Hexcel Corp (HXL) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to this Hexcel Corporation fourth-quarter 2009 earnings release conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to call over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Thank you. Good day, everyone. Welcome to Hexcel Corporation's 2009 fourth-quarter and full-year earnings conference call on January 28, 2010. 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 in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements to date. Such factors are detailed in the Company's SEC filings, including our [2008 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 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 fourth-quarter and full-year results detailed in our press release issued yesterday. First, Dave will cover the markets; then I will cover the financials, and Dave will provide our outlook. And then we will turn it over to questions.

Thanks, Wayne. Fourth-quarter revenues of $267 million were down about 8% from 2008, but 12% lower if you adjust to a constant currency comparison, somewhat better than the full-year 14% FX adjusted decline. While it is true that last year's Boeing strike made for an easier comparison, sales were up about 3% sequentially from the third quarter as we saw some signs of life in the commercial aerospace market, our biggest.

After adjusting for the previously disclosed legal settlement, operating margins of 8.3% were better than the third quarter, but below last year's, as operational improvements did not fully recover the impact of the sales decline.

Our heavy emphasis on all elements of cash resulted in another strong quarter of almost $17 million of free cash flow. For the year, that makes it $74 million, a $153 million improvement over free cash in 2008.

Now let me cover the markets using constant dollars to describe sales trends. Remember, in 2008, the dollar was extremely weak for the first three quarters, then strengthened significantly at the end of the year. In 2009, it has steadily weakened. In the fourth quarter, for the first time in the year, the dollar is again weaker than the prior year, exaggerating our sales [but] compressing our operating income.

Commercial aerospace sales were about $137 million for the quarter, down 7.2% from last year's strike-affected sales. While it is difficult to gauge the exact impact of last year's strike on our Boeing sales, it is worth noting that we had a 10% sequential revenue growth for the quarter for Boeing programs.

Sales to Airbus also had modest sequential growth. And while they were down almost 25% for the year, the fourth quarter moderated to a 17% decline from the comparable period in 2008. Our regional and business jet submarket had sales remain at the low levels of the prior two quarters, and were down more than 40% year on year. This submarket now represents about 20% of our commercial aerospace sales, and continues to run at about the $100 million run rate that had become evident after the first quarter of 2009.

Sales for new Airbus and Boeing programs -- the A380, 787, 747-8, and the A350 -- were up for the quarter as compared to both the prior year and the third quarter. These new programs made up more than [15%] of our commercial aerospace sales for the first time since we began tracking this ratio.

Sales to space and defense markets were $73 million for the quarter, down 7% on a constant currency basis. The end of the F-22 program has begun to impact us, but there were other gains and losses in the period. For the full year, space and defense sales were just higher than 2008 on a constant currency basis.

In industrial markets, while the quarter's as-reported sales of $56.5 million were down 18%, the FX adjusted drop was almost 26% for the quarter versus 15% for the year. Sadly, our sales to wind markets after a five-year run with compound annual growth over 30%, fell victim to the global credit crisis, and also ended the full-year down 15% in constant currency, despite a strong first quarter.

Now let me turn the call back to Wayne for some additional comments and then I'll come back and talk about the outlook.

Thanks, Dave. Gross margin of about $56 million for the quarter was 21.1% of sales, a slight decrease from the 21.4% gross margin for the fourth quarter of 2008. However, the year-over-year exchange rate impact hurt gross margins by about 100 basis points. So after that adjustment, we were 70 basis points higher than last year as operational improvements, cost controls and staffing adjustments more than offset the impact of the significant sales decline.

Gross margins from the third quarter to the fourth quarter were up sequentially by about 80 basis points due to improved mix of sales, with exchange rates having only a nominal impact.

For the full year, the exchange rate impact was less pronounced, and despite the 16% sales decline, we expanded gross margins by 60 basis points to 22.4% for the year. Selling, general and administrative expenses for the fourth quarter were $26.8 million, or $2.8 million higher than the fourth-quarter of 2008. This was due to exchange rates and lower variable compensation expense in 2008. The full-year is a better indicator of our run rate, and those expenses were $5.7 million or about 5% lower than the full-year 2008.

Research and technology costs were $7.5 million, about the same as the fourth quarter last year in constant currency. For the full year, research and technology costs were $30.1 million or about 3% more than 2008 in constant currency. So going into 2010, our average hedge rate for the year is slightly more favorable than our average hedge rate for 2009, and we are nearly 75% hedged of our estimated 2010 euros and British pound operating income exposure of about $100 million.

Our effective tax rate for the fourth quarter was 31.7%, and was 28.4% for the year. After excluding one-time items, our full-year 2008 rate was about 38%. So our 2009 rate reflects the benefits of actions taken over the past few years, and we expect our 2010 tax rate to be around 30% before discrete items.

In addition, we were awarded up to $8.1 million in new clean energy manufacturing tax credits as part of the American Recovery and Reinvestment Act. The credit is applied on qualifying expenditures we have incurred back to February of 2009 at our new Colorado facility. We expect to record over $3 million in tax benefits in the first quarter of 2010 related to the qualifying expenditures that we have already made, but we don't envision any further credits this year.

The total debt net of cash stood at $282 million at the end of the quarter, down $15 million for the quarter and $61 million for the year. This is the lowest our net debt has been since 1996. In addition, prudent reduction of capital spending regenerated $35 million in cash from working capital for the year, including $38 million from inventories and $32 million from Accounts Receivable. In addition to working capital benefit of the reduced sales, we also improved both our inventory and receivables on a days basis.

At December 31, our $125 million revolver remained undrawn, and we had $110 million of cash on hand. This January, we repaid $30 million on the term loan, and even after that repayment, our cash on hand and available borrowings under our revolver facility is still over $200 million.

Interest expense for the quarter was $6.3 million, higher than last year's $4.7 million in the same period. The difference was due to higher average borrowing costs and associated amortization of deferred financing costs for the new credit facility refinanced in May of 2009.

The previously disclosed legal settlement of $7.5 million relating to ending the Gurit patent issue is recorded as other operating expense. And it's the only exclusion in our non-GAAP adjustment to operating income. Likewise, there is an after-tax income of about $0.06 reflected in our adjusted earnings-per-share.

Now let me turn the call back over to Dave for some comments on our outlook for 2010.

Thanks, Wayne. Our current operating plan for commercial aerospace assumes no recovery in the business or regional jet submarkets. For large aircraft, we assume that beyond the previously announced Boeing widebody rate reduction, there will be no other changes to aircraft build rates through 2011. Boeing's call yesterday seemed to support this assumption. Airbus has yet to give 2011 guidance. But we are hopeful that they'll hold rates, and if so, we should see some sales recovery from the inventory destocking correction in 2009 once we clear the impact of the 777 rate reduction, which we are already seeing. We do expect new program progress to provide a steadily increasing contribution to sales throughout the year and beyond.

In space and defense, we expect an end to our sales for the F-22 program in 2010, but not the C-17. The strong growth in rotorcraft are expected to offset the F-22 demise after a number of quarters. And while we may be down slightly for the year, we could be showing positive year-over-year comps by the end of the year.

Industrial sales are the most difficult to forecast. After a strong start for wind in 2009, our run rate dropped noticeably midway through the second quarter. With the apparent drop in the announced backlogs and factory schedules of our key wind customers, we anticipate a significant inventory correction in the near term.

While we are still optimistic about the long-term global growth of wind energy, until we begin to see a significant resurgence of orders for our wind turbine customers, we remain cautious for the full-year industrial prospects in 2010, particularly in the first half.

So for the total company, with these assumptions, we would expect flat to slightly declining revenue on a constant currency basis for the full year, with the first quarter being the weakest, particularly when compared to 2009's strong first quarter.

From a performance standpoint, we attacked operational costs by aggressively reducing the number of days worked in the third and fourth quarter, and plan to do more as required in the coming quarters. While this approach does not fully align our cost with sales, particularly in Europe, it does improve our cash flows and allows us to retain critical skills and capabilities we need for the longer term.

Beyond work schedules, we have reduced global headcount by more than 15% since the summer of 2008 and we have reduced our cash fixed cost base at the plant by almost 10%.

We do still believe in the future of composites. We hate the lull, but we are using the time to improve our operational yields. We have made good strides in our drive to improve capital efficiency, which will allow us to reduce the CapEx rate of growth as new aircraft enter production.

2009 saw first flights of a number of new composite-rich aircraft, like the Gulfstream 650, the new Apache, and at long last, the A400M and the 787. Our growth is inevitable. Thanks to the hard work of the Hexcel team in 2009 will now be able to support it from a lower cost base and with less capital.

Now I would be happy to take your questions.

(Operator Instructions). Howard Rubel, Jefferies & Co.

Can you talk for a moment about some of the opportunities for incremental penetration? There's always airplanes -- you talk about it all the time, Dave, about incremental improvements to the airplane that require more composite penetration. As you look at your R&T work, how much of it is going towards that at the moment?

I would say our R&T has a lot of qualification work that is in it, a lot of basic research that's in there. But we are always trying to work on the next generation of materials. I would say that a lot more of it is working on next-generation materials because the mold by a number of our customers seems to have been broken -- in the past, it was they want to use what they used in the past -- that is, the composite. So the baseline is always the prior material or the prior technology. It was that way with aluminum, finally moving to composites.

But in the last year or two, a number of our big customers have recognized that the potential for composites are well beyond what we have done in the past. And while they are more comfortable with the prior materials, they see the benefits of future materials. So there's a lot of work going on at many of our customers' on trying to invent the next generation composite.

And then one on operating leverage and gross margins. You are really lots of different businesses, you're not just one; and lots of different plants, and you're not just one. What percentage of your business units are operating at what you'd say are acceptable gross margins, and what percentage are below that? And my guess is one of the areas that's below is industrial.

Well, I would say that if you exclude the new plants that don't have the sort of critical mass volume that we anticipate for the future, none of the plants or operations or product lines are unacceptable from a margin perspective.

We always like them to be higher. I think generally, they are all appropriate to the capital requirements. That is, industrial is lower, but it doesn't require the capital. Fiber is higher, but it requires a lot of capital. So I think they are reasonably balanced, and reasonably proportional. I like the whole portfolio now. We've done a lot to get it where it is and closing plants and exiting businesses. But we are pretty balanced now.

Okay. Thanks, gentlemen.

John McNulty, Credit Suisse.

Just a couple quick questions. With regard to the wind power business, with it being as soft as it is -- first, can you discuss what you can do in terms of the cost structure that you have for that business, if you can wind it down, and how much we might expect it to wind down over, say, the next couple of quarters?

And then as a follow-up, we have heard a lot about stimulus packages and a focus on alternative energy and things like that. And we've even seen a lot of awards handed out. When do you expect to see the demand pull, actually? Or what are you thinking in terms of the demand pull for wind power and when we might actually start to see it pick back up again?

Well, John, as for wind costs, we're looking at it, but we are probably mostly focused on taking time out because we don't believe it's going away or going to stay down for long.

Obviously, with new plants in Colorado and China, we have spent quite a bit of energy starting those up, working on qualifications, and training people. So not too keen on doing anything radical there. In Europe, we have two take another look at it -- what is the growth rate going to be in Europe, especially if our customers start to make turbine blades in China and the US and there is not backfill. So we will have to take a look at that.

Short-term, though, if it's an inventory correction, we want to do it by taking days out. It is pretty difficult to get paid days out, particularly in Europe, which is where most of our work is. So we are a little concerned about how we will handle it -- the inventory correction in wind. We did just go through it with aerospace last year, so I think we will get through.

As for stimuli, China clearly is very aggressive about their stimulus plans. They are a little herky-jerky on whether they use local providers or European providers. So it's not clear what that picture will look like for our customers.

The US does seem to be getting some traction, but as you might have seen, the reports for the shares won last year are, as expected, heavily dominated by General Electric, who purchased their blades and don't use pre-preg technologies at this stage. I think Vestas and Gamesa combined were in the 15% share range last year.

So we need pre-preg customers to win in the US. It does seem like we are starting to see some traction in the US. In Europe, it still seems pretty slow. There have been some awards announced recently. Vestas is still maintaining, last I saw, that they expect this year to be flat compared to last year, which is better than what we are seeing, of course. But I would say it is going to be year-end loaded, as it is typically, if there is a recovery.

Okay, great. And then just one question on the margins. You definitely saw some decent traction and improvement from 3Q to 4Q, with a little bit of sales recovery, but also a lot of work on the cost side. How should we think about the margins in 2010? You are guiding to a slightly softer revenues. Can you [have] the margins up from the fourth-quarter levels? Should they be kind of flattish? Should they be down? How should we think about that for the full year 2010?

Well, you saw in the release that we've got a big depreciation -- and interest, for that matter, but a big depreciation step up -- that we have to pay the piper for the CapEx start that we ramped up a year and a half ago. So not a lot we can do about the depreciation.

Otherwise, though, I hope we demonstrated that we really put a serious focus on what we call cash fixed cost run rate. So I noted Obama last night talking about freezing discretionary spending -- that being 12% of the entire budget, well, give me a break. Discretionary spending -- there is none in any of the rest of that 80%, 90% of the budget? There is discretionary spending everywhere, and if you define it as discretionary, everyone will argue that it's not.

So we don't go there. We just say, your cash fixed cost run rate needs to get better. And that's what we work on. So we came pretty close to the full year of variablizing this terrible downturn. And I don't see that relentless drive slowing.

Materials ought to go automatically with sales. Directs in the US are a pretty easy track with sales. Directs in Europe are more difficult. Overhead is the hard part. And of course, there is discretionary.

So maybe -- we've tried to move away from EBITDA once we lowered our leverage, and to keep people focused on the cost of capital spending. But EBITDA margin -- we actually improved a little bit in 2009. 2008 was down a little with the start-up of all the new plants, but we gained ground on it in 2009. So that might be a better proxy of a way to look at what we try to do all the time.

So covering depreciation would be a pretty long putt. But I would really hope that if sales decline at all, we can hold the EBITDA margins. And if sales go up, we get some good leverage on it.

Okay, great. Thanks very much.

Steve Levenson, Stifel Nicolaus.

Do you want to take a shot at what you think you can do for free cash flow in 2010? And do you expect net debt to go lower?

Yes and yes. I would like you to give us credit for the $74 million free cash flow for 2009 and then put it in the box and forget it. We do hope to have a good cash flow year this year. But if sales are flat for the year, it will be the bathtub that we talked about before. That is, we are going to have probably a down first half where we could maybe get some of our working capital gains. But then if we do start ramping up a little bit towards the end of the year, as I hope, working capital at the year-end point might be a little bit tougher.

So I don't think we are going to get quite a benefit we got from working capital. I do think we still have opportunities in inventory. We always have cash outflow in the first quarter for a variety of reasons that are seasonal. But I would hope that we can, with the reduction of CapEx and some further gains in working capital, that we can have a decent year in cash, sort of midway between zero and where we were last year, if sales average what we outlined here.

That's good. That's a nice, tight range. You were mentioning before about replacing prior materials with new materials. And I just want to get clear on it. Do you mean replacing aluminum with composite, or do you mean maybe replacing somebody else's composite?

I'm sorry, I didn't mean replacing, if I said that -- I mean the next airplane, the next wind turbine, the next-generation fighter instead of using the existing composite material system that they are comfortable with from the prior airplane, they are now more aggressively pursuing advances.

You know this is really a brand-new industry compared to metals. And we have not yet begun to fight. So our customers seem to be comfortable with the idea of composites, and recognize that they can do more instead of automatically assuming that they want the same old material that they used last airplane. They are more interested in seeing how far we can push it.

Are you referring indirectly to Boeing's 787 side of body situation?

No, that's an -- existing aircraft really would have -- aircraft that are as far along in development as the 787 rarely have a (multiple speakers) -- pardon me?

I just mean your experience with the material and the problem there.

No, no, no, that's just a design issue. I think -- I don't really know, I guess, would be the more honest answer. But if there is an excessive load in an area of aircraft, it doesn't matter what the material is made of. It is designed to handle a certain amount of load.

I'm not talking about the performance of any existing materials. I think all aircraft are safe. I think all composite materials are good, including our competitors'. I'm just talking about the next generation will -- for instance, we've got what we thought was the next-generation material that we put on the A380. And we wanted that to be the standard for the next 20 years. I don't think it's the standard at all. I think we are able to go beyond that now. And I think the next aircraft will be able to convince people that we can do better.

Great. In terms of wind, does United Technologies' investment in Clipper Windpower potentially help you as, if I'm correct, you're doing business with Sikorsky already?

Yes. Well, we have -- the thought has crossed our minds. But it comes down to what the blade designs are. And if the blade design -- if we are able to get their R&D labs interested in doing something with blade designs to make them lighter or more precise or more efficient, we certainly hope we can move into some of our materials. But I wouldn't call that a near-term opportunity.

Okay. On A320, when they originally thought they were going up in the monthly billed rate (technical difficulty) down, is there Hexcel material or parts sitting there that are going to result in a drag this year, or are those being worked off?

Well, we had a pretty serious inventory correction in aerospace, as you know, all through the year. It was particularly pronounced at Airbus. I don't fully understand the whole supply chain flow when we have a new aircraft or when we have a reduction in build rates. But I speculate that the correction that we saw in Airbus, which was pretty dramatic last year, compared to what we should have been selling -- that it was a result of that line rate change. I am hopeful that we're through most of it. As I say, we did have a slight sequential improvement, fourth quarter versus third quarter. So I am hopeful that we are past that inventory correction.

Thanks. And the last question is for Wayne. Could you remind us, please -- I think you used to tell us what the revenue change would be in a quarter if there was a 5% change in the dollar exchange rate.

Yes. So, Steve, actually, we disclose in terms of operating income impact. So for 2010, a 5% movement in exchange rate is about a $1.25 million impact on the operating income for the year.

Okay, got it. Thank you.

Mike Sison, KeyBanc.

Could you give us a feel -- in the regional jet business, sort of what the future is there. It's a business that has been chopped in half to some degree. Is there an interesting secular trend there where they want to use more composites? And what do you think needs to happen to get this market back on track for you?

Well, it's regional and business jets. Regionals, I think, have been painful for everyone. There is a bit of a secular penetration story in the regional jets, but it's not anywhere near as dramatic as the big aircraft.

The C-Series from Bombardier is going to be pretty composite intensive. So that is sort of the first salvo. Embraer's 190 is pretty composite intensive. The build rate counts are particularly down the smaller RJ's, which don't have much in the way of composites.

I think in the regional jet business, it will continue to be slow because a lot of the driver for that whole business segment was two-tier wages for US legacy airlines. On the other hand, some people like Republic are rightsizing by getting rid of small planes and upscaling to bigger planes. That would be positive. Aircraft emissions standards worldwide are generally going to give us good long-term prospects. I am sure Embraer is going to keep an eye on the C-Series, and consider how they are going to reply to that. So I think regional jets will be okay for a while, but I don't really look for that to give us a big lift.

Business jets -- you know, I noticed that departures are finally starting to move up again, that people are starting to fly again. So maybe that will come back soon. But I am not sure we are through the inventory correction. There are a lot of players in that market. Some of them are pretty composite intensive. Gulfstream in particular is of interest. I think they are maybe the biggest on a dollar standpoint in the business jet world. And they did just launch both the 250 and the 650. They seem to be doing a little better than the others. It's got a horizontal stabilizer on the 650 that's composite. But they are much smaller aircraft, much smaller counts, and much slower recovery in my mind.

Okay. Now, for 2010 in commercial aerospace for the segment, it sounds like regional business juts basically flattish, right, for the fourth quarter levels? And you sort of have a better comp, because there isn't inventory destocking in 2010 versus '09, assuming the build rates that Boeing and Airbus have shared. So shouldn't the commercial aerospace segment be up in terms of sales?

I think it could be. I think we have said flat to up. If we didn't, somebody changed it. But the business and regional jet I do think will be flat. We do have another quarter to go.

So the first quarter last year, they were still flying like crazy, shockingly. So we used to tell you that that other commercial was 28% of our commercial aero sales. In the second through the fourth quarter, they're down 40%. So if you just do the math on our first quarter of last year, and you say -- if 28% of those sales were business jet, and they are down 40%, that's a $17 million first-quarter hit. So we've got to fill that hole for the full year.

We do have a little bit of a down from the 777. It's a good program for us, and it's down two aircraft per year starting in the summer -- per month, sorry. So we are starting to see that now. Otherwise, though, as we told you last year, we thought that that inventory correction was -- for big airplanes is overly impacting us to the tune of about 10% from steady-state. So that should give us a lift. So if you just look at the big airplanes, they are about 43% of our total sales. And I do think Boeing and Airbus total sales will go up every quarter this year, partly because of the inventory correction being done, and partly because of the new aircraft sales coming onstream, just offsetting the 777 part. So it could easily be up this year.

Okay. Then last question, and I know it's a little bit longer term, but when you think about 2011, 2012, what do you think needs to happen to get topline growth in total sort of in the right direction -- sort of back on the growth path?

I think if wind is just an aberration and a short-term correction, which I think it is -- definition of short-term is the only question -- we will get growing again in wind, and that will carry industrial. Again, we had five years at 30%. Maybe it won't be 30% -- CAGR, 30% CAGR. But that pulls the industrial pretty easily.

I really do think that helicopters and Joint Strike Fighter and A400M new aircraft are going to carry space and defense back to their historical 7% to 10% without much difficulty. I think the big airplanes are going to start growing again. If we don't go down in the line rates, as some of you still forecast, I think the new aircraft will start to get us good growth. So I expect that we will start growing again second half of this year and into next year.

Thank you.

Nigel Coe, Deutsche Bank.

Most of my questions have been answered, but you have given some good color on 2010, flat to slightly down sales. Have -- [you seemed] to say flat sales, could you just give us some perspective on the kind of margin system of that, and thinking about mix, and perhaps thrown in FX into that equation as well? And then normally, we see stronger first-half margins in a normal year, but 2009 -- 2010 won't be a normal year. So if you can maybe talk about that as well, Dave.

I think the simple answer, not knowing what is going to happen to FX, and Wayne has done quite a bit of hedging -- I think the simple answer is I don't expect to see a big swings in variable margin, in gross margin at all. I mean, it will bounce around some.

And year-over-year comps will be tough, because remember the first quarter in 2009, we had some real good tailwinds. We had I think 13% operating income, as I recall. We had oil down at $30. We had favorable exchange rates, a great product mix and good volume. So except for the first quarter of last year, I think the second, third and fourth quarter sort of shows that we manage pretty well through the swings of mix and of volume.

If you were just to normalize and say the whole year is going to be flat, I would say everything else is going to be flat as well. It will more likely step up as the bathtub steps up. I do expect we will get good volume leverage. You see it in the engineered products group. In the fourth quarter, our composite materials were down 20% and our engineered products were up 20%. We had a fairly boring look in fourth quarter, but underneath the covers, it was pretty volatile. We've got great leverage in engineered products. And if we could get growth going, I think we will get leverage. So I think will have a tough start in that first quarter because of the comps; a little bit of difficulty in the second quarter as -- unless wind starts kicking in. And then I'd hope for a pretty good second half, and end up with a fairly average looking year with EBITDA percentages in the same neighborhood as what they were this year.

So flat volumes, flat sales, flat margins, effectively. Just to summarize what you just said there.

Flat on an average. And I remind you of the depreciation step up. I'm not proposing I can cover that depreciation.

EBITDA margins fairly static.

Correct.

And then just a couple of quick ones I think for Wayne. Interest expense picking up next year. We had that slightly down. Could you maybe talk about that? How much of that is cash interest, and how much is maybe non-cash?

Nigel, most of the increase in the interest expenses -- actually I will call it noncash, for lack of a better word, but we have capitalized interest expense on the carbon fiber capacity in the past, and we are going to put into place in April a pretty big [tranche] of capacity. And we will stop that, and that's what will cause interest expense to go up.

And that is the bulk of the $6 million?

Correct.

And then on the D&A, you said it's going to pick up maybe $1 million next year. Does that continue into 2011 and 2012 as well?

Yes, it's a lot longer than that.

As far as I can see. Okay, guys. Thanks a lot.

It actually little more than that, because putting the precursor capacity online in April that Wayne is talking about that's affecting interest is also when the depreciation is going to take the step.

So hopefully at that stage, the revenues will absorb down.

I'm sorry, say it again, Nigel?

Probably in 2012, you probably have some rising revenues to absorb that, so it shouldn't be too (multiple speakers)?

Yes, right.

Al Kaschalk, Wedbush Securities.

Just to take it a step further on the margin question, I guess that implies margin -- EBITDA is flat, that EPS is down. Is that fair?

I'm going to let you do a little work on that. I gave you interest and I gave you tax rate.

Got it. Talk about what you meant, Dave -- and not to be a cynical question, but you said signs of life in commercial aerospace. Does that mean the part about the orders and deliveries sort of matching, or destocking completed? I hear your comment about relatively flat topline, but maybe you could just add a little more color on what you meant by that.

Well, sequential growth at both Boeing and Airbus is encouraging. The 787 flight was a good thing. And while we aren't exactly sure how that is going to affect our sales, we are seeing a pickup in 787 materials sales. Actually, every one of those new programs had a sequential increase in materials sales. So the new programs, beleaguered as they are, are starting to contribute.

The fact that we have had sequential growth at both Boeing and Airbus on the legacy programs suggests to me that the inventory correction is over, and we are getting back in line with what are the current run rates. So I'm not ringing a bell here; I'm just saying that I think the worst is in the rearview mirror with respect to large commercial aircraft, which is 43% of our sales.

All right. So I won't put words in your mouth, but my view on that is it sounds like you are starting to see some positive product contribution on sales on these new airframes and that should continue to ramp, albeit modestly, throughout fiscal '10.

Right.

Which would say would be different than your view maybe even a quarter ago.

Right, well, I might have anticipated that it was going to happen, but now we are starting to see it happen. (multiple speakers) So we said -- you might have noticed in the release that we said it's over 15% of our commercial aerospace sales now. We've never said that before, and I expect that it will stay there, and that it will be an increasing percentage from now on.

And then finally, could you talk about the CapEx program and related spend in 2010? I know you quantified sub $75 million, but where are the dollars going into 2010 in the time frame? I just heard earlier about capacity being put in place in April of 2010, but where is the (multiple speakers) going?

Well, the biggest bulk of our CapEx in recent years has gone to expanding carbon fiber capacity, which we needed to do for USEC which we need to do for our military programs, which we will need to do for the A350. So we started adding capacity.

The most recent big announcement of capacity, which was 2007 -- we were going along at a pretty frantic pace in 2008, trying to bring it online -- we are actually trying to accelerate it. And then in 2009, we realized with the USEC delay or drop, as well as the full market drop, that we didn't need it as desperately as we had thought.

So we slowed down the precursor line, and we stopped work on the fiber lines. The precursor line and the fiber line still was the bulk of what we spent in 2009. It will still be the big part of what we will spend in 2010. So the precursor line that we slowed, we are going to commission in the April/May time frame, at which point we will have to start the depreciation and we will stop the interest.

So we have slow rolled them, but we do want to get that precursor line up and running, because we do expect to start seeing the demand for precursor and pressure on our capacity next year there. So our depreciation rate is $45 million or $46 million. That is still a good proxy for what the steady-state CapEx requirements would be. The $98 million or whatever we did last year, and the $75 million or so this year is still about carbon fiber capacity.

Okay, thank you. That's all I have.

Lucy Guo, Macquarie Research.

Just a question on defense. How much more runway do you see in the strength of the rotorcraft sales that you are citing will offset the F-22 withdrawal?

I don't know. I would say that the demand at the end market level is still pretty strong, from what I read, with Afghanistan requiring even more assets that have been deployed. I have heard that the V-22, which is an important program for, is now in Afghanistan performing well. I've even heard talk that the Air Force is now interested in it. So that is all good news.

Beyond that, even if things were flat, there are a number of programs where there are new helicopter blade programs where they're developing a new blade for existing airframes. So for instance, the Blackhawk helicopter, which is a very big helicopter around the world -- I think 2,500 of them have been deployed, there is an upgrade that has been developed that has a wide core composite blade. And with the new engine, you can provide an extra 500 pounds of lift.

We've got a very good business in helicopter blade [assistance] materials, subassemblies, even some finished assemblies in our engineered products business. So you see that engineered products group was actually up in 2009. Part of that is because they have a heavy Boeing element, and the strike helped them. But another big part of it was our increased penetration in new composite blades for helicopters.

Okay, great. And then just a follow-up on your conversation with Nigel. Regarding margins in 2010, if I heard you correctly, you said if revenues were flat, margins can be kept flat as well. And since you are getting more higher percentage of commercial aerospace revenues from new programs, does that mean that margins on new programs are similar to those on legacy programs?

We don't have -- we don't really have any products where we are unhappy with the margins, nor where the margins are so lucrative we are embarrassed to talk about them. We are really pretty well-balanced.

Okay. Sounds good. Thank you.

Avinash Kant, D.A. Davidson & Co.

A few questions. First one, if I understood you right -- did you say that CapEx requirement for calendar year '10 is going to be roughly $75 million?

Yes, we said it will be $75 million max. So it depends a little how the year develops. If things start to recover, we would probably use the full $75 million. If there were other delays on programs or any other negative news, it could be less than $75 million.

I see. But that remainder will be pushed into '11, then, right?

Well, I don't know about a remainder, but we'll have a plan for 2011 based on what we see as the demand picture and the A350 program in 2011, which we'll talk about later in the year.

Okay, so most of the CapEx in '11 will be related to the 350 program -- a majority of that, at least?

It depends on a bunch of factors. We haven't actually laid out our 2011 spending plan yet.

Right. And you have been talking about seasonal weakness in the March quarter. Now from the commentary, it looks like the one business that could be weak is the wind business. But other than that, do you expect a sequential decline in any other business, or it's just primarily due to the wind business question?

Sequentially, the other commercial aerospace submarket maybe will be flat, maybe will be down some more. I don't know if there's inventory correction going on there. Space and defense probably would be flat because we already were down in the fourth quarter. Wind almost certainly will be -- I would say, yes, you're right. I didn't think about it.

Okay. And in terms of legal expenses, you had a pretty significant one. Is it going to go to zero in the next few quarters, or are you still going to have some?

I would love to see legal expenses go to zero, but the legal department probably wouldn't. That settlement that was referenced in there was a one-time settlement that closes what is listed in our Qs and Ks as a patent dispute with a company called Gurit. So if you look at our recent filings on that subject, that is what it's addressing. And it's complete and closed and finished.

Right. And you have no other legal issues going on right now, right? Ongoing (multiple speakers)

We always list what legal open issues there are in our Qs and Ks. I'd suggest you read that.

And I believe you did say that tax rate should be around 30%.

Correct.

(multiple speakers) Perfect. Thank you so much. Thanks, David.

That does conclude the question-and-answer session as well as Hexcel Corporation's fourth-quarter 2009 earnings release. Thank you for your participation.