Hexcel Corp (HXL) 2011 Q4 法說會逐字稿

Good day, everyone and welcome to the Hexcel Corporation fourth quarter and fiscal year 2011 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 Mr. Wayne Pensky, Chief Financial Officer. Please, go ahead, Sir.

Great, thank you. Good morning, everyone, welcome to Hexcel Corporation 2011 fourth quarter and full-year earnings conference call on January 26, 2012. 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 2010 10-K, our third 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 re-recorded or re-broadcast without 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 us to review our 2011 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 return for some final comments on the air.

Thanks, Wayne. Good morning, everyone. We have another strong quarter which enabled us to complete a very good year for Hexcel. Fourth-quarter sales were $355.3 million. Up over 14% in the same period in 2010. Our seven straight quarter of year-over-year double-digit growth. Revenues were stronger than typical for a fourth quarter, and we had great leverage on the incremental sales with operating income of $49.4 million for the quarter, a 59% improvement over last year. An adjusted diluted EPS of $0.33. A 65% increase over 2010.

For the year, sales were up almost 19%. To nearly $1.4 billion. And adjusted EPS for the year of $1.24 was just about the higher end of our most recent 2011 guidance. Throughout the year we executed well. And made major strides in improving our advanced our adjusted operating margin. We finish the year at 13.6%. Over 200 basis points better than 2010, as we delivered 25% operating leverage in the incremental $219 million of sales growth.

Now, let me cover the markets using constant dollars to describe the sales trends. Commercial aerospace sales of $211 million for the quarter were up 21% constant currency from 2010's fourth quarter, with growth in all areas at this market. Revenues for new programs which include the A380, 787, 747-8 and A350, increased by more than 20% for the quarter, compared to Q4 2010. And again that counted for more than 25% of our total commercial aerospace sales. Year-over-year sales to legacy platforms at Airbus and Boeing were up over 15% for the fourth quarter in 2010, in line with the expected demand for the announced build rate increases. Sales to other commercial aerospace, which includes regional and business aircraft, were again up over 30% compared to the fourth quarter of the prior year. For the full year 2011 commercial aerospace sales increased over 27%, with combined sales of Boeing and Airbus accounting for approximately 82% of this market segment. Sales for regional and business aircraft grew to $150 million, a 34% improvement over 2010, but still short of the $200 million peak in 2008.

Sales to space and defense markets were $77.1 million, down about 8% in constant currency, versus our record fourth quarter of 2010. Historically, sales in the space and defense market are lumpy from quarter to quarter as orders from many programs tend to be campaigned. For the full year, sales of this market were up 2% over 2010 levels, driven again by Rotorcraft, where we continue to benefit from growth in new programs, as well as composite blade initiatives. In industrial markets, sales for the fourth quarter were $67.5 million up almost 28% year-over-year in constant currency. Driven by dramatic improvement in wind sales from the prior year's weak level. For the full year, wind sales were up more than 15%, and grew sequentially every quarter, but are still about 25% below their 2008 peak. Now, let me turn it back to Wayne for some additional financial comments.

Thanks, Dave. Our reported diluted earnings per share for the quarter of $0.39 includes a $5.8 million benefit, primarily from the reversal valuation allowances against net operating loss carry forwards in Belgium and US foreign tax credit carry forwards as a result of our improved performance. Excluding these out-of-period benefits, our adjusted earnings per share was $0.33, versus $0.20 in the fourth quarter of 2010. Gross margin of $85.6 million for the quarter was 24.1% of sales, as compared to 21.7% in the fourth quarter 2010 (technical difficulty) strong sales volumes. Our operating income for the quarter was $49.4 million, or 13.9% of sales, as compared to operating income of $31 million, or 10% of sales, in 2010.

Selling, general administrative cost in constant currency were almost 3% lower in the fourth quarter of 2011, as compared to the 2010 period, due to lower variable compensation and legal expenses. R&D expenses were increased by 5%. These two line items essentially offset each other, allowing all of our incremental growth margin to flow through to operating income. Our interest expense for the quarter was $2.3 million, as compared to $4.2 million a year ago. We are benefiting from the lower rates from a July 2010 refinancing, the February 1 bond redemption, and lower borrowings. We also had some one-time benefits and interest expense this quarter, and we expect that our go forward interest expense run rate will be $3 million to $4 million per quarter. Our effective tax rate for the quarter was 17.2%, as our improved, performance and outlook allowed us to reverse valuation allowances against net operating loss and foreign tax credit carry forwards that we previously thought would expire unused. Excluding these benefits and similar ones in 2010, our effective tax rate for the quarter would have been 29.5%, as compared to 25.7% in the fourth quarter of 2010.

For 2011, excluding out-of-period tax benefits, our effective tax rate was 30.1%, versus the full year run rate of 29.4% of 2010. Our 2012 estimated effective tax rate remains at 32%, reflecting improved profitability in higher tax rate countries, and that the US R&D tax credit has not yet been extended for 2012. Our full-year 2011 free cash flow was $12.5 million as compared to almost $78 million in 2010. The increased earnings were more than offset by substantially higher levels of capital spending, and additional working capital for our projected growth. Our accrual-based capital expenditures for the year were $184 million, as compared to $61 million in 2010. This included $80 million in the fourth quarter, as our previously announced capital expenditure acceleration program has kicked in. Cash on hand plus available borrowing capacity at year-end and was $254 million.

In 2012 we expect our capital spending to be funded buy our cash from operating activities and existing credit facilities. Now let me turn the call back to Dave for some closing remarks.

Thanks Wayne. So to sum up, 2011 was a great year for Hexcel by almost every measure. We started out the year with worries about the impacts of earthquakes, the tsunami, nuclear contamination, tornadoes, and global economic crisis. But thanks to years of strategic positioning and focus on markets with long-term growth prospects, we've returned to our double-digit revenue increase trend. I think over the last 10 years we've demonstrated an agility and a commitment to respond well to external shocks. But our preferred business model is to deliver earnings leverage on growth. In 2011, we got the growth we had hoped for, And with it, we managed to deliver 57% more adjusted net income than the best year in our 63 year history. We've never felt better positioned, and reaffirm our December 7 guidance for the year. And now we'd happy to take your questions.

(Operator Instructions) Steve Levenson from Stifel Nicholas.

Thanks, good morning, everybody.

Hi, Steve.

Can you tell us a little bit about the news that was out the other day about the land purchase down in Decatur, and how the additional precursor capacity fits in with the other capital expenditures?

Precursor and carbon fibers are our biggest capital expenditures, so you probably shouldn't be surprised to see that we picked up a little -- another piece of land in Decatur, Alabama. It's right next our existing facility where all the infrastructure can be shared. We mapped out our long-term growth footprint a number of years ago and, to the great extent, all of our existing locations is where we expect to stay and expand. In a couple of locations, we need to lease a couple more buildings or acquire a little bit more land, Decatur being one of those.

And is it room for one line there, or do you expect to have room for multiple.

There's room for multiple lines. Room for our long-term plan actually.

Okay. Thanks. Is there anything you can say about a A350 right now? I guess some of the bottle necks have been relieved, and a lot of parts have been delivered to final assembly, which hasn't yet started. But do you see a sort of parallel to what Boeing's done with the 787, where they'll be adding air frames to sit and wait for certification? Same sort of schedule?

I am pretty pleased with what I see on the A350, working with all the partners and subcontractors. Working on developing, improving output yields, lots of activity, some of the bottlenecks that we are reported a number of months ago seemed to have cleared. I am pretty excited about the whole program.

Great, thanks a lot.

Amit Mehrotra from Deutsche Bank.

Great, thanks. Good morning.

Good morning.

25.5% incremental margin, quite strong in 2011, is that a number you're comfortable with for 2012? And can you talk about some of the puts and takes that may drive that higher or lower?

I think 25% incremental has a nice ring to it, for sure. You know we targeted over 20%, I did didn't quite expect that we'd do that well. The second half was particularly strong. I think some of that was helped by our build-up of inventory for what's to come. But pretty much I just think we had good performance all the way around and big growth. As I have said before, it gets a little tougher as you start to expand capacity, as we are now, you start to see the increase in depreciation, higher cost of premium shifts and training. But I think maintaining the 24% to 25% gross margin going forward is good, and we'd hope to get the expansion of operating margins by controlling the overhead costs after that.

That's great, that's helpful. Lastly, if we look at 2011 sales, second half out-paced sales in the first half, which I guess usually isn't the case due to seasonality. How should we think about cadence in 2012 sequentially up through the year? Or will 2012 be more representative of a more typical year with a stronger first half?

Well, I think the first half is typically stronger, as you point out. But if you've got a growth pace that is in the high double digits, as we had last year, even the second half can outweigh the first half. I don't have a quarter-by-quarter outlook here, but I would expect the first quarter to be stronger than the fourth quarter for sure.

Great, thanks a lot.

This last fourth quarter, I meant. (laughter)

Yes.

Ken Herbert from Wedbush Morgan.

Good morning, thank you. Just wanted to follow up on the commercial aerospace outlook. I know this year had very good growth from A380 and 747-8. As you look out to 2012, what extent will 787 and A350 maybe offset some slower growth on the larger aircraft?

I think, as I think I went through last quarter, I still feel the same way. The A380 was the biggest year-over-year driver this year, and is the biggest in that segment. It's got more growth to come. Build rates that I've seen Airbus announce publicly, looked to have another 15% or 20% step up in them. How we're timed with that is always a little tough to tell on big programs, on new programs.

But the A380, I expect to continue to grow. After that the 787 and 747-8 are both starting to -- should start kicking in more. They've been fairly flat for a number of quarters as Boeing's gotten their production system rolling. But I would expect those to be bigger contributors, relatively, in the sequential thinking anyhow, the next couple of years. And after that we have A350 and then the re-engining of the A320 and 737, assuming we have increased content on those programs. So, I think, coincidentally, these are layering in pretty nicely, and we ought to be able to have a good, orderly double-digit growth trend.

That's very helpful. It sounds like, from a lot of commentary from the 787 has been, like you just indicated, sort of flat sequentially. As you look in 2012, is there a particular quarter or a particular inflection point where you might see a materials step-up in that program, or anything we should be thinking about from that standpoint?

> > Well, it shouldn't. Those things happen, but we're shipping to many subcontractors at various tiers in the whole supply chain. So those things tend to normalize and create a pretty steady trend. So I wouldn't expect to see any particular pops, and if I did I probably would not disclose it on the call. (Laughter)

I thought I'd ask. I appreciate it and great 2011.

Thanks a lot.

John McNulty from Credit Suisse.

Hi, this is Abhi Rajendran calling in for John. Your wind business had a more typical seasonal pick-up through the third and fourth quarters of 2011. Could you talk a little bit about what you're seeing with your customers, in terms of orders and deliveries for 2012? And what sort of growth you might expect in your business this coming year?

Well, it's been a tough couple of years for the wind industry, with tight credit and the global economy, changing rules in China, low natural gas prices, uncertain or expiring incentive programs. But I still think long-term desire for renewable clean energy and the result in jobs creation and energy independence makes it attractive on a megawatt basis, thanks to big wins by Vestas, particularly in Europe, Canada and South America. The backlogs almost double what it was in 2008, which was our peak wind sales year. So, assuming credit availability, we do expect continued double-digit growth in 2012, albeit from a lower level than 2008. So, it certainly doesn't look as -- the visibility isn't as clear and as certain as aerospace, but the potential for relative and sequential growth is still real encouraging for us.

Great and could you just remind us again what the typical lead-time is in that wind business, from when your customers purchase your products to when they build out their end products and if that has changed at all, over the last year or two as the uncertainty has grown?

I don't know if we've even answered that, because I don't really know if there's an orderly pattern to that. It's probably different region by region. Our plants in the US and China are just around the corner from Vestas, so we make it, they build the blades. How long it takes the blade to get installed in a location in North Dakota, I'm not clear.

Okay, got it. And one last quick one, if I may. Could you speak a little bit to demand for Rotorcraft blades in the space and defense segment, as well as how the wind-down in Iraq and other areas might impact your core business, and if there's some opportunities to kind of offset that?

Well we continue to think that the diversity of our positions, and the move to more composite rotor blades by almost every helicopter maker in the world, and growth in the V22, the A400M and the Joint Strike fighter, which are much more composite intensive than the airplanes they replace, all help offset the drip, drip, drip of the 100 other defense programs that we participate in. So Rotorcraft, I have not looked recently, but Rotorcraft was growing at about 15% a year, helping us offset the F-22 ending, and a couple of others programs that have slowed down. We still think we are going to be able to see single-digit growth, despite all of the hand wringing.

Great. Thanks very much.

Avinash Kant from DA Davidson

Good morning, Dave and Wayne. A few questions. The first one, could you comment a little bit about your capacity utilization at this time, and where do you see it going throughout the year? I know you're building capacity, but if you could give us any reference, that would be great.

We don't have an absolute number that makes any sense for the total company. But I'd say, other than wind, let me just think a minute, I think other than wind, we are adding capacity in just about every area, which suggests we are in the 90% to 105% capacity range. As a new line gets put in and gets qualified, whatever the capacity of that line is surplus capacity until it fills up and we go to the next one. But with the double-digit growth trend, I think you could just sort of put us down for being at the high end of capacity utilization continuously for the next few years.

You do not expect any specific margin impact as those capacities come online?

I expect to cover any negative depreciation costs with the incremental leverage of factory operations and productivity.

Okay. And the second question was on JSF. Of course there's been a lot of concern about that program. Could you talk a little bit about how much visibility do you have in the JSF program and where do you see it going?

We don't have any more visibility than you do, and I don't have a more informed opinion about where it's going than you do. I would just remind everyone that it's not a very big part of our space and defense segment, but has the potential to be. And to the extent of more airplanes are being built then were two years ago, we are getting incremental growth from the program. So whether it will be as big and exciting as people thought it would be 15 years ago, I don't know. But it does give us incremental sales growth until such time as it completely ends.

Okay. Thank you.

Noah Poponak, Goldman Sachs.

Hi, good morning, everybody. Any update or new thoughts on where cash from ops comes in for 2012?

As Wayne said, we still think we can comfortably fund our accelerated expansion program over the next few years with cash from operations and our existing credit facility. The CapEx payable surge in December and typical seasonal impacts, will surely result in the negative cash in the first quarter, but from there I'd hope we could be fairly balanced for the rest of the year. We haven't given specific guidance on 2012 cash, but if you just convert the EPS and depreciation guidance into EBITDA and match against our CapEx guidance, you'd get a $50 million dollar deficit, or so, that we've got to deal with before any working capital changes. But again, with cash and available credit at $250 million, we are pretty comfortable with our expansion.

Okay. That's helpful. And then with that expansion program and the extra D&A, that you just eluded to overcoming from a margin perspective, does that mean that your next year much more likely to just hover around that just above 20% incremental area, versus this year when you were able to really generate significant upside to that? Or do you still see a bunch of opportunities to get more efficient and more productive and can you speak to what those are?

Well, I think we've made a lot of progress in getting efficient productive and the year's results show that. I think, though, the biggest driver, quite frankly, is what the growth rate is. So if you assume gross margins stay in the neighborhood of 24% to 25%, and you don't get a lot of leverage on the gross margin because of the expansion programs, and we can do a good job at holding our SG&A, as we have for the last five years, the amount of leverage is pretty much based on how big the growth trend is.

Okay. I've been on and off here, have you said specifically what you expect the growth rate in wind to be in 2012 versus 2011?

No, but we think industrial will grow double digits, principally driven by wind. So, the backlog at Vestas gives us quite a bit of comfort that we should be able to get through 2012 with double-digit growth again.

Got it. Okay. Thank you.

(Operator Instructions) Mike Sison from KeyBanc.

Hey, good morning guys. In terms of regional business, jets had a nice recovery in 2011 versus 2010. How do you see that market shaping up for 2012?

I don't feel very well informed on that, there are so many players and there seems to be some share shifting, if I read the press right, amongst some of the players. The big aircraft are more interesting for us, and they seem to be holding up a little bit better. I, quite frankly, was a little surprised at how strong 2011 came in. Maybe 2010 was artificially low. We just sort of straight line that because we don't know any better, and I don't have much more I could guide you than that.

Okay. And then, in space and defense it looks like you had some orders sort of delayed in the fourth quarter, how big was that? And do you expect that to come back pretty quickly in the first, or is it sort of flow through throughout 2012?

> > Well, we had some timing anomalies in the fourth quarter that are not atypical. These particular ones were in Asia and Europe, but they weren't big, there's so many programs, there's nothing that jumps out in that quarter versus any other quarter. The year before happened to be a very strong quarter, and it was similarly inexplicable. I think we are still going to see single-digit growth in 2012. I don't know quarter-by-quarter though.

Okay great thank you.

Eric Hugel from Stephens incorporated.

Good morning, guys. Can you talk about, in the engineered products segment, it's been a while since we saw a number for from about 14% to 4% level. Is there anything there, or are we just looking at mix?

Eric, we got a little bit spoiled the last seven or eight quarters at above 16%, which for that business is great. This quarter we had a little bit of development costs associated with new programs and the little startup cost associated with some new product configurations, none of them big by themselves and probably tend to mitigate going forward. So, I just view this as just sort of the normal ins and outs of the new program developments.

So we are thinking, on a go-forward basis, the engineered products, we should be looking more in, what so around the 15% than the 15% to 17%?

Yes, if we're in 15% to 16% range, that's a good outcome for those guys.

Great. Can you talk about, in terms of your wind business, Vestas, obviously they've been having production problems, they've have been sort of talking about if the US production tax credit isn't extended, seeing a meaningful cut in production. Can you sort of talk about what kind of visibility you have into their backlog? Because, while you're looking at sort of good numbers for this year, there certainly has to be a risk that, as we go forward beyond this year, there is a substantial drop in that business.

Well, there could be in the US, if that's your point, if the production tax credit is not extended. This is an old story, it has happened I think five times in the 10 years I was here. They go to the eleventh hour and then suddenly it gets extended. Nevertheless, because Congress waits so long, we do end up with big swings in installations in the US.

This market is a lot more global than the US, of course. And Vestas is not the dominant player in the US. I think their orders last year, which are published, many of them are published, not all of them, I think about 25% of the orders were in the US, if I recall. So maybe that becomes a more difficult -- I would suggest that Vestas is also pretty active in the political arena, letting people know what a great jobs industry this is, how many jobs they have created in the US. And I would suggest some of that -- some of that talk is to wake Congress up to get them to realize there are jobs there in a renewable field that are very attractive, and that they need to move on the PTC.

Have their production problems worked their way, impacted you or worked their way through sort of your orders yet?

> > Well, I won't speak for their problems -- whether or not they have solved their problems -- (multiple speakers).

Well, wait, but just in terms of the supply, the impact of the supply chain?

We had a very strong growth quarter and we've had four in a row. And the way we think about it is, the extent that they've got production output problems, but don't have orders canceled, our sales are just delayed. So the fact that we've had growth, maybe is the answer to your question. But if their output has been delayed because of those production problems, it just means the backlog is stacked up a little longer in front of us. So I still feel pretty good about 2012 for Hexcel.

Last thing, one more. Maybe just some visibility as to when you guys might get some more sort of visibility as to what the opportunities are on the sort of the Max and the Neo? What kind of timeframe would you contemplate?

I think that would be years, not quarters. We've had -- we know what pieces and parts they're wanting to move to composites, but I don't ever count anything is in the bag until a new program is fully certified because they can make changes as they go through. Normally the changes are to the benefit of composite companies, as they wrestle with weight problems. But I think it will be a while before we'll have any clear answer for you on that.

Thanks, guys. Good quarter.

Thanks.

And that concludes today's question and answer session, and it also brings us to the end of the presentation. Thank you for your participation and have a wonderful day.