Hexcel Corp (HXL) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Hexcel first quarter 2009 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 2009 first quarter earnings conference call on April 28, 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 that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the Company's SEC filings, including our 2008 10-K and last night's press release and the filing of the first quarter 10-Q.

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 that 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 2009 first quarter results detailed in our press release issued last night. First, Dave will cover the markets, then I will cover the financials and then Dave will return with some comments.

Thanks Wayne. First quarter revenues were 10.8% lower than last year. About half of the reduction was due to the broad-based decline in our commercial aerospace market, a bad thing, but half due to a dramatic strengthening of the dollar, a good thing. Space and defense and industrial sales were up nicely, but not enough to cover the aerospace decline. Nevertheless, operational improvements along with good cost controls, helped us generate record operating income of $39.9 million; 9.6% higher than last year's first quarter. Net income of $23.4 million was also above last year.

As usual, let me first cover the markets using constant dollars to describe sales trends. After years of a weakening dollar, there has been a major year-over-year swing that affects many of our numbers and ratios. The first quarter euro is on average 15% weaker than last year and the British pound is 27% weaker. For reference, our top-line sales for the quarter of $307 million were 10.8% lower than last year's reported, but down only 5.5% on a constant currency basis. So the apparent sales decline of about $37 million was really $18 million in real terms. It's important to note that if these rates stay as they are, the second quarter exchange swing will be even more; maybe $26 million.

Commercial aerospace were about $154 million for the quarter, down about 16% in constant dollars from last year. While there have been few near-term aircraft build rate changes announced by large OEMs, there is clear evidence of across the board management of inventories by all of the tier-1 and tier-2 customers that we serve. We also felt the lingering inventory correction effects from the Boeing strike that spilled over into the first quarter, as many of the Boeing supply chain only slowed their production through the strike.

Beyond Boeing and Airbus, our other aerospace subsegment which represents 25 to 30% of our commercial aero sales, was aided a bit by some nonrecurring engineering and tool sales, but this subsegment includes sales to the regional and business jet markets, which are under particular stress and we expect further declines over the course of the year.

Finally, the 787 program delay hurt our year-over-year comparisons. We had begun to record some strong sales in the first half of 2008 for the program ramp-up, but then it stalled after the delays were announced in April of 2008. With the first 787 flight expected in June, we hope to be back on the growth path in the second half for new program sales.

Sales to space and defense markets were $77.3 million for the quarter, up almost 8% in constant currency, in line with our traditional growth rates in this area. Sales to rotorcraft programs; and we include the V22 in this category, constituted over half of the space and defense sales this quarter and continued to be the growth driver in this market.

Sales for our industrial markets of $76 million were up nearly 10% versus the first quarter of last year on a constant currency basis, though the as-reported sales were down 3% due to the strength of the dollar.

Glass prepreg sales for wind turbine blades were predominantly in euros and once adjusted for FX, grew at double-digit rates again this quarter. Vestas reported on their quarter last night and indicates continued strong demand, but cautioned of concerns about project funding due to credit markets. They continue to expect a year of double-digit sales growth.

Sales to the rest of industrial market were flat year-on-year, but up more than 10% sequentially from the fourth quarter levels. As you would expect, sales to auto and recreation submarkets were very weak, but they were offset by growth due to the American Centrifuge Project and our new Hex Tool product range.

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

Thanks, Dave. Gross margins of about $77 million for the quarter was 25.1% of sales, an increase from the 23.3% gross margin for the first quarter of 2008 and significantly better than the 21.4% for the fourth quarter of 2008. Improved product mix, execution of factory productivity initiatives, incremental improvements at our new European facilities, a stronger dollar, along with lower commodity and freight costs all contributed to gains despite the lower sales volumes. The stronger dollar, net of our foreign exchange hedges, contributed about 75 basis points of the gains of the gross margin line and about 100 basis points to the operating income margin percentages.

Selling, general and administrative expenses remained well controlled and they were down $2.6 million or 8.2% to $29.3 million for the quarter, helped by the weaker euro and pound. In constant currency, the SG&A costs were down about 2%.

The strong gross margin and the good control over all our expenses resulted in operating income of 13% of sales. This was the first time in more than 10 years that Hexcel has reached a 13% operating income.

As we have previously disclosed, we have put a concerted effort into tax planning over the past year, attempting to better align our structure with our view of the future. Our effective tax rate for the quarter was 32.5%. We expect this to be in the range of our new underlying run rate for the rest of the year. After excluding onetime items, last year's effective rate was 38.5% for the quarter. Compared to last year, this year's lower rate added about $0.02 to our earnings.

The net debt increased by $28 million in the quarter to $372 million. The big driver in the increase was a $35 million increase in accounts receivable, as is typical for the first quarter, due primarily to seasonally higher sales in February and March as compared to November and December. Our past due receivables were lower than year-end and our overall aging has improved since then.

We ended the quarter with about $27 million in cash on hand and we had no amounts outstanding under our $125 million revolver facility. After considering the outstanding letters of credit, we had about $139 million of cash and available borrowings at the end of the quarter. We have begun discussions with our lenders and expect to either extend or replace the senior secured credit facility well before the March 1, 2010 expiration of the revolver portion of the facility. Based on our current outlook of interest rates, it's obvious that any refinancing action we take will result in higher borrowing cost going forward.

While Dave has told you the effects of foreign exchange on our sales, let me once again remind you of the role currency plays in our operating income. 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 exposures hedged at rates comparable to our 2008 hedged rates, though those hedge rates vary by quarter. Remember, a strong dollar helps us, so if the dollar stays where it is currently, it would provide a small tailwind compared to 2008 on the 25% portion that's unhedged. Roughly every 5% strengthening of the dollar for the full year of 2009 would add about $1 million of operating income but reduce our sales by about $24 million, thus this creates an exaggerated improvement in our margin percentages.

The sales exposure is primarily in euros, but we do have significant cost and working capital in both euro and British pounds which can make comparing year-over-year changes for individual line items challenging.

Now let me turn the call back to Dave for some final comments.

Thanks Wayne. We feel great about our performance this quarter, but I know many of you are more interested in our sales outlook. Unfortunately we still have very little visibility beyond a couple of quarters and we don't plan to handicap what the global recession, credit markets or swine flu will do to the remainder of the year, much less declare what our customers are planning when they haven't yet disclosed themselves.

What I can tell you is that we have been and will continue to take actions to respond. As indicated by our first quarter results, we've already lowered our cost structure and improved operational performance enough to allow us to weather a constant dollar decline of 5% and still hit last year's EPS performance. We would also expect improved cash flow if sales decline, as the need for working capital lessens with weaker demand. A weaker outlook and the availability of carbon fibers also allowed us to adjust our capital spending profile and we currently foresee less than $100 million of CapEx this year and less than $125 million next year.

As in the past, we're focused on managing things within our power to control and encouraged that we, unlike many, can look forward to the coming payoff from their relentless transition to composite intensive aircraft and the global push for clean energy from wind and uranium.

Now I'd be happy to take your questions.

(Operator instructions) Your first question is from Howard Rubel.

Two questions; one is with the lower capital spending and with somewhat improved receivables turn, Wayne, how significant will your free cash flow be this year; could it be $20 to $25 million?

Howard, we've said we intend to be free cash flow positive and we're sticking to that. How big that number will be, I think will just depend on the amount of sales in the fourth quarter. That will probably be the bigger driver of everything.

Our main point, Howard, is that if sales get worse than people are expecting, cash should get better.

The model works; I mean it does what it's supposed to do, as opposed to getting stuck with something. I appreciate that. The second thing is, in terms of new products and in terms of the F35, and sort of what you're going to do with even the capacity that you've added, could you address some of the markets that that's going into and how this will offset maybe some weakness in other markets, Dave?

Well, let me talk about a couple of pieces of capacity. First, wind energy capacity coming on late in the year in Colorado and China are to address our customers making blades there, so that's sort of stays independent assuming those projections from our customers remain true. And they're not really relevant to any of the worry that goes on now in commercial aerospace markets.

In military programs, we've got good visibility and always have for what the long-term prospects look like for our carbon fiber and we've always managed and monitored that very closely, as have our customers and as has the U.S. government. The main CapEx expansion, as you all know, has been for our future outlook on the A350. In the case of prepreg, we've put plants up in Europe. Those plants are up, qualified and running, supplying developmental materials to the A350. Now, I'm sure that as we go through the development phases of the A350 there will be stops and starts of that capacity, just because that's the nature of a new airplane program. Longer term, each of those plants will have addition prepreg capacity and be great contributors.

The principle CapEx of course is carbon fiber. Carbon fiber has gone from severe shortage a couple of years ago that was stifling many, many composite markets, to now what is clearly a surplus. It started with the delay of the 787 and of course the global slowdown in other markets has freed up even more, particularly in the industrial range of carbon fiber. Ours was specifically designed to position us for the USEC program, the American Centrifuge Project, the A350 and know builds for F-35 and other such programs. So we still expect to have good utilization. We expect that the margins will continue to be aided -- our overall margin will continue to be aided by the richness of fiber mix. Fiber, as we've long said, has higher gross margin, as it needs to, to cover the tremendous capital that's required.

Howard, are you still there or are you still trying to imagine if I came anywhere close to your question? Operator, I think we lost Mr. Rubel. Why don't you go to the next caller and Howard will dial back in, I'm sure.

Your next question is from John McNulty.

Just a couple of questions. With regard to the USEC business, I know that platform or that contract has ramped up at this point. Can you give us a clue as to how ramped up it is or what the contribution was into the industrial segment and how that should progress throughout the year, if we've kind of plateaued there or if it should pick up further?

We've given the general guideline of $100 million over three years, right Wayne?

Right.

And so it's started to ramp up and it's probably getting close to what we would think to be the run rate of the fiber portion. There will likely be some prepreg portion further down the road that would be additive to that. We would like to think that it's going to be consistent going forward for 2.5 years, but do keep an eye on the funding for USEC; they're working and getting close to funding the project and that's an important part of our prospects there.

Okay. And then with the two wind plants, the China wind plant and the Colorado plant, I know one's ramping up and one is I guess working to get qualified right now. In terms of the costs that are tied to that, is that something that's holding the margins back at this point or is it something that would be kind of viewed as negligible and not really an impact one way or the other?

Well, first remember we started last year talking about the incremental costs; fixed and startup costs of new plants. So if I could just drag you through the entire history, the first coming on line was our fiber plant in Spain. That really started to impact us from a cost standpoint last year in the first quarter and that is up and running in good shape now, so it's a contributor. Then we have the two prepreg plants in Europe that started to impact us in the second and third quarter. Those are qualified and running, but as I said before, those will be on again, off again as we develop the A350 platform. So those won't be contributors, they won't be big pains but they really won't get up to average margins probably until they get to some serious volume out a year or two.

China is running, probably didn't quite have a full first quarter, but this is really close to a full quarter in the China plant. So it's again, will contribute more when additional lines are added, probably drags the average down a little bit, but it is a minor point. And Colorado is just still being built and we hope to start qualification process in the latter part of the third quarter. I would say overall, in this quarter and going forward for the next at least three quarters, the year-over-year delta of new plant startup costs will be improved.

Okay, great. And then just one last question. On the margins, the 13% certainly is a lot better than we've seen in the past, despite having some pretty weak operating leverage. Beyond the raw material costs being lower and the FX benefits, which I think you'd highlighted on the call, is there anything specific that may be either onetime or a temporary blip where we shouldn't be kind of thinking about this going forward as kind of a normal run-rate in this raw material and FX environment?

I think there's a pretty broad mix of things that you need to think about; some being maybe temporary and some being more permanent. I think the main thing -- kudos to operations on this part, is that we've made a lot of improvements over last year, as we needed to and as we expect to. We were running so much overcapacity in many of our operations last year. There was a lot of scrambling, excess overtime, premium freight charges, extra setups; it was not pretty if you were an operations person last year. When you have unexpected growth that's beyond your capacity, that can happen. You love to run close to capacity but running beyond it, efficiencies usually suffer.

So we are getting way back under control, have made a lot of good gains in the factory and I would expect those to continue at these run-rates and it's certainly what everyone is focused on now since we have very little ability to influence sales. I do remind you that first half, second half is typically very seasonal. If you go back over the years, you typically would find about a 2-point differential first half to second half, though there have been exceptions in periods of strong growth. So if you factor in some normal seasonality, I would say that we'd like to see a strong first half in both volume and seasonality might create some issues on the second half.

I do want to point out though, the importance, for those of you who have models, of this FX. This swing of getting the sales right for FX or going to a constant sales number is pretty darned important if you're using margins. So as we've pointed out, I think the operating margin benefit just from FX was 100 basis points. I'd love to take credit for it, but last year we complained about it going the other way and so we can't take credit for it this way. So that 13% is really 12% from operations.

The second quarter, the exchange rate is even more beneficial to us. That 100 basis points might move to 130 basis points. I don't count that but you need to when you're building your models. And remember the real shift in exchange rates happened in the fourth quarter, so third quarter might look a little bit like this with respect to exchange rate help to margins and the fourth quarter we returned to parity if exchange rates stay where they are today.

Your next question is from Cristina Fernandez with UBS.

Of the declining commercial aerospace that was not related to the Boeing strike, could you give us a little bit more color as to how much business your regional was down and how much of it was attributable to the inventory destocking at Airbus and Boeing?

I don't really have a good answer for you. It's just sort of widespread, broad-based; there's nothing that really jumps out. The only pieces we could pull out of the data, and these are rough estimates, is that year-over-year delta from new programs essentially 787 driven, was about $10 million. And we think that the lingering effects of the strike specifically was about $10 million and we get there pretty crudely. They were planning to ship 100 more airplanes than they did last year and our sales were down 40 and normally you'd expect for them to be down 50 on 100 average airplanes. So, we estimate that the strike was maybe $10 million of the pain and the 787 was maybe 10 because of the slowdown. All the rest of it we just have to say is spread over all of the suppliers to those customers.

Okay. And then with relation to your guidance, was the guidance you gave in January, did that include the 32.5% tax rate or is that helping you offset the additional revenue decline you are seeing now? How can I bridge the guidance you gave in January versus now, to help you still achieve modest EPS growth for the full year?

Well first I'll try once again to remind you that it wasn't guidance in the first quarter, nor do I have guidance today. We say we just don't have enough visibility to what line rates are going to do to our commercial aerospace part of our sales in the fourth quarter because 2010 build rates is what will drive that. What we said was we had planning assumptions to get our cost in line so that we could still have earnings growth, even if we didn't have top-line sales.

So with that qualification, I will say we have been talking for some time now about major efforts we've been doing to restructure our tax structure and while I know a lot of you don't count tax gains, I just finished writing a big IRS check and I had to consider that one day we might be calling these the good old days. A lot of hard work and some significant SG&A expense last year resulted in a refined global structure that will give us real cash savings going forward and we had anticipated that for the majority of this year we'd have a better rate.

Okay. And then in your space and defense market, you mentioned that half of it is helicopters now. Can you give us more color as to how much is replacement blades versus content on new platforms and then on the other 50%, how much is military aircraft versus base structures versus other items?

We have a broad range of coverage in what we call rotorcraft. On rotorcraft we include the V22, which isn't technically a helicopter, but it's a very good program for us and that one probably stands out amongst the others; it's in our top five or 10 programs. Replacement blades, we wouldn't know exactly, because generally we're selling materials to our customers who are making helicopters or blades and we don't particularly know what the replacement rates are. I would say that it's a very small percentage, would be my guess, though it is probably one of the very few places in the entire repertoire of Hexcel sales that have anything to do with replacements. Almost everything we do is for new builds, so we don't have the spares exposure that many of our aerospace peers have.

Military and commercial mix, again, many of these aircraft are the same design that is used in both categories and I don't' really know the answer. I would say the vast majority -- I would say certainly the majority are military based. I'm looking at Wayne to see if he's agreeing. Yes, so I would say mostly military. And it's many of the customers and we have one we pointed out last year, some increased content or some value added on a couple of our blade programs where we're now helping do some subassemblies and in some cases even almost completed blades.

Your next question is from Al Kaschalk with Wedbush Morgan.

Dave, I wanted to try and press a little bit on this margin story and I appreciate the comments about the operating up about 130 basis points if dollar stays where it's at. Should we assume that's off of the 13%? How do we calibrate 12-13% operating margin as a basis to adjust up or down, given the trends that we're seeing? Because it appears that we're setting up for back half of 2009, where volumes aren't going to be as strong or you're anticipating that and I just want to understand a little bit better the leverage here in the model as we look out.

Unfortunately, Al, it's a little hard to predict. I would admit that the margins were better than I expected this quarter, the gains that have come in the factories, the comparisons of year-over-year new startups, some what are probably temporary low-level commodity input materials that benefited the quarter. Last year we got caught with some of those things such as acrylonitrile, freight premium costs, some utilities. While we have most of our supplies match up contract wise with our customers, we did get hurt last year and we talked about it on the call a couple of times.

Those increased costs became a basis for negotiating as new contracts came due, so in many cases we got some price increases and now with a temporary downdraft in things like acrylonitrile and oil, which I'm sure will be back shortly, we got a benefit. So, it's a pretty complex model, I'm sorry to say. Going down in sales typically is very hard not to have punishment to the absolute margin.

Margin percentages, we work real hard to try not to have those get hurt. You might recall that after September 11th sales went down. Commercial aerospace sales for us dropped 30% and we were able to expand our margins. Jim McNerney, I heard last week, called this a once in a lifetime slump. Well maybe for my eight-year-old grandson. We've been through this before and not to say things haven't changed or we've got the sort of latitude to take that kind of cost out this year, but that's our desire and that's our intent and we're going to try to do all we can do to respond to whatever happens without sacrificing our long-term growth entitlement.

Would it be fair to say that this may be the high watermark for the year in terms of margins or is that a little bit too much of a reach at this moment?

I don't know. If you give us credit for FX, which of course we have nothing to do with, we get a help in the second quarter and the second quarter is usually a strong quarter for us. Last year, sales in the second quarter were extremely strong, so top-line sales I think last year's second quarter were 20% higher than this quarter that we just passed. Was that just aerospace?

No, it's total.

Total. So again, you have to adjust maybe $26 million out of there for FX difference, so the sales number is not likely to impress just like this first quarter didn't, but I wouldn't be surprised to see margins come in strong for another quarter, because of the FX gains.

On the industrial side and specifically wind, you made the comment or reference that you hope -- maybe you said that if projections stay true or the customer's projections stay true, can you comment on when you expect that update or do you have a timeslot for an update or you just plan to produce throughout the year based on--?

I think wind, as opposed to commercial aerospace, has got a lot less visibility and things could change more quickly than aerospace. Typically in commercial aerospace, not so much business jets, but in the big airplanes, the whole supply chain gets quite a bit of advanced notice of a change. You've seen some announcements like the 777 decline from seven a month to five a month. It's targeted for June of 2010. We don't have that kind of advance warning from wind energy customers. So we just look for the press releases and the comments that they make publicly and then we try to monitor what's going on at the plants where blades are made and we deliver materials.

So I'm a little bit concerned of some of the comments in the release this morning about decreases in Denmark, which is a big shipment location for us, talk of some layoffs there. Part of it is because they're now going to make the blades in the U.S. and China. So it's possible that there would be some near-term disruptions in our supply chain, but longer-term if you look past a quarter or two, all the basics really look good. Government initiatives in the U.S. and Great Britain in particular, have been a good news area. So I think unfortunately we're just going to have to monitor closely and respond quickly. The thing to remember is we're starting with a very high revenue growth history and so far most of the people who have lowered revenues have lowered them from very high numbers to nicely high numbers.

And finally, given the concerns on the outlook, do you have further cuts to make in terms of cost structure or overhead, personnel, if you've maybe made some since the summer of 2008, but where are you at in your thought process on the outlook for personnel cost?

We have made cuts and we'll continue to review opportunities but I think the big opportunities for us are on improved efficiencies. The fact that we know we have growth in the future makes Hexcel a little bit different than other businesses that have run where a downturn maybe looks semi permanent like a U.S. auto market. So we've got to be a little more judicious about what we do, knowing what the future entails. I don't worry because we really do have great opportunities for efficiencies and I think that the majority of what we'll do to respond will be fine tuning and improving or refocusing a lot of our talent and skills into operational efficiency.

Thanks a lot and nice performance on the quarter.

(Operator instructions) Your next question is from Noah Poponak with Goldman Sachs.

Just following up on wind, and you had talked about Vestas having just reported. It looks like they're saying demand is still strong and growth can still be 20%, but the huge if is financing and I think they used the word crisis in there. And so I just wonder if you can maybe tell us what your checks on the financing environment for these projects looks like?

Noah, I don't know. I'm hoping that some of you guys in the industries that you're in will help us understand it. We sell to somebody like a Vestas or a Gamesa blade shop who then ships it to the turbine assembler and sometimes they have the whole field installation responsibility and sometimes they're just shipping turbines and it can be to anywhere in the world. We know what projects they have and who's won what, but the financing behind each of those projects is not something we've been able to get good visibility into.

Okay. And then I wanted to ask you about China. There's plenty of discussion of it really breaking away from the rest of the world and economists taking up their GDP forecast there and you guys clearly have exposure there, you're expanding capacity there. Are you able to quantify what percent of the total business ultimately ends up in China right now and maybe where you see that going in the next three years and just sort of how you're thinking about that part of the world?

Are you talking about wind specifically?

I'm talking about the total business, but if you want to talk specifics on wind as well.

Let me just ask one more clarifying question. When you say China breaking away from the rest of the world, is it like the U.S. did recently, or do you mean that they're going to break out of a slump first?

Yes, I just mean the rest of the world in a huge recession with declining GDP and the forecast there for GDP to grow almost double-digits.

I think wind energy is going to be a good growth area because we're starting from almost nothing and how you balance that with what blades our customers were shipping from Europe, I'm not real clear. I think wind will grow there just as strongly as everywhere else in the world, though there will be a lot more local competition. So, I don't consider it a complete breakout in our wind market. I think it will probably net out to be a similar growth rate as the rest of our wind markets. That's just a guess. I think the biggest benefit to recovery of China or any other big country is that they can be a big driver of commercial aerospace recovery. We do almost nothing -- probably nothing, I hope nothing that ends up in military because of export restrictions so commercial aerospace is probably the place where we'd see the best benefit from recovery in China.

Okay. And I'll take one last shot at the margin question. You had said at the end of last year that you'd expect the gross margin for this year to be between '07 and '08, it was a lot higher in the first quarter; you just touched on that seasonality you have. Should we still expect the full year to come in there or should we just expect the rest of the year to come in between '07 and '08?

We didn't actually project that last year. I believe you're referring to a question that I got on this call, where someone sort of led me -- or suggested that I was targeting 24 to 25% gross margin, which I'm embarrassed to say, I thought was way too high and said so on the call last quarter. Desperately seeking some answer to give him, I suggested it should be between the 27 and 28% range, without having even looked at it. I think this year's margin, if you don't discount for the FX change, will clearly be better because of the efficiency gains and the FX gain. I don't have specific guidance on what the margin will be, other than I would expect the first half will be stronger than the second half, as it has been many of the last 10 years.

Your next question is from Steve Levenson with Stifel Nicolaus.

Vestas has said they're going to expand I guess to service Inner Mongolia; is that something that you can do from your plant in China, is it from other plants, are you going to have to build something else?

The transportation cost of wind turbines is causing an awful lot of little plants being built in lots of parts of the world and I think you're going to see a lot more of that. I'm hopeful that our principle operating base will be just one in each region, though I don't know for sure what the world will bring. We can ship our materials in a freezer truck; it's a lot easier than them shipping blades. So, I do not expect to follow every new facility that's built by our customers.

Okay thanks. You were talking about surplus carbon fiber; I know you will probably continue to be a net purchaser, but how did that change in the last quarter, how do you think it might be for the year and how does that impact margins?

I don't think the mix will shift dramatically. A lot of what we purchase we must, because of qualifications. A lot of what we sell must be purchased from us, because of qualifications, not entirely. Where we have started to apply our fiber to new programs like the A350 and the USEC Centrifuge Project, it's certainly enhancing our margins. To the extent we have excess to aerospace demand, we sell into industrial markets or convert into prepregs for the industrial market as there's a surplus on the market, the pricing is lower, but it's still an incremental gain for us. So in general, we would expect, now that the startup of the first lines is behind us and we're starting to see year-over-year growth in the use of our fiber, that it will continue to contribute to our margin mix and help expand our margins, albeit still a small part of what would be our sales, should it all be sold on the open market.

Okay thanks. Last one is, with the winding down of F-22 and the beginning of F-35, how do you see that impacting the company? Is there sort of a balance or are you going to lose out on one first before the other picks up?

Well, I don't know what the timing will be of those, Steve. I see Secretary Gates calling for the end of the C17 and F-22 and perhaps that will happen, but my recollection is the same thing was said last year and maybe the year before and Congress, in the interest of jobs, probably put it back in. So, I don't spend a lot of time worrying about it until we see the order pattern change. The F-22 and C17 are both in our top-10 important programs for us; obviously the F-35 will be, as things build up. I'm hopeful that you'll see some sort of a gradual phase out, if there is one and other things will take its place. Remember, our rotorcraft is more than half of the segment, so the growth of rotorcraft, if you believe there will be some because of Afghanistan and so forth and replacement cycles, could also cushion or even outweigh any decline in other programs.

Your next question is from Nigel Coe with Deutsche Bank.

Just quick ones here. Just going back to tax rate quickly, you seemed to indicate that 32.5% was good for the 2009. Is that sustainable beyond 2009?

We believe it is sustainable. We'll always continue to look for improvements and try to find ways to lower it, but assuming tax rates in the countries don't change, we would hope it holds at this rate or lower.

Okay. Then in a similar vein on FX, some of your hedges roll off in 2010, I believe you're 35% hedged for 2010. Does that mean that you get a similar benefit in 2010 on the margin as you saw this year?

Well hopefully -- actually 2010 will be a little bit better if rates hold where they are today, 2010 will ultimately end up being a little bit better. We roll our hedges in up to 2.5 years in advance, so we actually have a little bit in 2011 and part of 2010, as we roll from -- I think we're at 40% today as we will probably end the year being 75% hedged for 2010. So as we roll in new hedges, if they're at today's rates, that's better than the rates we're at today -- better than the hedge rates today, so hopefully we'll get a little bit of improvement.

So just to clarify, if we stop the clock today, then you get a point of margin benefit in 2010 as 2009 from FX?

Yes, correct, if you stopped it today.

Okay. And then just coming back to this margin question; I know it's been -- someone's deaf here, but in terms of seasonality, the first half is certainly stronger than the second half, Q1 tends to be strongest at a gross margin level. Is that just utilization of the plants or was there anything on the sales mix side that causes that phenomenon?

My view of seasonality is it's the first half and it's principally days worked. We have half of our sales, roughly, are in Europe and there's a pretty significant holiday period in August, partly in July. There's usually a ramp-up before then to try to get schedules out the door. And then you have in the States, Thanksgiving and then you have the Christmas holidays, end of the year holidays and some inventory correction. So just looking over the years, there are a couple of exceptions, but I always pay attention to it and it just ranges in the neighborhood of two points of both gross and operating margin, first half to second half. So I just remind people of that.

Okay. And then just finally, the China and Colorado glass fiber prepreg for wind, when those two facilities are at full capacity, what sort of revenue run-rate do you expect?

I don't think we'd give something out like that and I also wouldn't know how to define full capacity, because each of the new prepreg satellite plants, those two plus the two in Germany and France, are really intended as the new platform, the new footprint for that region. So in the case of the A350, those plants are designed to allow us to add prepreg lines in a series or in parallel; the same can be true of the other plants. So full capacity of the existing lines is about the only way we could look at it and we haven't given out any numbers on that.

Your next question is from Michael Lew with ThinkEquity.

In the past you've mentioned that you'll earn roughly about half million per plane for the non-composite intensive aircraft. Given that Boeing and Airbus are experiencing pricing pressures which has impacted margins, I wanted to know how often do you negotiate your supply contracts, are they reviewed and when's the next time they will be reviewed?

Different customers have different durations and they don't always repeat with the same duration. We don't disclose how long those contracts are or when they're coming due, other than occasionally like with the win of the A350, which was an independent contract. But they, both Boeing and Airbus have multiyear contracts and once negotiated, whatever the terms of that contract are, are to my experience honored through the duration.

Okay. And also with regards to the wind business, do you see any potential acceleration in that business for the year and are you currently engaged in any later stage discussions with potentially new customers?

I would say no to the second question. We're working with a number of customers on developments for next generation blades, however, the pace of growth, as I think I mentioned in the last call, is such that most have stayed with their traditional concepts and designs and materials. That's good news in the case of our customers and not as good news in the case of penetrating new customers. Do I expect a surge? It's been nothing but surge since I came, and with that sort of viewpoint, I would say I would expect less of a surge is more likely than a surge at this stage, just because of credit markets and the ability to finance. The longer people have difficulty getting access to capital, the more I worry about a slowdown in the growth rate, the sooner it comes back, the sooner I think we'll start talking about surges again.

And that now concludes today's conference. We thank you for your participation.