Hexcel Corp (HXL) 2010 Q4 法說會逐字稿

Good day, everyone and welcome to the Hexcel Corporation fourth quarter and full-year 2010 Earnings Release conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions I will now turn the call over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Great, thank you. Good morning everyone, welcome to Hexcel Corporation's 2010 fourth quarter and full-year earnings conference call on January 27, 2011. 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 third quarter 10-Q and last nights press release. Lastly, this call is being recorded by Hexcel Corporation as copyrighted material. It cannot be recorded or rebroadcast without our expressed 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, Communications Investor Relations Manager. The purpose of our call to review our 2010 fourth quarter and full year results detailed in our press release issued yesterday. First, Dave will cover the markets. Then, I will cover some of the financial details. And Dave will comment on 2011 before taking your questions.

Thanks, Wayne. Fourth quarter sales of $311 million were up almost 17% from 2009 or 19% if you adjust to a constant currency comparison. This is our third straight quarter of the double digit growth we hoped to deliver well into the future. Our adjusted operating income of $31 million was 41% higher than last year's $22 million, and adjusted diluted earnings per share of $0.20 was almost twice last year's $0.$0.11. For the year, our adjusted net income was almost $78 million or $0.78 a share, compared to last year's $0.63. This was a 24% improvement on just 7% gain in constant currency sales.

Thanks to an all-time record $199 million of EBITDA and a concerted effort to reign in inventories, we're pleased to report that our free cash flow for the year was nearly $78 million. And both our net debt and leverage are at our lowest point since 1996. Now let me cover the markets using constant dollars to describe sales trends. Commercial aerospace sales were $174 million for the quarter, up almost 29% in constant currency from last year's fourth. In good growth from both legacy platforms and the new Boeing and Airbus programs.

Total revenues to new programs which include the A380, 787, 747-8 and the A350, again, nearly doubled for the quarter as compared to last year and accounted for more than 20% of our commercial aerospace sales for the third quarter in a row. Sales to other commercial aerospace, which includes regional and business aircraft, were the highest since Q1 of 2009 and about 15% higher than last year's fourth quarter. Full-year sales of other commercial airspace of $112 million were 7% lower than the full year of 2009, but above the $100 million per year run rate that we saw at our recent low point. For the full year, constant currency sales and commercial aerospace were $91 million, almost 17% higher than 2009, with new program sales providing over 80% of the increase.

Sales to space and defense markets for the quarter were $84 million, up about 17% on a constant currency basis versus last year. For the full year, constant currency sales were 4.5% higher as the ramp-up of the V-22 program fully offset the wind-down of the F-22 program. If you were to exclude the sales of the cancelled F-22 from both 2009 and 2010 full-year results, space and defense sales would have been up almost 9% for the year. Consistent with our long-term trend and future expectations, due to our increasing penetration of composites in helicopters and their blades.

In industrial markets, sales for the fourth quarter were $53 million, down about 2% in constant currency versus last year. But wind energy sales were down over 20%, both sequentially and year-on-year. As you may recall Vestas, our largest wind turbine customer, recently announced the closure of several European plants to realign more of their production capacity to US and China markets. This not only caused a short term inventory adjustment; resulted in a significant disruption to our operations and shipping costs as we responded.

For the year, our wind sales were also down over 20% on a constant currency basis. With the record breaking Vestas order intake in 2010 and the introduction of their new larger 55-meter blade, we expect to return to double-digit sales growth beginning in the first quarter of 2009 -- by '11, 2011. Fourth quarter industrial sales, excluding wind, were up over 30% year-over-year. And were also modestly higher for the entire year. The quarter's growth in the sub-markets was across the entire realm. Now let me turn the call back to Wayne for some additional comments.

Thanks, Dave. Our reported diluted earnings per share for the quarter was $0.23 per share. That amount included a $0.03 per share benefit from the reversal valuation allowances against US deferred income taxes. Excluding that gain, our adjusted diluted earnings per share for the quarter was $0.20 or 82% higher than the $0.11 per share we reported a year ago. For the year, with reported sales up 5.9%, our adjusted diluted earnings per share of $0.78 improved 24% over 2009's $0.63.

Gross margin of about $68 million for the quarter was 21.7% of sales, 60 basis points higher than a year ago. Inventory decreased $26 million in constant currency in the fourth quarter of 2010 after increasing almost $14 million in the third quarter. While the quarter benefited from higher sales and the favorable exchange rates, it was offset by the unfavorable absorption impact of the inventory decline and the operational impacts in Vestas' European wind plant closures that Dave mentioned. For the year, gross margin was 24.1%, compared to 22.4% for the prior year, with about 40 basis points of improvement coming from the exchange rates.

Higher sales volume, factory productivity, cost reductions and a favorable product mix allowed us to more than offset the step-up in depreciation expense including cost of sales of $4.5 million versus last year. As usual, the second half was seasonably weaker than the first half, but less pronounced than in 2009. For the second half of the year, the absorption impacts essentially netted out and that may be a better way to look at the period. The gross margin rate for the second half of 2010 was 22.8% as compared to 20.7% the prior year or a 210-basis-point gain.

Our operating income for the quarter was $31 million or 10% of sales, as compared to adjusted operating income of $22 million or 8.3% a year ago. For the year, our adjusted operating income was $133 million or 11.4% of sales compared to $111 million in 2009 or 10% of sales. So for the year, our adjusted operating income increased $22 million on $65 million of sales or an incremental leverage ratio of 34%.

For the second half, our incremental leverage was 31%. Interest expense for the quarter was $4.2 million compared to $6.3 million last year. This is due to lower interest rates as a result of our July refinancing, lower average borrowings outstanding, plus a $700,000 one-time benefit from a reduced interest in liabilities for uncertain tax positions. As we have previously disclosed, in December, we did a $135 million add-on to our revolving credit facility that expires in 2015.

Next week we'll use the add-on plus some cash on hand to redeem $150 million of 6.75%, senior subordinated notes, plus pay 2.25% call premium. Margin on our senior credit facility, which includes revolver, plus the $97 million term loan will reduce from 2.75% to 2% in the first quarter of 2011 as a result of lower leverage ratio we achieved through our improved EBITDA and cash generation initiatives. Excluding the previously mentioned $2.9 million tax benefit, our effective tax rate for the quarter was 25.7%. For the year, excluding one-time benefits, our effective rate was 29.4%. Contributing to this quarter's low rate was the catch-up benefit from the US R&D tax credit extended in December for 2010, and the expiration of exposure to some uncertain tax liabilities. These two items combined contributed about a penny to our earnings per share.

Our free cash flow for the quarter was a robust $40 million, driven by the $26 million drop in inventories. For the year, free cash flow was about the same as our net income, and almost $78 million as compared to last year's $74 million. We began the ramp-up of capital expenditures spending in the fourth quarter, and our accrued capital expenditures for the year totaled $61 million. So total debt, net of cash, now stands at $215 million, the lowest level since 1996. Now let me turn the call back to Dave for some closing remarks.

Thanks, Wayne. So to sum up, 2010 was a good year for Hexcel by almost every measure, especially given the expectations. A year ago at this time, we had low expectations for aircraft build rate improvements. We were facing a major inventory correction by Vestas in the first quarter.

We learned that the cancellation of the F-22 and another delay of the 787. But by year end, we've returned to a double-digit sales growth trend, improved our profitability, lowered our interest rates and generated more free cash than any of us had expected. Going forward, we expect good growth in each of our markets. New aircraft programs are finally driving our top line. Legacy aircraft have line rate increases in the offing.

Our helicopter programs -- our helicopter program's penetration is expanding, and Vestas seems to be back on track, at least for the near term. Even other industrial and other aircraft manufacturers seem to be on the mend. For those who have tracked us for awhile you might note that our sales for 2010 very closely resemble 2007. But in these last three years, we've built, staffed and qualified five new Greenfield factories to take on the growth from new programs in the globalization of wind energy.

We've added and trained over 300 people in 2010 to support our outlook. And yet, despite this foundation expansion and their associated fixed cost burden we delivered 8% more adjusted EPS than 2007 and our return on invested capital of about 11% is back to covering our weighted average cost of capital. We've never felt better positioned and reaffirm our guidance for the year as summarized in last night's release. Now let me turn the call back over to the Operator, and we'll take your questions.

Thank you, sir. The question-and-answer session will be conducted electronically.

(Operator Instructions)

We'll hear first from John McNulty from Credit Suisse.

Yes. Good morning. Thanks for taking my question. A couple questions. First, with regard to your forecast, I see that you haven't changed it at all relative to where we were a few months ago, and yet we've seen a lot of disruptions and potentially it looks like the pushing out of some of the 787 deliveries and that type of thing. Can you give us an update of what you're looking for for commercial aerospace growth in 2011?

I expect we're going to be solidly in the double digits. We've got good recovery in the legacy build rates. The other commercial aerospace seems to have stabilized and is growing slowly, And we've got the four new programs, which have grown pretty dramatically quarter after quarter for the last six quarters. So, sure, we're disappointed at the 787 push-out; but as you heard on the Boeing call yesterday, there's still a lot of building going on.

Don't forget the A380 is an important program for us. After all the years in delay and the inventory that was pumped into the system, we've taken the slack out of that rope, and the A380 is becoming a solid contributor to our growth. And we do have significant sales to the 747-8 and the A350 in the plan. So, we feel real good about our commercial aerospace prospects.

Okay, thanks. And then just -- with regard to wind, your expectations for double-digit growth, certainly at least relative to our firm's forecast on wind seems a little more aggressive than I would have expected. Is there any inventory filling or anything like that for some of either these new platforms tied to Vestas or their new facilities? Or is this really just kind of core growth that you think you're going to be seeing?

John, I would say there are really three things that make me comfortable with the double-digit growth for the near-term on wind. Number one, as you know, Vestas is our biggest customer and If you look at their order pattern -- I just saw a report from another firm in Europe that tracks this pretty carefully, and I haven't looked at their final numbers yet. But Vestas' dollar orders booked two years ago were $4.5 million; one year ago was $1.9 million. (sic - see below) So a big, big drop. Billion. I'm sorry.

And 2010 was $8.5 billion. So the pull-back that we saw last year in Hexcel with Vestas was because of the dearth of orders in 2009. 2010 had a record order year for them. I don't know exactly how they're laid out in backlog and schedule, but they typically aren't multi-year contracts. So their backlog is looking a whole lot better than it has in the last six quarters. That's number one.

Number two, we do have easy comps. First quarter and fourth quarter of 2010 were big inventory corrections. First quarter, you might recall, it dropped in half. So we could easily have a hundred percent wind growth in the first quarter because of that easy comp just if we sort of run our last summer build rates.

And I had a third point, which -- oh, the new V112 that Vestas introduced last summer has a 55-meter blade versus their typical V90 workhorse is a 44-meter blade. Doesn't sound like a lot, but the weight of materials that goes into making a blade goes up by a cube factor as you lengthen the blade. So to the extent the V-112 is successful in the market, which generates three megawatt's on much lower wind speeds, our sales per turbine will likely increase over time.

Great. Thanks for the color. I appreciate it.

And we will hear next from Steve Levinson with Stifel Nicolaus.

Thanks, good morning, everybody.

Hi, Steve.

With the price of energy rising a little bit, what's going on with your raw material and natural gas costs, and do you have them hedged off here at all?

Natural -- we don't hedge materials. Natural gas has actually come down quite a bit in recent years and is still trending pretty low. So natural gas is doing fine.

Fuel costs have gone up, though they've pulled back a little bit recently. So we do have pressure on resins and input materials. A lot of what we do has got an oil basis at the beginning of the supply chain. Acrylonitrile, which is an important part of our carbon fiber input, has gone up quite a bit in recent quarters. So we've got some pressure in that regard. We hope to cover it either with price or indexing or productivity gains. But so far no particular panic.

Great. Thanks very much.

Yes.

And we will hear next from Avinash Kant from D.A. Davidson.

You're on, Avinash.

Avinash?

And It appears that he has disconnected. I do apologize. Bear with me for a moment.

(Operator Instructions)

For the record, that wasn't us laughing.

And we'll get Avinash on. Just one moment, please and thank you. Just one moment.

For those of you who are not in the Northeast, we have light attendance today. We had 18 inches of snow up here. Had to walk to work. So, I think there are a few people who didn't make the call today.

And we have Avinash Kant on at this time.

Hi, Dave and Wayne. Can you hear me?

Good morning, yes, we can.

Good morning. A few questions. First, of course, again trying to get back to the build rate schedule that Boeing has been talking about. Clearly, they -- I think they are still talking about two planes a month kind of [friendly]. If I were to say that since you spoke during the last quarter, which is now with the file situation and delays in the program, have you seen any change in terms of their order pattern or your delivery rates to them over the past three months?

Well, as you know, we don't deliver much directly to Boeing. We're dealing with some 30 or 40 different ship-to subcontractors, tier 1s, tier 2s, tier 3s, each with a different sort of inventory build rate plan and yield rates at the beginning. So, we don't see sudden changes typically in a program unless there's really, really a radical move.

The fact that the plane certification has moved out hasn't,, so far as we've been able to determine, had a big enough change that we would even call any attention to the trends. They are still building. As you suggest, they still do have a ramp-up the next two years planned, as you suggest. As long as they keep on that track, we think our guidance is in pretty good shape.

So if you were to think of a scenario where things would change, what would that be?

If things could change, what would that be?

Like, when you start to see an impact if there would be a meaningful change in Boeing's program? If they were to push out the deliveries scheduled by another six months or so? Is that when you will see a change in the food chain, or --

It depends. Supplier -- or customer by customer by customer. Sometimes they keep going, because they're having troubles keeping up, and sometimes they're too far ahead and they slow down, so it's a moderate change for us. We don't ever see really radical shifts when they make minor announcement changes like that. Again, they're really just talking about changing the first delivery.

There are, I think McNerney said yesterday, 31planes up in Seattle. So, we're working on planes well beyond that, not on those initial ones that are already built.

Okay. And also on the wind side, as you talk about AC and pricing going up over the last few quarters, has there been any conversation with you and your customers to pass it through to them?

We have a wide range of contract arrangements with various customers. Some are indexed, some are not. Some deal with that, some don't. But acrylonitrile is the basis for our carbon fiber, which goes into most other products like aerospace. Wind is mostly glass and resin input materials.

All right. So they're still into the long-term contracts pricing there?

We don't specify any of our contracts by customer, by market or by supplier. We have a wide range, and we recognize the risks of inflation and oil and the acrylonitrile swings and we try to protect with both back to back contracts or indices or otherwise spot pricing that gets renegotiated.

Okay. And the final question on tax, I believe when you gave your guidance last in December, you talked about 32% being the tax rate. Is that what we should be modeling going forward?

Yes, Avinash, the only thing that's changed since then was the R&D tax credit was extended. That was after we gave guidance. That was a minor impact as of 2011. So, maybe that's worth a half point. So, we're in the 31 to 32% range.

Okay, thanks so much, Wayne. Thank you so much.

Yes.

(Operator Instructions)

And we will hear next from Ken Herbert with Wedbush.

Hi, good morning, everybody.

Hi, Ken.

Just wanted to talk -- I know you maintained your CapEx guidance for the year of $150 million to $175 million. Can you talk about the mix that you're expecting this year between what I would call maintenance CapEx and A350 specific CapEx, and the timing, specifically, that you're going to be facing on some of the decisions or potential spend in support of the A350 program as we go through the year?

Well, I wouldn't break out A350 specifically. I would say that maintenance CapEx -- by maintenance we mean sort of ongoing, not necessarily broken down equipment, but ongoing cost reductions and such. Typically, it's something short of our depreciations. I would say out of $40 million to $50 million.

Everything else is growth related and , of course, the A350 is an important part of it. But the big, big numbers are always in carbon fiber, precursor plants, additions and carbon fiber plant additions. Those support a variety of programs, including fibers that go into the GE90 blade, the fibers that go into the 787 engines, fibers that will go into the A350, fibers that hopefully will go into USEC, if they get funded, and start that program up again. So I would characterize the beyond $50 million amount as growth-specific .

As for timing, the big numbers, again, are precursor lines and carbon fiber lines. Those, as you recall, we put a slowdown or stop to a couple of years ago after the credit crisis as we realized we didn't need it as quickly. We started up the work on those again last summer. In fact, line E, which is our latest precursor line has just started trials and training and development staffing. We will be working that through the first half getting that ready for qualification runs. And our newest carbon fiber line, which are the completion of fiber lines that we put on halt a year and a half ago, we hope to have up in the third quarter, at which point we'll start training and running trials and qualification runs on those. Typically takes a year to get aerospace grade qualifications, and we hope always to be able to sell what fiber comes off pre-qualification into industrial markets if the markets will cooperate with us.

Beyond that we have some trigger points where we'll revisit with the board to add the next tranche of precursor and fiber. If programs stay on track, we would expect you'll see yours in the 150 to 200 range for a number of years in a row. And if we win the next program, hopefully it will continue

Okay, so if I look out over -- I appreciate the color -- I look out over 2011, then, of that give or take $100 million in growth CapEx, there is -- is it safe to assume that, that's fairly smooth over the course of the year, or is there any specific spikes maybe to quantify it that you would point to?

Ken, I've been in various forms of manufacturing my entire career, which, if you know my age, is a long one. And for some reason CapEx is always a fourth quarter event. I always expect it to be smooth, and it never has been in my entire career. So, I would say it's typically back-end loaded. But we do have a lot of work going on, on those fiber lines that are supposed to be up in the third quarter. So it might not be as back-end loaded this year as in prior years.

Okay, great, and just one question specifically on the 787.If we were to get first delivery, hypothetically, in the mid-third quarter or go with the third quarter when Boeing has talked about, and if around the time of the first delivery they take rates up or start to plan to take rates up from the current two a month to three or four a month and start to get on a much more aggressive increase schedule to ideally get to what they talked about, the ten a month by the end of 2013, does that -- what does that do as we think about, under that kind of scenario, say where they go up from two to three a month, what does that do to the outlook for the incremental margins for you in the first half of this year under that kind of scenario? And what are the implications then potentially for head count or additional spend to support that, or is that something that you're fully prepared for or ready for, because I'm assuming you'd see that as you've indicated, give or take, six months ahead of time in the aggregate.

Well, with all major programs and, in fact, all major airline customers, we have regular reviews and visibility into projected build rates of each aircraft. Those are confidential, but that big suppliers for both Boeing and Airbus have visibility into month-by-month build rates of every aircraft. So we monitor that carefully, and we have regular views to determine what we need to do both from a staffing, from a capacity expansion planning standpoint, and so what the plan that Boeing has, has been shared with us, and it is factored into our capital spending and our staffing plans.

But back to your question on volume and leverage. We, as we've said before, have a pretty balanced mix of margins across all of our products, with the exception of wind, which tends to be a higher-volume, lower-margin kind of business than our aerospace businesses. So, when we talk to you about incremental leverage being 20% plus on an operating basis, that's what we expect when we get growth regardless of where the growth comes from.

Okay, Dave. I appreciate the color. Thank you very much.

Sure.

And it appears that there are no further questions at this time. I would like to turn the conference back over to the speakers for any concluding or additional remarks.

I think we're all set. Thank you very much, operator, and everybody be safe shoveling your driveways. We don't want heart attacks out there.

Thanks.

Bye.

So again, that does conclude today's conference, and we do thank you for your participation.