Hexcel Corp (HXL) 2010 Q1 法說會逐字稿

Good day, everyone. Welcome to the Hexcel Corporation first quarter 2010 earnings release conference call. As a reminder, today's conference is being recorded.

For opening remarks and instructions, I will now turn the call over to Mr. Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Great. Thank you. Good morning, everyone, and welcome to the Hexcel Corporation 2010 first quarter earnings conference call on April 27th, 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 today. Such factors are detailed in the Company's SEC filings, including our 2009 10-K, our first quarter 10-Q, 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 and Investor Relations Manager. The purpose of the call is to review our 2010 first quarter results detailed in our press release issued yesterday. First, Dave will cover the markets, then I will cover the financials, then Dave will provide the outlook, and then we will turn it over to questions.

Thanks, Wayne.

First quarter revenues of $263 million were down about 14% from 2009, or about 16% lower if you adjust to a constant currency comparison. Despite a dramatic inventory projection in our wind energy market, sales were just above the fourth quarter of 2009 in constant currency, thanks to a strong recovery in our sales to large commercial aircraft. Excluding an environmental charge, our adjusted operating income of $27 million or 10.4% of sales was not as good as the record $40 million we had last year, but it was 210 basis points above the fourth quarter levels on similar sales. We are particularly pleased with our 25.1% gross margin, as it is only the third quarter in the last 10 years we have achieved this level. Our improved profitability is a result of a number of factors, including a favorable product mix, and the impact of our 2009 efficiency improvement and cost reduction actions.

Let me now cover the market using constant dollars to describe sales trends. Remember that while the dollar has strengthened in recent quarters, it is still weaker than the first quarter of 2009. Commercial aerospace sales were $152 million for the quarter, down 3.1% from last year's first quarter; the smallest year-over-year decline in six quarters. Sequentially, commercial aerospace sales were up nearly 11% from the fourth quarter, and 20% higher than the third quarter of last year.

Airbus and Boeing-related sales were up over 10% from a year ago, and were at their highest levels since 2008, as last year's inventory destocking seems to have run its course. Sales to other commercial aerospace, which includes regional and business aircraft, continue at about the $100 million per year run rate, down nearly 40% year-on-year. The drop in this sub-market began in the second quarter of last year, so we expect easier comparisons going forward. Sales for new Airbus and Boeing programs, that is the A380, A350, 787, and 747-8, were up for the quarter as compared to both the prior year and the fourth quarter. These new programs, again, made up more than 15% of our commercial aerospace sales for the quarter.

Sales to space and defense markets were $72.5 million for the quarter, down about 7% on a constant currency basis versus the first quarter of 2009, as the impact of the impending end of the F-22 program plays out. It is important to note that last year's first quarter was our high point for space and defense sales last year.

In industrial markets sales were $38.5 million, down 52% in constant currencies. Our wind energy sales were down approximately 70% from the first quarter of 2009, due to significant inventory correction actions taken by our customers. These actions included multi-week production shutdowns at numerous blade-making facilities during the quarter. We believe the aggressive shutdown actions helped quickly deal with the inventory issues, and the first quarter will be the low point for the year. Nevertheless, we remain caution in the near term, due to the lower than usual published backlogs at our customers. Our remaining industrial sales beyond wind were down over 20% for the quarter, due primarily to USEC's American Centrifuge Project, which went on hold in August of 2009.

Now, let me turn it back to Wayne for some additional comments on our financials.

Thanks, Dave.

Excluding a one-time tax credit and environmental charge, our adjusted diluted earnings per share was $0.15, compared to $0.24 a year ago and $0.11 in the fourth quarter of last year. Gross margin of about $66 million for the quarter was 25.1% of sales, the same as a year ago, though on 14% lower sales. This was 370 basis points higher than the average of the last three quarters of 2009. The year-over-year exchange impact hurt gross margins by 40 basis points; so adjusted for currency, we are even higher than a year ago, as operational improvements, cost controls and good sales mix more than offset the impact of the significant sales decline. Gross margins from the fourth quarter to the first quarter were up sequentially by about 400 basis points, due to improved mix of sales and a 75-point assist from exchange rates.

Selling, general and administrative expenses for the fourth quarter(Sic-see press release) were $31.4 million, or 2.1 million higher than the first quarter of 2009, due to exchange rates and higher stock compensation expense. Research and technology costs were $7.4 million, about the same as the fourth quarter of last year in constant currency, but down slightly from 2009's first quarter of $7.8 million. Interest expense for the quarter was $6.6 million, higher than last year's $5.4 million in the same period, due to higher rates and the amortization of deferred financing costs associated with the new credit facility of May 2009.

This month, we are starting up the largest block of carbon fiber precursor capacity to begin training and qualification efforts. This will be the primary contributor to a $2 million per quarter step-up in depreciation expense, and a $1 million increase in interest expense going forward. We capitalized interest on our large carbon fiber expansion projects, and by placing this capacity into service we will no longer get this benefit in interest expense.

We recorded a pre-tax charge of $3 million in other operating expense for additional environmental reserves associated with our former Lodi, New Jersey facility. As detailed in yesterday's release, we will be implementing new technologies to substantially complete the remediation of this site in the next year, and this charges is our estimate to complete. Cleaning up this 2.2-acre site that for a refined chemicals business that was sold in 1986 has been quite a long journey, and we are pleased that the end is now in sight.

Our effective tax rate for the first quarter was 9% as reported. However, after excluding the previously-disclosed $3.5 million of new clean energy manufacturing tax credits, our adjusted effective tax rate for the quarter was 29.1%, in line with our expectations.

Our 2010 average hedge rate for the year is slightly more favorable than our average hedge rate for 2009, and we are just other 75% hedged against our estimated 2010 Euros and British pound operating income exposure. We currently estimate that for 2010, a 5% exchange rate movement will result in about a $1.25 million impact on operating income.

Our free cash flow for the quarter was a use of $10 million, as compared to last year a use of $25 million. As usual, the first quarter has a seasonal use of cash, due to performance compensation payments and the timing of interest coupons. In addition, we had a $16 million increase in accounts receivable, due to higher sales in March as compared to December, and the $7.5 million cash payment made this quarter for the previously-disclosed settlement and licensing agreement.

Our accrual-based capital expenditures for the quarter were abnormally low at $7 million, due to program timing. With the recovery of commercial aerospace, this will increase for the rest of 2010, but we still expect to be below $75 million for the year. At March 31, our $125 million revolver remained undrawn, and we had $66 million of cash on hand.

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

Thanks, Wayne.

On the last call we told you that our 2010 planning assumptions were flat to slightly declining sales for the year. Our previous comments on most of our sub-markets remain unchanged. Regional and business aircraft are likely to remain flat, at a $100 million per year run rate. Until we get better visibility into wind and the American Centrifuge project, we think our second half 2009 industry sales rate of $50 million to $60 million per quarter is a good proxy for the coming quarters.

In space and defense, the impact of program endings is likely to offset the growth of rotorcraft programs for the rest of the year. What has changed, in our view, is Boeing and Airbus-related commercial aerospace sales, which were 40% of our total sales last year. We are beginning to see increased demand from a wide range of Boeing and Airbus suppliers. Our first quarter sales increase seems to have put us back to the level we expected for the current line rates, suggesting that the inventory correction is behind us. While we had worried about 2011 aircraft build rates and their impact on our second half, both Boeing and Airbus are talking of increased schedules, taking this worry off the table.

Finally, new programs are at long last gaining traction. While sales for new aircraft have not yet even recovered to the 2008 pre-delay peak, we are getting near-term ramp up schedules from many of our customers. We expect the return to year-over-year quarterly sales growth to begin in the second half, maybe even this quarter. With the work we have done to our cost structure in recent quarters, we expect to deliver good incremental leverage when that growth returns.

Operator, we would now be happy to take questions.

Thank you.

(Operator Instructions)

We will take our first question from Howard Rubel with Jefferies.

Thank you very much. Good morning. Nice quarter.

Thanks.

Could you address a little bit more the efficiencies, and how you are going to carry them forward now that you will have some start-ups with these large facilities?

Well, we will have some start-up costs, but I am hopeful, Howard, that those new facilities, the five plants that we had been through a painful start-ups two years ago, will be able to get engaged and start delivering some incremental sales. So I would think that the training and start-up that we will see on the precursor line, we ought to be able to offset with the -- assuming we have volumes, we should be able to offset it with these new facilities, so I am not particularly worried about start-up costs.

Then just one more on that, and that is that if I try to do the incremental profitability, it doesn't work very well, because if I look sequentially, sales were down a little bit, but we were up $10 million in gross margins. I guess, if you continued at that rate, you would earn an infinite amount of money; but in all seriousness, how should we think about what you have done to restructure the business in terms of incremental profitability?

It is probably a crack if we were able to testify in Congress if we were able deliver to deliver that too much more, but I won't make a comment. The way I see it, as always, is that we like to see these over time an incremental operating income leverage of 20% on our sales growth. I actually think going forward, when we get back to a normalized state, it should be a be little better than because of our investments in fiber, which obviously demands a higher margin, and as we start to get some leverage off those new plants that we put in. So I think incrementally, 20% is sort of the long-term expectation. It bounces around quarter by quarter.

I think the only caveats I would say to continued improved margin performance is, as we noted in the release, we do have a depreciation step-up starting in the second quarter of this year. We also would likely have a little more of a normal mix, so that might cost us if we did nothing else -- that might cost us a point or a point-and-a-half of margin. We typically also have a second half that is 100 to 200 basis points lower than the first half, because of a variety of seasonal reasons.

So if nothing changed, you would expect margins to end the year in the 22% range. However, I do expect good leverage on the efficiency improvements we have made. If we get incremental growth on this lower fixed cost that we have, we should do better than that. And to the extent we get back in business in fiber and get some growth in the new plants, I am hopeful we will be seeing good margins going forward.

Thank you very much.

Sure.

And now we will open the floor up to John McNulty with Credit Suisse.

Just a couple of questions. One, with regard to the 787, we know there was a lot of product going throughout, or inventory going throughout the channel. It seems like it just kind of hit its end, so the rest of the channel seems relatively empty. How should we think about the demand pull that you would feel on the carbon composite side for the 787, as it starts to ramp up looking out over the next couple of quarters?

John, it is really hard for me to ever predict what a new ramp up looks like. They have been so, so different. On the A380, we had a tremendous build up and ramp up, and so everybody was worried about hitting rates, then we went years without much pull. We are now starting to see some strength finally with the sub-tiers on the A380.

The 787 seems like a tighter inventory situation. It didn't seem to have as much in the way of pre-sales a year-and-a-half or two years ago. We are starting to see some pull from some of our bigger customers on 787 products, so I think it will come back fairly directly and pretty soon, and it is a matter of trying to predict what are the build rates that Boeing will manage to achieve in the next, you know, year or two.

Okay. Great. Then with regard to the wind power markets, clearly, by your commentary, things are pretty difficult right now. But we have heard, at least, a number of kind of positive updates with regard to new contract signings, and some of your customers are actually starting to re-ramp up their plants, it sounds like. How long before you actually start to feel that in your wind power business? Is it a quarter lag? Is it longer than that, just because of inventory restocking? How should we think about that?

I would like to think that the fairly violent shutdown schedule that took place in the first quarter is a healthy thing for the future for us. Instead of a long, drawn out inventory correction that has us idling at inefficient levels, we had to shut down. It wasn't my choice, but that is what our customers did. Most of the plants -- maybe all of the plants of our major customer locations shut down for at least five weeks, some up to nine weeks. So I am hopeful that that was a good purge of inventory that will allow us to share in any kind of recovery or growth soon, rather than slowly. I am encouraged by very recent pronouncements on orders. I don't fully understand when orders are announced versus when production starts on each.

Vestas, our biggest customer, announces tomorrow I believe on their earnings, so we are all anxious to see what they say for the year. I do think, long term, this is still a great, great business. We do have easier comparisons starting in the third quarter and fourth quarter. Last year, I would remind you, the second quarter was strong for the first two months, and then dropped off at the end. So the second quarter last year was a transition quarter. I can't say how it will do the second quarter, but as I said in my comments, I think a placeholder, or a safe way to look at the second half, is to say it will look a lot like last year, until we see a few more cards.

Okay. Great. Thanks for the color.

Yes.

Moving on, we will hear from Ronald Epstein with Banc of America, Merrill Lynch.

Good morning. When you look at the wind market, what indicators are you looking for as indicators that it's firming up? What do you look for?

Well, I look for orders, and government policies, quite frankly. In China, it has been a little sporadic. They have invested in dramatic fashion. They have put infrastructure in place. They changed the rules quite a few time to the disadvantage of Western providers; our customers are the Eastern providers at this stage. So I pay pretty close attention to what goes on in China.

It is no secret that our biggest customer in this market is Vestas, so we naturally look at anything Vestas says. They have a number one position worldwide. They are tied with General Electric, I believe, at the end of 2009, but there are also differences in dominance region by region. General Electric is very strong in the U.S.; Vestas is not very strong in many places, but they are strong in lots of places, they are in 23 countries. So Vestas orders tend to be way more disbursed around the world. So the growth last year was most dramatic in the U.S. and China, which tend not to be -- play to Vestas's strength, so their share slipped last year. One could call it geographical mix.

But I think the policies that are encouraging, clean energy, the jobs it creates locally, the green energy movement, all the political and economic pressures, point towards good wind growth, and if our prepreg customers gain their fair share of that growth, we'll profit as a result.

Okay, and switching gears here back to aerospace, there's been some discussion around some upgrades to the 777, and one of the things that's been discussed is potentially a composite wing. If Boeing were to go down that path, would you expect that to be an open bid for who would be the structural fiber provider, or would it just go to Toray? I mean, how would you expect to play out? Another way of saying this, is this a potential opportunity for you guys if Boeing were to go down that path?

Every new airplane is a potential opportunity until it is launched. We don't ever quit on a new airplane. I would be stunned if Boeing or Airbus introduced a new airplane that didn't have a lot of composites on it. As you point out, incumbency is always a benefit, if you are the incumbent, and a detriment if you are not. But we have made a lot of progress, and have introduced a lot of new products, and I am sure if there is a new Boeing airplane, whether it is a 777 or whatever, I am sure we will have a very good role to play on it.

Thank you.

And now we will hear from Noah Poponak of Goldman Sachs.

Hi, good morning.

Good morning, Noah.

Just a clarification on the comments that the industrial quarterly numbers should look like the back half of last year, that $50 million to $60 million. Are you looking for that in the second quarter? Because that would imply a pretty big sequential step up, and you sound kind of cautious on the wind side, and USEC isn't doing anything; can you [expound] on that?

I tried to dodge the second quarter, because we are kind of into it. It certainly should be a step up, sequential step up in wind, because we had these big shutdowns in the first quarter. That is not to say wind is on a great recovery track yet. We haven't said that, nor have we denied it.

When you look at the first quarter in wind, I think you want to look at not a 70% reduction, you want to look at a shutdown, an inventory correction, so a one-time hit, if you will. Not all of it, but some of it certainly was. I haven't done the math, but if you did the math on a five-week shutdown or something and backed that out of it, that run rate has declined by some amount other than the inventory adjustment; and it is confusing, and that is why I looked at the second half. The second half is when we had six fairly stable monthly wind run rate months that I think are sort of a safe proxy for going forward, until we see some more news from Vestas.

Okay. On the defense side, it sounded like you said the programs ramping down more than offset continued strength in rotorcraft for the rest of the year. Going forward, does the ramp down on certain programs kind of take you into the timeframe in which investment accounts are under further certain pressure, and we're withdrawing from Southwest Asa, so maybe the rotorcraft strength turns to flat to maybe down? I guess what I'm getting at is, when do you foresee this business showing year-over-year growth again, if any time soon?

I think that -- I would put the range in single digits plus and minus, if you take a rolling average over time. If the F-22 and C-17 had stopped at the same time, we would might have seen a double-digit decline, but they aren't. I think we are absorbing, or will be able to absorb, the F-22 and C-17, and still a single-digit range.

While peace might break out, I actually think the rotorcraft sales still look good for some time to come. It is not that they are just building more helicopters, they are changing helicopter blades to composite manufacture; they are reblading older aircraft, or proposing to reblade older aircraft, and we've won a number of blade assembly programs in our engineered product business that are incremental sales that have nothing to do with base funding or aircraft build rate. So I don't see space and defense as being a drag on our future, other than maybe some single-digit quarters in the next year-and-a-half or so.

Okay. And so, if that -- even if that business is kind of flat, if industrial and aerospace are doing what you think, the top line can probably grow double-digits the next few years, and you just talked about maybe stronger incremental margins than you have seen historically; when you put that all together, do you think the Company can earn $1.00 of earnings by 2012?

Yikes. I haven't given the EPS estimates for this year nor next. I am not sure I'm going to 2012. I have long believed, though, that once we divested the non-composite related markets and focused on these things that have great growth like wind and energy, and commercial aerospace and advanced military, that we should have steady growth for as long as the eye can see. I was wrong a year ago. I wasn't expecting a credit meltdown. But I do expect with the portfolio that we have, we have a great growth story that would be real hard to stop. If we do our job and get good incremental leverage as we go, I think our earnings have somewhere to go but up.

Yes. Okay. Thanks a lot.

Moving on, we will hear from Robert Stallard with Macquarie.

Good morning. Looking at the aerospace OEM build rates, you said order shipments are back up in line with where OEM rates are at the moment. Have you started to see any of your customers anticipating the announced production increases by Airbus and Boeing?

I would say no. Normally, we are six months ahead of time. I would say the discussions of build rates going up perhaps got people a little nervous about their inventory level. We had given you some projection last year that when we did the math on what our run rates should be in commercial aerospace, we seemed to be lower by about 10%. That is pretty crude attempt to estimate what the destocking was looking like. Coincidentally, the sales to Boeing and Airbus are up 10% this quarter. So I kind of surmise that we've stopped destocking and have gotten back to the right rate.

I think as people see build rates coming up or start to see some traction on the A380 or 787, I think people are going to be more worried about coming up short, and they'll have more pressure from Boeing and Airbus to make sure that they have inventory in the pipeline, So some of the ramp up that we have seen in the first quarter might be anticipation or pipeline fill where we ran it too low before, but we do feel pretty widespread demand from the 30 or 40 or 50 sub-tier suppliers to Boeing and Airbus that we deal with on a daily basis.

Okay. Moving over to the new programs, I was wondering if you can give us an update on the A350, and how you are tracking versus milestones on that program?

Well, I am not going to speak for Airbus on what they are doing with their schedule. They're asked that regularly on calls, and I am sure you can listen to that. We are supporting all of the revenue-sharing partners and Tier 1s who are making developmental hardware for the program, so our customer base is beginning to spread out quite a bit, where we had been developing materials for just a number of Airbus locations to do all the testing and qualification and certification, we are moving into shipments for development of hardware to many locations.

Okay. Thank you very much.

Yes.

Now we will open the line up to Cristina Fernandez with UBS.

Good morning. I wanted to touch specifically on the margins for your engineered products segment. You had your best margins ever with flat sales from the prior year, and it's little lower from the fourth quarter. Is this primarily due to the helicopter blade programs you are talking about, or is there anything else that is driving the margins this high, and are those the level going forward?

I will say the first quarter margins were -- I can't say shockingly good, because I like not to be shocked by margins like that, but they were a little better than expected. There were no big one-time items in that mix. There were some pricing catch up things that -- where negotiations had finally closed, and some minor factors like that. I think that the way to look at a longer haul, since we have been reporting it I think in early 2006, if you look quarter by quarter, you will see we had almost steady growth in there, while everything else in the composite business has declined because of the pull back, you will see that engineered products grew throughout, with the one exception of the Boeing strike for a quarter or two. In fact, from 2006, the [Kager] looks to be about 10% per year, so -- and the engineered products parts of our business have gotten good leverage, in the neighborhood of 20% on operating income, and thus the operating income has grown dramatically -- grown consistently.

We also have some new products, like HexMC parts that a couple of years ago you might recall had a lot of development costs to get that new product launched. Those are now starting to ship, so we are starting to get the benefits of that. Those program wins in helicopter blades had a lot of development costs in it, and those are starting to pay back now.

But a lot of hard work and process improvements, and better use of our Asian joint venture have just made this business a good-looking business to us. They had long been the laggard of the Company, and now they are in the upper teens, where they need to be for this capital-intensive business, and I hope to keep them there. Whether they will stay at the 18 that you saw this quarter or not, I'm not certain, but certainly they belong in the high teens and I expect them to stay there.

And then for Wayne, when you look at 2011, 2012, where are you there on your hedges, and at what are you hedged out in the next years?

Yes, Cristina, for 2011 we are probably in the 40% to 50%, and 2012 would just be 10% to 20% level. So we hedge looking out about ten quarters, and we sort of slowly roll it in.

And is that a better rate than you are for 2010?

Yes. To be honest, I don't remember, but it is probably in the same range as 2010. We will roll -- if rates stay low as is, we'll continue to roll it in and hopefully will come out a little bit better.

Okay. And then do you see any impact from the R&D credit not being extended in this quarter, and should that impact you in 2Q if we don't see that passed?

Cristina, think of the R&D credit as probably a little less than $0.01 a share for the year, and so you are right, it's not in the first quarter, so if the law gets enacted, we would see the benefit for the rest of the year. It is not that big of a number.

Okay.

And moving on, we will hear from Steve Levenson with Stifel Nicolaus.

Good morning. Just on the precursor facility, just so I understand better, will you be producing a return right out of the box, or how long do you think it will take to overcome the additional depreciation and interest expense that you have to record?

Well, this facility, as well as a couple of carbon fiber lines, we slowed or stopped, depending or not what part of the project you are referring, to last year, when it became apparent that the capacity was -- could be delayed. Particularly with the USEC delay, which was a big carbon fiber user. We've reached the point where we need to get it back up again, and start the qualification and training process, and that takes upwards of a year.

The pay back comes when we start to actually use that product, but of course it won't be 100% used in aerospace on day one, or we would be too late starting it up. So it is a fairly gradual boost going forward. But as we've said before, with each tranche of capacity that we add, that incremental cost of start-up becomes less of a factor with respect to the total output, because to the extent we need more capacity, it means the capacity that we started at two years ago is approaching full utilization.

Okay. Thanks. On USEC, since you mentioned it, do you want to handicap the odds of their getting a guarantee? It sounds like maybe it's a little bit more likely?

It does sound a little more positive in recent months, but I really can't handicap that.

Thanks. Last, Vestas announced an order for some wind turbines in China this morning; do you think that is a sign at all that maybe the locals can't meet the requirements, whether it is capabilities or deliveries?

It is so hard to explain what is going on month-to-month in China. I think, personally, that the quality and reliability of the Western turbines at the beginning of any sort of start-up are superior. and I don't think the Chinese government wants to chase Western companies away entirely. I think they would love to, if they could, but I think it is probably either a need for their performance and quality, or an olive branch to keep everybody in the game, and I can't say.

Okay. Thanks a lot.

Good.

Moving on, we will open the line up for Ken Herbert with Wedbush.

Good morning. Thank you.

Hi, Ken.

Just a quick question back to the wind market. What kind of lead time or visibility do you have or did you have on the first quarter shutdowns? And I am assuming, with everything you have indicated, you are expecting this is essentially a one-time item?

I sure hope it is a one-time item, but you never know. We are cautious until we see more backlog in orders, and hear from Vestas tomorrow. We did have some visibility to the shutdown. We had confidentiality arrangements that precluded us from getting very specific. But if you look at the language we used in the last release and on the call, we tried to give a little indication that we expected an inventory correction. But we are in pretty close discussions with them regularly. We are a pretty important supplier, and it is pretty expensive to store prepreg inventory, because it requires freezers, so we work pretty closely with the customers and generally know what is going on in the near term.

Okay, good. Just then on the aerospace side, is there anything else you can say -- I know you discussed what you are seeing on the [Dream Lander 77]. Can you comment at all on the ramp you're seeing with the 747-8, and any expectations for that particular plane here through the rest of this year and into next year?

Yes, the 747-8 is an important program for us. The engines -- while it is pretty metal intensive, the engines are CFAN engines with composite fan blade that is a Hexcel product, and then the cells have a bunch of material on it. So it is an important airplane for us. The counts aren't so exciting that we talk about it a lot, but when we talk about new programs, it is right up there with the others during the ramp phase.

Very good. Thank you very much.

And now we will hear from Avinash Kant with D.A. Davidson.

Good morning. Thank you for taking my question.

Sure.

Two questions. First, on the capacity utilization at the current stage, would you be able to comment on current capacity utilization on the precursor side and also on the carbon fiber side of the business?

We don't give specific information out on that, but we certainly did slow the addition of our capacity last year, and now we are working on starting it back up again, so we project that in the year's time that it's going to take us to get it up and qualified, that we're going to have need for the next tranche of capacity.

Okay, so maybe to try to get an understanding how much you are adding at this point, if the facilities you are adding were to be fully running, how much more capacity would you have from what you had at this point?

Yes, Avinash, when we originally started the carbon fiber capacity expansion program, we were roughly around 5 million pounds of [nameplate] capacity, and we announced additions that would get us up to 16 million pounds. Today we are probably a little bit over 10 million pounds, and to get the last 5 million or 6 million pounds it doesn't take too much time and capital, but it is still at least a year away.

Okay. So you are close to 10 million pounds, and you will get up to 16 million eventually?

That's correct, for the announced capacity today.

Okay. And could you talk about the precursor also?

Just right now, what we are saying is precursor is a little bit ahead of the carbon fiber, but that -- when we announced the total, that included precursor to get us to that number.

Okay. Also, historically, you have seen some seasonality from one of your key customers, Airbus, during the September quarter. Given that you are starting to see a ramp now, would you expect a similar partner this year, or it may be different?

I would say we almost always see a seasonal pattern because of summer holidays. So I don't know that Europeans are going to cell their August holiday, so I would expect it to be similar. The seasonality isn't just European, but it is driven to a great extend by the European shutdowns for holidays.

And final question, on the tax front, what should we be thinking, maybe 30% tax going forward or what should be the tax rate?

Yes, correct. We are still thinking 30%.

Great. Thank you so much.

And now we will take final questions from Peter Cozzone with KeyBanc Capital Markets.

Good morning. Could you maybe just give us a little bit more color in regards to the regional and business jet, kind of where we are in that inventory cycle, has destocking largely ended there? And then maybe just a little bit more -- on the customer front, are you seeing any more optimism, and as the economy improves here, is there a possibility there could be some upside in this business at the end of 2010 here?

I would say I don't plan on a lot of upside in that any time soon. I am happy to see that the sales have stayed fairly flat. I don't know if I would call it an inventory correction. We have -- there are quite a few people in that business, if you include turboprops, regional jets, business jets, small aircraft, everything that we have in this other category, and we just saw this stepdown starting the second half and it stayed fairly flat. I can't attribute it to any one program. There is nothing that stands out.

I think in general I hear more positive comments from people in the business jet world, I think small regional jets probably won't see a lot of activity soon. The turboprop market had a little bit of revitalization in recent years, because they are pretty efficient aircraft. I just think when you add it all together, there is not the sort of driver for a big surge in composite utilization in the coming quarters, so I kind of just flat line that until further notice.

Thank you. That is helpful. Then I was hoping you can maybe quantify the impact of cost reduction and productivity initiatives to date, and what part of that is temporary versus permanent, and how much I guess can we expect to come back as volumes rebound here?

I think we made a lot of progress in improving efficiencies of our factories, coming off of a pretty ugly base. If you go back two years ago, we were so out of capacity that we had lots of premium freight, premium overtime, extra costs, just because we didn't have the right capacity in place. The market grew faster than we were prepared for, despite our capital spending program. 2009 was a reprieve, when everybody could get back to basics and figure out how they ought to be running the factory. So I would hope that the efficiency gains that we managed to recover are pretty permanent.

What we look at often, internally, is what we call cash-fixed costs. So when we take costs out, we like to try to keep them out and get leverage off of the growth. So we monitor indirect headcount and cash fixed costs regularly every plant, have a review every month, and we have a pretty good record of holding the fixed costs down.

Last year we needed to take more out than I would have expected, because we thought that we were going to continue to grow with the pull back and all the predictions that build rates were going to go down in 2011, as well as 2012, by some analysts. We took some increment costs out, and as long as we have them out, we would like to keep them out.

Okay. And then one more. You had a sequential uptick here in SG&A. I was hoping you could maybe walk us through the driver there, you know, with the sequential decline in sales, and maybe is this the -- kind of run rate for the rest of the year here as you increase training and add some people back here?

On the sequential increase in SG&A, most of that is just due to the stock compensation expense. We don't take it ratably over the year, we take a much bigger charge in the first quarter, just in terms of mechanics how it works, and so between that and exchange rates, that explains most of the sequential increase. So that won't happen again in the second, third and fourth quarter.

Okay, thank you.

That does conclude the question-and-answer session for today. I will turn it back to the speakers for any additional or closing remarks.

We don't have any closing remarks. Thanks, everyone. We will talk to you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation.