Hexcel Management Discusses Q2 2012 Results - Earnings Call Transcript

Hexcel (HXL)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET


Wayne C. Pensky - Chief Financial Officer and Senior Vice President

David E. Berges - Chairman and Chief Executive Officer

Nick L. Stanage - President and Chief Operating Officer


Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Abhiram Rajendran - Crédit Suisse AG, Research Division

Amit Mehrotra - Deutsche Bank AG, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Michael Lew - Needham & Company, LLC, Research Division

Avinash Kant - D.A. Davidson & Co., Research Division

Peter J. Cozzone - KeyBanc Capital Markets Inc., Research Division

David E. Strauss - UBS Investment Bank, Research Division



Good day, and welcome to the Hexcel Corporation Second Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Wayne Pensky, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Wayne C. Pensky

Great. Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2012 Second Quarter Earnings Conference Call on July 24, 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 2011 10-K, our second 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 rerecorded 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; Nick Stanage, our President and Chief Operating Officer; and Michael Bacal, our Communications and Investor Relations Manager.

The purpose of the call is to review our 2012 second quarter results detailed in our press release issued yesterday. First, Dave will cover the markets, then I will cover some of the financial details, and then we'll take your questions.

David E. Berges

Thanks, Wayne. Good morning, everyone. We had another great quarter, with sales up $399 million, up over last year by about 16% on a constant currency basis, or 13% as reported. Sequentially, second quarter sales looked a lot like the first quarter, but with even better margins. Plus, we had some onetime items that, combined, add $0.05 to our EPS. Adjusting out the onetime items from both periods, diluted EPS of $0.42 was 31% better than 2011.

Thanks to our good execution and strong conversion on incremental sales, improved our adjusted operating income to 16.1%. This was a 210-basis-point improvement over the second quarter of 2011, with only 30 basis points coming from favorable currency impacts. We again set company records this quarter for the highest operating income dollars and percent and for adjusted net income.

Now let me cover the markets using constant dollars to describe the trends. Commercial aerospace of $233.5 million for the quarter were up over 14% in constant currency from 2011, with growth in each of our submarkets. Total revenues from new programs increased by more than 30% for the quarter versus the prior year and now account for about 30% of our total commercial aerospace sales.

Sales for legacy platforms at Airbus and Boeing were up modestly from the second quarter of 2011, but lower sequentially as sales rates moved back in line with aircraft production levels.

Sales to other commercial aerospace, which includes regional and business aircraft, were up over 10% compared to the prior year, but also slightly down sequentially.

Space & defense revenues were $88.1 million, up about 10% on a constant currency basis versus the second quarter of 2011 and up almost 4% from the first quarter. Growth in rotorcraft continues to be the primary driver.

In industrial markets, sales for the quarter were $77.6 million, up about 28% year-over-year in constant currency. Wind sales were up significantly over an easy comparison to last year's second quarter, and they have now grown sequentially for the last 6 quarters. While we're encouraged by this growth and the large backlog of turbines on order with our largest customer, our guidance for the year assumes a second half similar to the second half of 2011 due to economic and policy uncertainties.

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

Wayne C. Pensky

Thanks, Dave. Gross margin of $105.5 million for the quarter was 26.4% of sales as compared to 24.6% in the second quarter of 2011, due to good leverage on the strong sales volume and favorable impact of exchange rates.

SG&A and R&T cost grew less than revenues, and that's improved to 10.3% of sales. Our foreign exchange rates contributed about 30 basis points to the high operating income percentage in the quarter as compared to last year and about 40 basis points to the year-to-date operating income percentage. Our operating leverage continues to be strong. After adjusting for exchange rates, we delivered 28% incremental operating income on the sales growth for the quarter and 26% for the first half of the year.

Additionally, during the quarter, we experienced 3 onetime events that impacted reported operating income as presented in Table C of last night's press release. They netted $9.5 million of income and consisted of $9.6 million of income from settling our business interruption insurance claim arising from the April 2011 tornado that hit our Alabama PAN facility; a gain of $4.9 million from the sale of land in Livermore, California, the site of a previously closed manufacturing facility; and lastly, a $5 million in charges to the environmental reserves, primarily for remediation of a manufacturing facility in Lodi, New Jersey that was sold in 1996 -- excuse me, 1986.

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