Hexcel Corporation (HXL)

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Hexcel Corporation (HXL)

Q2 2010 Earnings Call

July 27, 2010 10:00 am ET

Executives

Wayne Pensky - CFO

Dave Berges - Chairman and CEO

Analysts

Noah Poponak - Goldman Sachs

Abhi Rajendran - Credit Suisse

Steve Levenson - Stifel Nicolaus

Christine Leva - Bank of America-Merrill Lynch

Ken Herbert - Wedbush Securities

Peter Cozzone - KeyBanc Capital Markets

Eric Ramos - D. A. Davidson & Company

Kwang Wei Ling - Capstone Investments

Presentation

Operator

Good day, everyone, and welcome to this Hexcel Corporation Second Quarter 2010 Earnings Release Conference Call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Wayne Pensky

Great, thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2010 second quarter earnings conference call on July 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 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 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, our Communications and Investor Relations Manager.

The purpose of the call is to review our 2010 second quarter results detailed in our press release issued yesterday. First, Dave will cover the market, then I will cover some of the financial details before taking your questions.

Dave Berges

Thanks, Wayne. Second quarter revenues of $305 million were up 10% from 2009, 12% higher, if you adjust to a constant currency comparison and 18% higher than the first quarter on an FX adjusted basis. Operating income of $40.5 million or 13.3% of sales were substantially higher than last year's adjusted $31.4 million. The operating income of $40.5 million is the highest in our history, yet on sales 15% below our second quarter 2008 sales peak.

Our diluted earnings per share of $0.23 is $0.05 above the adjusted EPS of $0.18 in the second quarter of last year. We are particularly pleased with our second sale quarter of over 25% gross margins.

Now let me cover the markets using constant dollars to describe the sales trends. Commercial aerospace sales were $161 million for the quarter, up 18% in constant currency from last year's second quarter, and 6% higher than the first quarter. Airbus and Boeing-related sales were up about 20% from a year ago, and were at the highest level since the peak of 2008.

Sales growth was driven primarily by new Airbus and Boeing programs that is the A380, 787, 747-8 and the A350. New program sales, in fact, doubled for the quarter as compared to last year, and now account for more than 20% of our commercial aerospace sales in the quarter.

Sales to other commercial aerospace, which includes regional and business aircraft, were slightly higher than both last year's quarter-end 2010's first quarter levels, seem to have stabilized at about the $100 million per year rate.

Sales to space and defense markets were up over 7% on a constant currency basis versus the second quarter of 2009, and 9.5%, sequentially, as growth in composites for rotorcraft outpaced the wind-down of the F22 program.

In industrial markets, sales were $64.7 million, up almost 4% in constant currency versus last year and up 68% compared to the first quarter of this year. After the significant inventory correction by our largest wind turbine customer in the first quarter, our wind energy sales were up more than $20 million, sequentially, and have now returned to the 2009 second half run rate as we expected.

Recent large orders announced by Vestas, give us confidence for the near-term with wind sales and we remain cautious about the timing of the return to significant growth.

In total, our remaining industrial sales on wind were flat compared to a year ago in constant currency, but up sequentially, but with the exception of the decline in the sales to USEC's American Centrifuge Project, which was put on hold after the second quarter of last year, all other industrial submarkets were up sequentially and year-over-year.

Now, let me turn the call back to Wayne for some additional financial comments.

Wayne Pensky

As Dave pointed out, our adjusted diluted earnings per share was $0.23 compared to $0.18 a year ago and were up 53% from the first quarter of this year. For the first half of the year we are at $0.38.

Gross margin of about $78 million for the quarter was 25.7% of sales, 290 basis points greater than a year ago. The improvement reflects the higher volume, factory productivity and cost reduction initiatives and favorable product mix.

In addition exchange rates contributed about 50 basis points in the improvement enough to offset the $1.5 million step up in depreciation expense included in constant sales that was primarily due to the completion in the quarter of our newest carbon fiber precursor line.

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