as strong as the incredible 2008, '07 and '06 that we saw. But I do think that it will come back pretty significantly. Particularly with this administration.

Great. Thanks very much.

Karl Oehlschlaeger from McQuarrie Securities.

Thank you. Talking about the wind business a little bit again.

In Commercial Aerospace you talked about the six-month leadtime and there there's backlogs and to a certain extent at least for the first half of the year there's -- you've got a really good sense of what's going to happen.

Can you talk about that situation on the wind side? Is it a similar six-month lead time where you know the first six months of the year you have a pretty good idea what your rates are going to be and then the question mark is really the back half of the year.

We have pretty good visibility. Nowhere near as good as Aerospace up until current market conditions. But we also -- it is also very high velocity business and as you recall, our materials need to be stored in freezers. So there's not any kind of inventory build.

So our customers have been shipping at a pretty frantic rate in recent years. And if they have any kind of a problem like with the supply of the gearbox or a bearing or capacity constraint, we sort of have an immediate correction. So while we have good visibility to what the demand should be and what the projection -- the projections are, we know how many blade molds our customers have and how quickly they can turn a blade in those molds.

So we know what the pace should be and that's what we sort of plan on. If they have difficulties or problems, we can have a pretty short snapback on delivery potential, not unlike an unexpected strike at Boeing.

But on the other hand on aircraft dropping line rates, as I said and after September 11th, it wasn't until nine months later that the actual build rates declined at Boeing. So there's definitely a higher beta in wind.

Then looking at the quarterly trends, how much of an impact -- you talked about production rates at Boeing being, not recovering till February, how big of an impact will we see for you guys in the first quarter? And so what does that mean in terms of how we should think about the quarterly trends and EPS? Are we going to expect Q1 to be down a little bit and then up a bit in the second and third quarter? And then maybe -- or there's uncertainty in the second half of the year?

I didn't give EPS guidance of any substance. But you wanted monthly or quarterly? Let me not answer that by giving you a little color.

Commercial Aerospace -- first half, second half I think are sort of the things to keep an eye on. If you look at the first half of 2008, for some unknown reason the first half of each of the last four years, new programs have been strong in the first half and weak in the second half. Coincidence, it's not seasonality, but the A380 delay. The same thing happened at the 787.

So a couple of years -- for a couple of years we talked about the first half, new programs being about 10% of our Commercial Aerospace sales and the second half being about 5%. In 2008, the first half were about 15% of our Commercial Aerospace sales and about 10% in the second half.

So first half, second half thing that went on so I called that a little bit of a hill to climb the first half from a comparison basis. If you believe that the new programs are going to have a significant step up this half.

On legacy programs, I would expect them to be similar to last year in the first half. And then the big question mark is what happens in the second half.

In the case of Boeing we obviously have easier comps because of the Boeing strike. New programs, hopefully, do start to gain some traction though we haven't planned on them. On the other hand, 2010 is an unknown and by summer we all should have a pretty good indication of what Boeing and Airbus are saying about 2010. And then we would be able to get a good look at the second half.

The other Aerospace though, remember, is $200 million in sales. And I do expect that to be down throughout the year.

Did I not answer that question well?

No. That was great actually. In Defense, you talked to -- maybe you spoke about this before, but can we get a sense of, if possible, what sort of the ship set values would be on the GSF versus like the F-22?

All those big programs that I described to you earlier are in the neighborhood of $1 million or so per each of them.

Right. Okay. Looks great. Thank you.

Cristina Fernandez with UBS.

Good morning. I wanted to follow up on the question on the newer aircraft programs. At least, directionally, is there any more color you can give us on A380, 787 as we progress through the year? I mean, are you expecting one of them to be up, another down or both flat or how should we think about those two programs in specific?

I sort of lump them all together because it's just really hard to tie down exactly what is going to happen. You know we have so many Tier 1, Tier 2, Tier 3 three players that we are shipping to and some of the materials that we ship are used on multiple programs. So it is really pretty hard for us to define.

So I can't give you much detail on it, because I don't even know it that well.

The A380, I really had hoped would start to climb out of its doldrums. We had some signs of movement this year, but if you've followed the trade press, Airbus has backed off twice now on how many they expect to build next year. We generally have probably shipped materials for much of what is planning to be shipped next year. So we are sort of looking to what the builds are for 2010 that will start to give us some significant pickup.

The 787, sort of similar number of delays. The most recent ones are sort of just my impression is they kind of put the bill rate ramp up out past the current window of 2009. So just internally from a planning perspective, we just said let's not count on that to make our year and let's get our cost in line to deal with an unexciting year on new programs. And if they happen to come in, we'll see those upsides.

Thanks. Then just a quick one for Wayne, with regard to pension, I know you terminated your US pension plans, but you have a little bit of a in exposure to the European plans. How much is -- is there going to be an impact at all in 2009?

Yes, our UK -- our biggest pension plan is in the UK. And their returns this year were not nearly as bad as a lot that you hear about in the US, but they still were bad. But at the end of the day, we're probably expecting pension expenses here to just be up a couple million dollars. So it is not a huge overall number.

Okay. And this flows through your composite -- your composite materials segment?

Yes correct. That's where it will be.

Thank you.

Mike Sisson with KeyBank.

Good morning. Nice quarter. If 2010 build rates mirror 2003, 2004, somewhere around 600, could you maybe remind us how your position now versus you were then? And maybe generally speaking how would you manage the second half of the year in the event that [bearish] forecast comes in -- that's not my forecast, just sort of think about what the Dow forecast could be?

You are going to have to first pick me up off the floor here. 600 (technical difficulties). You've taken my breath away here.

You know, we would have to take a hard look at a lot of what we're doing to see what we could do to reduce costs. After September 11, we took out over 30% of our head count. A tremendous amount of cash fixed cost.

I don't think we have that left to give. And of course the outlook, to me, anyhow, the longer term outlook looks awfully darned bright whereas in 2002, we didn't know if things would come back. So it's a little different situation.

I can't say that if in June they announce that 2010 was going to be 600 airplanes that we would be able to completely align this Company for that kind of a drop. But I see no indications that we are going to have something that bad happen.

Good. In terms of the Industrial segment, wind being up high teens in the fourth quarter implies that the non wind stuff was down high teens. Do you see any improvement there heading into the first quarter or sort of that business remains pretty weak as we head into on the first half of the year?

Well, I think we said that the Other industrial, the non wind industrials maybe have found bottom yet again. If you factor in the American Centrifuge Project would be in that category. So I think any further decline in that submarket would likely be offset by American Centrifuge Project or at least so for the year.

Okay. Then last question. When you think about these facilities that you -- that was a negative impact in gross margin in 2008, gets a little better in 2009, how close will you be at the end of the year in terms of getting that profitability closer to the average of your other facilities?

I wouldn't think that all of them combined are going to be at the average of the other facilities. Some, a couple of them might be because they will be at pretty good utilization rates, but those -- in particular, those satellite facilities, the satellite prepregs facilities in Germany and France -- are designed across the street from locations that are going to be big users for A350.

They will be making materials for other products as well, but the A380 and A350 are the principal purposes for those facilities. And until they get two or three prepreg lines in each of those facilities, they will be a bit of a drag.

Great. Thank you.

Michael Lew with ThinkEquity.

Thank you. Morning. With regard to the outlook you provided, does it incorporate a build rate decline for Boeing and Airbus? You've mentioned uncertainty in the back half of the year. Does it incorporate the legacy softness you've indicated or talk about?

I would call it less a forecast than what our planning assumptions have been, with respect to aligning our costs in our current business. So I wouldn't say that -- that that flat assumptions is exactly what we have in mind.

As usual, we can only repeat what public statements have come out of Boeing and Airbus. And we are privy to some internal documents, but even those are not fully fleshed out for 2010. So I put the second half still firmly in the question mark category.

Okay and with regards to the A350, do you have a sense of timing as to when the secondary structure awards will be handed out? Do you believe this could occur this year?

I think bits and pieces and gradual design progress will sort of have a continuous and steady movement between now and three years from now for all kinds of pieces and parts and materials. They will all be interesting, but they will not be anywhere nears as substantial as what we already declared in the primary structural prepregs.

And also with regards to another question on the wind business, you had mentioned you are engaged in discussions with customers that could shift over to fiberglass prepregs technology. How far along have you progressed in negotiations? Do you believe you could add another customer engagement this year?

Well, we have activities with customers and we are shipping materials to customers. A big changeover from infusion technology to prepregs technology by one of the other major players in this area is unlikely, I would say.

Okay. Also on the competitive landscape, you've indicated some of the third party blade makers have indicated softening. Are you experiencing increased competitive pressures, let's say, from [Goret]? In the (multiple speakers).

I think we have always had good competitive pressures from them and I would expect them to continue. I don't know of anything that's dramatically changed.

Thanks.

And that does conclude today's question-and-answer session as well as today's conference call. We appreciate your attendance and have a wonderful day.

Thanks very much.