Hexcel Corp (HXL) 2012 Q4 法說會逐字稿

Good day, and welcome to the Hexcel Corporation fourth-quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Wayne Pensky, Chief Financial Officer. Please go ahead, Sir.

Thanks. Good morning, everyone. Welcome to Hexcel Corporation's 2012 fourth-quarter and full-year earnings conference call on January 24, 2013. 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, 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 2011 10-K, our third-quarter10-Q and last night's press release. We expect to file our 2012 10-K on February 8.

Lastly, call this call is being recorded by Hexcel Corporation as copyrighted material. It cannot be rerecorded 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; Nick Stanage, our President and COO; and Michael Bacal, our Communications/Investor Relations Manager. The purpose of the call is to review our 2012 fourth-quarter and full-year results detailed in our press release issued yesterday. First, Dave will cover the markets, and I will cover some of the financial details, and then we will open it up for questions.

Thanks, Wayne. You remind me of the accountant reading of the voting procedure for the Oscars. (laughter) Good morning, everyone.

Despite a significant drop in sales to wind turbine customers, we had another good quarter, with sales of $387 million, 9.5% better than last year on a constant-currency basis. EPS of $0.36 for the quarter, compared to adjusted diluted EPS of $0.33 in 2011. Unfortunately, as expected, the expiration of the production tax credit for wind turbines did cause a significant decline in our wind business, causing us to lose a few points off of our traditional sales growth.

Our sales and EPS ended up right the middle of our October guidance for the quarter. Our full-year sales were $1.578 billion, just over 15% better than 2011 on a constant-currency basis. But EPS of $1.56 was 26% better than 2011. Also, for the year, our adjusted operating income of $239 million was $50 million higher than the prior year. And, as a percent of sales, it pushed past the elusive 15% mark, a full 160 basis points better than the record-setting 2011.

Now let me cover the markets using constant dollars to describe the sales trends. Commercial aerospace sales of $234 million for the quarter were up 11% in constant currency from the same period of 2011. Total revenues from new Airbus and Boeing programs increased by more than 20% for the quarter, and continue to account for more than 30% of our total commercial aerospace sales. Sales for legacy platforms at Airbus and Boeing were up 10% from the fourth quarter of 2011, and in line with build rates.

Sales to other commercial aerospace, which includes regional and business aircraft, were about the same as the fourth quarter of the prior year. For the full year, FX-adjusted commercial aerospace sales were up 15.5%, with new program sales up over 25%, legacy platforms sales up more than 10%, and commercial aerospace sales up 7% -- I'm sorry -- other commercial aerospace sales.

Space and defense revenues for the quarter were $93 million, up almost 22% on a constant currency basis. Rotorcraft sales to India and China were particularly strong this quarter, in part due to the concentrated timing of shipments. Sales in Europe were also strong due to helicopters, but also due to the ramp-up of the new A400M cargo plane. Rotorcraft sales ended the year at 60% of space and defense sales, and again delivered double-digit growth.

In industrial markets, sales for the fourth quarter were $60 million, down by about 10% year-over-year in constant currency. Wind sales were down over 15% from both last year's fourth quarter and from the third quarter of 2012. For the full-year, FX-adjusted industrial sales were up about 16%, with wind sales up about 30%, due to an exceptionally strong first half ahead of the PTC cliff.

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

Thanks, Dave.

Gross margin of $96 million for the quarter was 24.7% of sales as compared to 24.1% in the fourth quarter of 2011. For the full year, gross margin of $407 million was 25.8% of sales, as compared to 24.6% in 2011, due to productivity gains and good leverage in the increased sales volume. Our selling, general administrative costs were 11.8% above last year's abnormally low fourth quarter, but about the same run rate as the prior two quarters.

Our R&D costs of $10 million for the quarter were up $1.8 million over last year, as we continued to invest in new products and process technology improvements. On average, we expect R&D costs to remain at this run rate over the course of 2013. Foreign exchange rates contributed about 30 of the160 basis points' improvement to operating income percentage for the year as compared to 2011. After adjusting for exchange rates, we delivered 23.5% incremental operating income on the sales growth for the year.

Our effective tax rate in 2012 was 31.2%, up from last year's adjusted effective rate of 30.1%. For the fourth quarter, our tax provision was $15.6 million, an effective tax rate of 29.7%, up slightly from last year's 29.5% after adjusting for 2011 one-time benefits of $5.8 million. Free cash flow for 2012 was a use of $31.3 million, as compared to the source of $13 million in 2011.

Cash from the higher earnings, plus the reduction in working capital usage compared to last year was more than offset by $105 million increase in cash paid for capital expenditures in 2012, as compared to 2011. Our 2012 accrued capital expenditures were $241 million, in line with our improved third-quarter guidance. We continue to expect that even with our projections for growth, our capital spending will stay under $200 million in the coming year, as we benefit from yield and productivity improvements, as well as reduced cycle time to replicate and qualify new lines.

Net debt at the end of the year was $224 million, which is a decrease of $29 million from the end of September. For the year, our net debt is up $23 million. As a reminder, because of our improved cash flow prospects, in December we announced a $50 million share repurchase program.

We now would be happy to take your questions.

(Operator Instructions).

John McNulty, Credit Suisse.

Good morning. Just a couple of quick questions. With regard to the margins, when we look at the composite materials segment, or even the engineered products segment operating margins, there -- despite the decent growth that we saw this quarter, and actually through the year, your margins are lighter than they have been in over a year in each of the divisions. Can you walk us through some of the puts and takes on that? I know you highlighted R&T was up. Was that the bulk of the difference, or are there other things that we should be thinking about?

Yes, John. If you look at composite materials, we were 17.3% for the quarter and that did all the increase in R&T spending happened in that segment. If you actually go back before the fourth quarter of 2011, we actually only had two other quarters in our history where we were above 17%. So, the bar has been raised, and we obviously acknowledge that. But in general, I wouldn't say anything unusual in the quarter other than the R&T spending.

With respect to engineered products, we are at 13.6%, which is just a little bit lower than our targets, 14% to 16%. And we did hit it for the year at 14.5%. It's much more labor intensive in that segment than the material segment, and they do have learning curve on new programs. And sometimes they have one-time catch-ups with the customers. So, it bounces around a little bit more than the composite materials, but nothing we're -- in particular.

Okay. Fair enough. On the space and defense business, clearly came in better than what we were expecting. I think you called out the rotorcraft being particularly strong, and maybe some timing issues in terms of deliveries between India and China. Can you quantify what that was? Is that something that we -- you pulled from the first quarter of 2013, or is this something more that was supposed to go out in the third quarter and actually just got pushed down a quarter instead?

The exports tend to be done in pretty big lumps and create some choppiness in our quarter-to-quarter. And of the fact that India and China both had export release clearances in the fourth quarter. You could maybe spread those over a couple of quarters. I would not call it pull-ahead, for sure.

The other thing, though, that is different in 2012 than 2011 is the A400M is starting to ramp. They're close to certifying and starting to ship it. As you can imagine, the whole supply chain has started the drum beat of growth. We have not talked about that a lot because it has been a long time coming. But it's starting to register.

Okay. Great. Thanks for the color.

Amit Mehrotra, Deutsche Bank.

Thanks for taking my question. Dave, first question on the A350 Airbus was out today, re-affirming that it is on track for first flight this year and first delivery next year. But if I remember correctly, I do not think you are looking -- or you're baking in much A350 growth in your 2013 guidance. Can you just help me reconcile the two, given some of the longer leader -- lead times in the new programs?

I do not remember saying we don't expect A350 growth. We have had good A350 growth from the beginning. I think a lot of people try to take our projected run rate, multiple per airplane times the number of airplanes built. And in the development phase for two or three years before that, it is way more than that, as people are developing and breaking parts intentionally, and yields are down. We have had significant A350 sales for the last two or three years, had good growth, second only to the 787 in 2012, and expect good growth next year and the year after, and the year after.

Okay. And just one follow-up. Can you give us some color on the seasonality in the business this year? Should we still expect the typical pattern, a stronger first half. Or it will be more balanced, as for a stronger second half, given some of the ramps on the '87 and theA350?

First, let me jump to wind, because that's probably the biggest year over year comparison thing you need to be careful of when you're doing your modeling. Last year -- I'm sorry, yes, last year 2012, the first half of the year in wind was the strongest first half in our history. It was very strong. The fourth quarter run rate was about 30% lower than the first half run rate. So, wind as we moved up to the PTC cliff, went down 15% in the third quarter, down 15% again in the fourth quarter. We delivered good numbers, we delivered record fourth quarter, so I am not particularly worried about it.

But, as you're modeling growth, recognize that if that run rate continues, as it probably will until the US gets cranked up again, and there is more of a recovery going on in the rest of the world, you have 30% delta in comparisons for the first two quarters. Just make sure you factor that in. I wouldn't call that seasonality. It is a fact of life. I do think we are still get -- single-digit growth in space in the fence even off of a very high quarter -- I mean a very high year. But remember, when you get to the fourth quarter, we've got a big step up comp because of the export.

Seasonally, we also always have a higher SG&A expense in the first quarter, because that is when we deal with variable equity long-term compensation. You can look at the history on that. Otherwise, SG&A bounces around. But it should be anything way out of whack with the current run rate. Let me think. What is seasonality, Wayne?

Always the margins in the second half are lower than the first half because of the number days and European holidays and such. But generally, that is within 2 percentage points, both on the gross and operating level.

Okay. If I could just sneak one more in and then I will hop off. In the December conference, you talked about potential M&A. I wanted to see -- how should we think about that from a timing perspective. Should we expect something in the nearer midterm? How active is the M&A pipeline? What sort of parameters are you looking at in terms of end markets and even valuation?

Boy, that's a lot of questions. For sneaking one in. (laughter)

As we said in December, we are happy with our improved cash flow prospects. We have passed what we think is the peak for the next few years on capital spending. Our cash from operations was up 36% this year. So, as capital spending moderates and we continue to grow and deliver operating cash, we are going to have plenty of cash for both internal and potentially external growth or returning it to shareholders.

We have not spelled out any specifics on M&A or any specific timing on M&A. Only to say that if there are targets that fit our strategy, which is being in leader and advanced structural materials in markets that have growth, and sequitur penetration with sustainable competitive advantage -- I know that is a mouthful. But, we are not currently planning to grow for the sake of growth or to just build up the top line. We like the business model and the slope of our margin improvement leverage and intend to focus on primarily keeping that on track.

Okay. Great. Thank you so much.

Noah Poponak, Goldman Sachs.

In the follow-up to the quarterly cadence question, given the difficult comps on a total company basis in the first quarter, to make sure we're all on the same page. Should we expect total company, first quarter of '13 organic revenue growth to be positive or negative?

Well, we're not giving quarterly guidance. But wind is less than 15% of the business, and it is going to have tough comparison. But I do not know of any other problems. So, I will let you do the math.

Okay. Does the wind energy tax credit extension mean anything significant for the industry in your view and anything for your outlook for next year?

Yes. It means there are tremendous inefficiencies in anybody who's doing anything in the US on wind turbine business. To have people racing to get something in before the clock expires. On long-lead items like wind turbine developments, it is just nuts. If you look at the history of US installations compared to anywhere else in the world, we look like a Slinky. It is just -- it's insane. I am sure that wasn't your question. What was your question?

The question is, really -- does it generate upside potential to what you laid out for wind in 2013?

No. It takes a long time to get the whole thing cranked back up again. If there were programs in the pipeline that were held up and not signed, and now they are signed, that would be great news. But, it is going to take a while to get the whole machine cranked up again. I would certainly hope we will see some benefit in the fourth quarter and maybe the third quarter. But, it is not today.

Okay. Just one other one. In the space and defense segment, clearly, rotorcraft, a huge driver of the strength there, and now a very large part of the segment. Are there any specific helicopter programs that have now had a big build, are much bigger today than they used to be, that you can see in the budget start to flatten out, or even start to decline, that we should just be all aware of and thinking of in the out years?

Sure. The B22 is our most important program. It has had a good ramp. From shipments of B22s, not talking about our material, but B22 build rates, or deliveries, were up 14% last year. They were up 30% over the year before that. That's been a great help for us.

Textron said yesterday or today -- yesterday, probably, that they see a flattening out of that and the H1, actually. Flattening out, we actually think it probably will decline in the out years, depending on what happens in Congress. We stand by our single digit growth projection because we've got plenty of other lift to cover.

Thanks very much.

(Operator Instructions)

Ken Herbert, Imperial Capital.

This is actually Andrew Dupee on for Ken Herbert this morning. I want to dig into actually the new aircraft growth. I was wondering -- obviously, it grew 20% in the quarter. Is 20% a good number to assume for each quarter in 2013, or is there any -- are you guys seeing anything on that front? I was wondering if that's a decent run rate there?

Remember, as you're talking -- if you're talking about percentage growth working on a bigger and bigger base.

Sure.

So, I'm not going to complain about 20%. But, as you would expect, the A380 and the 747-8 are leveling out. So the growth is now being driven by the 787, and increasingly, the A350. The main driver that you want to monitor is 787 and what happens to the build rates. What the plan was, and if they stay on that plan, we should get pretty good lift from 787.

Okay. Great. I also -- my last one is on R&D, and what you guys are looking to spend there. How -- is that going to be one time-ish? I think you may have touched on it in a prior question, perhaps. Is that more of a spike, or do you expect to have it be a little more?

Let me have Nick Stanage give you a little color on R&T spending.

Yes. R&T -- two main things driving the increase spend -- products and processes. We have a number of enhanced product developments that are moving from the labs to larger-scale production, demonstration runs. The same is true for process improvement projects that target gains and our capital efficiency to reduce future growth spending requirements. As these projects reach production trials, the costs obviously go up. These campaigns will cause some lumpiness throughout the -- 2013, but we think the fourth quarter run rate is a good proxy for the year's average. We are excited about the opportunities and the benefits that these initiatives are going to bring to us.

Okay. Great. Just a follow-up on that. Is it too early to throw out any numbers about how much you expect to save from these various R&D initiatives? Is there anything that we can expect, just from these higher costs?

Those are proprietary, competitive, and sensitive issues. We really do not share those. I prefer not to comment.

The focus, though, as Nick said, is trying to get more out of our capital assets. The reduction in capital spending that Nick talked about on the last call is, in part, a result of gains we have made in development trying to find ways to increase the output per capital dollar. So, it is not so much savings, labor, or material savings. It is capital savings.

Okay. Got it. Just higher output over a fixed cost.

Correct.

Or sort of fixed costs. (multiple speakers)

Plus, new products are future sales.

Okay. Got it.

Steve Levenson, Stifel Nicolaus.

Can you give us an idea if you have a timetable for the ramp and demand for materials for the CFM LEAP fan blades and fan cases? That's gets to be a pretty significant program, but I know it's pretty small right now. When do you see the upturn getting steep?

You look to what you see for the programs that it is going on. They do not lead that anywhere near as much as a structural product for fuselage or something. It's a pretty tight supply chain on engine deliveries. Whatever are your projections on the new programs that use the LEAP, I would say we ought to track with that, but maybe beat it by six months.

Okay. Is that fiber only, or do you sell adhesives and things, too?

The blades are fiber, but there is a lot that go into the inlet, the engine, the cells, afterburners, acoustical treatments. In the engine, it is primarily the blade and fiber. In the cells it is a wide range of products, from adhesives, prepregs to honeycomb core and fiber.

Noise abatement.

And noise abatement systems.

Great. Thank you very much.

Sure.

Avinash Kant, DA Davidson & Co.

A few quick clarifications, actually. The first one is that, it looks like in your prepared remarks you are talking about the wind business and I think you suggested that the wind business has been down over the last two quarters, but could stay at these levels in the first half of 2013? Or you expect further decline?

We do not have good visibility on wind as ever, but I think it is safe to assume that the run rate that we finished the year with is a good proxy for what the first half is going to look like.

Thanks. Second question on the margins. Clearly, the margin profile has gone up lately. Is there any reason to believe that if you were to hit -- if you were to hit similar revenue run rates in the first half of this year, your margins won't get to the same levels that they were in the first half of last year?

I'm not sure I understand the question, and the top line sales is certainly going to be -- are certainly going to be muted by the tough year over year wind comparisons. But, in December, we upped our target to 23% incremental leverage over longer periods of time. We try to do that every quarter, of course. If you look at our 10-year history, we did have EBIT leverage of about 21%, but as you would expect, 50% of the years are over and 50% of the years are under.

Same thing happens on a quarterly basis. But, it is our intent to deliver that kind of leverage. It's a little bit easier when the growth is significant. It's a little bit less relevant when it's minor growth or flat. But, we are still targeting incremental leverage gains with growth, and thus, every year-over-year margin rate should be higher.

Okay. Final question on the Boeing 787. Of course, given the recent developments there, have you seen any impact? Or if you were to figure out how you would think about it, at least, or how could it show up over the next six months or one year?

Yes. We have no comment on the problem, its cause, or the fix, or any impact it has on our current projections. We are monitoring the situation closely, and will be prepared to take action, if needed, should the build rates be affected.

Okay. Perfect. Thank you.

Mike Sison, KeyBanc Capital Markets.

In terms of a base of defense, was your strongest top-line growth business in '12? Did that surprise you? Any particular reason it couldn't stay at those levels over the next several years?

I would say, it did not surprise us that it was up. It has been years of being in the 7% or 8% range. We did suggest it would -- might moderate to lower single digits, just because of all the worries of US economy. The B22 helped us, now the A400M is helping us, Asia's helping us. The year gave us a lot more confidence that the single-digit growth is a reasonable expectation, even with the threat of sequestration and others, just because the sequitur penetration and the non-US participation in this market.

Okay. Any thoughts on the JSF going forward for you?

I think, incrementally, every year has been better than the last one, and I would hope that it would grow more quickly. I expect that it is not going away. And that it will still contribute. It is certainly an important program for us in the future.

Right. Final question on the regional business jet area. It seems to be the only area that hasn't really moved the needle at all. Could that be an area that could generate some -- maybe the upside surprise in '13?

Well, it's not been good for regionals or somebody like Hawker, of course. But we have had pretty good growth from people like Gulfstream, Cessna, ATR, Desso. Larger business jets seem to have been the most resilient. They tend to be more composite intensive. I am hopeful that this trend of slow growth will continue. Upside is probably is more economy based than anything else.

Great. Thank you.

Steve Cahall, RBC.

First question on cash. In 2012, capital spending went a little higher than we thought it was going to be at the end of the year. As a result, cash was different than what we thought it was going to be at the beginning of the year. Just looking into '13, are there any risks to the capital plan at the moment. Is there anything we should be looking out for that can trigger that, one way or the other?

Let me just clarify. We confused people between -- on our cash flow statement, we show the cash spent for capital expenditures, but that numbers we give guidance on are the accrual-based capital expenditures. We do disclose both numbers. So, the guidance we gave was on the accrual basis.

The reason they are so different in 2012 is that -- recall, in the fourth quarter 2011, we incurred a lot of capital expenditures that we did not pay for until this year. That is a long-winded way to say that our accrued capital expenditures, which is what we gave guidance on, was actually less than what we started out at the beginning of the year, and right in line with the updated guidance we gave in October. We ended the year with $241 million of accrued basis, and our last guidance was $230 million to $250 million, and our initial guidance was to $250 million to $275 million.

Nick, any reason we're going to miss this year? (laughter)

No. There is not. We're always looking to do better. I think we can do better, specifically on inventory. But, as we increasingly use our own fiber, our internal supply chain from pan, to fiber, through weaving and prepreg, and in some cases to full assemblies, our inventories naturally grow. I am happy with the year-over-year comparisons and we will continue to work it.

In capital spending, guidance is --

Is $180 million to $200 million, and that's an accrual basis. But that will probably be more close to the cash basis this year.

Okay. That was going to be my next question. So, you are expecting accrual in cash to do a bit of catch-up?

That's correct.

They should be in line this year.

Also on A350, can you give any color as to where you are running as a delivery behind where Airbus is? Do you get any jam-up in working capital? Let's say they have a delay in testing, and then the ramp moves back three months or six months? How does that affect your working capital and your general deliveries on A350?

I don't think it will have a noticeable impact on working capital. We work very closely with the plants. We have satellite plants that are right across the street, in most cases, from the major production plants in Europe. If they are slowing down, we slow down. So, there's not an inventory build-up. Our prepreg has to be stored in a freezer, so even if we wanted to build it up, we would not have the capability. Those should track pretty well.

Any idea, or can you say how many months you are running behind their production schedule as a general sense?

Well, as I said, on the new development program, we ship materials for years before the first delivery. They have not even flown the first airplane yet, and we have had four significant years of sales. It is just how it works on development programs, as test articles are made, and prototypes are run, and equipment is tried out. It is just not a good -- you just cannot use the usual six-month lead time that a steady-state program runs for us.

Okay. Thank you very much.

Sure.

Amit Mehrotra, Deutsche Bank.

Thanks. Just a quick follow-up on your CapEx spend. I know it was recently lowered, but can you tell us how much of the A350 capacity is now in place, and how much more you have to go before you guys are comfortable with that program?

(laughter) No. So, first, you try to sneak in one more question and then (inaudible). I would say when we talk about -- that we expect our future to be inside $200 million per year. That's an indication that the heavy lifting is well past halfway. Our $200 million a year is everything - all programs, including A350. That's about as close as we can get you.

Okay, maybe one follow-up to that follow-up. You said before the $50 million was just the maintenance CapEx and everything above that was growth. Are there new programs now where you're putting in more lines, or is it still mostly dedicated to A350?

Well, it's not programs you do not know about. It is growth in a lot of programs. It is growth in helicopter, rotorcraft stuff, it's growth in 787, it's growth in fiber for the new engines. It's the acoustical core treatment, the equipment to manufacture that for the newest engines. So it's all growth. It's not A350.

Okay. Thank you.

As we now have no further questions, this does conclude our conference for today. We thank you for your participation and have a wonderful rest of your day.