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Hexcel Corporation (NYSE:HXL)

Q3 2008 Earnings Call

October 21, 2008 10am

Executives

David E. Berges – Chairman of the Board and Chief Executive Officer

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

Michael W. Bacal – Communications and Investor Relations Manager

Analysts

Richard Safran – Goldman Sachs

Steven Levenson – Stifel Nicolaus & Company, Inc.

Cristina Fernandez – UBS

Al Kaschalk – Wedbush Morgan Securities, Inc.

Matt Curtis – Credit Suisse

Karl Oehlschlaeger – Macquarie Research Equities

Nigel Coe – Deutsche Bank Securities

[Michael Loo]

Operator

Good day everyone and welcome to the Hexcel Corporation's Third Quarter 2008 Earnings conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would now like to turn the call over to your host, Wayne Pensky, Chief Financial Officer. Please go ahead, sir

Wayne C. Pensky

Alright, thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2008 Third Quarter Earnings conference call on October 21st.

Before beginning, let me cover the formalities. First I want to remind everyone about the safe harbor provisions related to any forwardlooking statements we make during the course of this call. Certain statements contained in this call may constitute forwardlooking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involved estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forwardlooking statements today. Such factors are detailed in the company's SEC filings, including our 2007 10-K 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 express permission. Your participation on this call constitutes your consent to that request.

With me today are David Berges, Hexcel's Chairman and CEO, and Michael Bacal, our Communications and Investor Relations Manager.

The purpose of the call is to review to our 2008 third quarter results detailing our press release issued last night. First Dave will cover the markets and I will cover the financials, and then Dave will return with some comments on our outlook, so let me hand the call over to Dave.

David E. Berges

Thanks, Wayne. Good morning, everyone. Third quarter revenues were again ahead of expectations with sales almost 18% higher than last year despite the beginning of the Boeing strike and the onset of global economic worries. Net income of $33 million grew 82% over last year, aided by $11.7 million gain from the sale of a joint venture interest in the quarter.

Adjusted net income then was up 18% for the quarter and 27% yeartodate. We made good progress on our three new facilities in Europe and have now begun the startup sequence in our newest plant, the wind energy prepreg facility in China.

The incremental fixed and startup costs created a yearoveryear drag of 200 gross margin basis points last quarter, but only 120 points this quarter. We are awaiting a number of key qualification approvals for our European operations, and have just begun the first runs in our China wind facility.

I am sure you are more concerned about our outlook for sales going forward, but let us first close on the quarter and I will come back after Wayne with thoughts about the future.

As usual, let me talk about the recent sales trends using constant dollars to better understand the real volumes. For reference, our reported topline sales of $331 million were 17.9% higher than last year as reported but 15% on a constant currency basis. So the apparent sales growth of about $50 million dollars was actually more like $43 million in real terms.

Commercial aerospace space sales were about $177 million for the quarter, up nearly 15% in constant dollars from last year, a significant rise. However, this was our lowest quarter for the year, and sales were 11% lower than the second quarter. This reflects the usual reductions in Europe due to summer holidays, plus the impact of the Boeing strike and the previously announced 787 delays.

Sales to Airbus and its subcontractors were up well over 20% for the third quarter in a row and we benefited across all platforms with only a slight impact coming from the A380 compared to the same quarter last year.

Sales of Boeing and that related subcontractors, which typically account for about 25% of our total sales, were just above the third quarter of 2007 and lower than the run rates in the first half of the year. We have begun to feel the impact of the Boeing strike, which began in early September. It first affected our engineered product segment where we sell and deliver assemblies directly to Boeing facilities. We are now experiencing the larger impact of the rest of the supply chain as the rest of the supply chain adjusts their production for the shutdown. This includes impacting our equity in earnings from ACM, our 33% joint venture in Malaysia.

Sales to all other aerospace customers were up over 20% for the seventh consecutive quarter as billed rates for regional aircraft and business jets have been particularly strong. While the current economic outlook may slow some of these markets we expect the resurgence of fuelefficient turboprops to partially offset any softness.

Sales to space and defense markets were $76 million, up over 23% in constant currency terms, bringing us to a yeartodate total growth of over 18%, well above our historic 8 to 10% average, in part because of a new incremental helicopter blade work that was begun this year. In the fourth quarter of 2007 we booked a significant tooling sale for one of these blade programs and thus we expect a tougher comparison in this coming quarter.

Overall sales for our industrial markets of $79 million were up almost 9% in constant currency versus last year. As usual, wind energy sales were strong and remain on track for midteens growth. We have now run our first qualification lots in our new Chinese facility and we are on track to open a new wind prepreg facility in Colorado next fall.

As in recent quarters, sales to recreation markets were down, but for the first time in over a year our larger other industrial category showed growth thanks to easier yearonyear comparisons and some available capacities.

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

Wayne C. Pensky

Thanks, Dave. Gross margins for the quarter were slightly more than $71million, or 21.5% of sales as compared to 23.8% gross margin for the third quarter of 2007 and slightly better than the 21.2% for the second quarter of 2008.

In summary, as compared to a year ago, incremental fixed costs and startup costs in new facilities cost about 120 basis points of the yearoveryear difference. Exchange rate swings cost us about 40 basis points and higher commodity materials, utility and freight rates about a hundred basis points. And higher commodity materials, utility, and freight rates about 100 basis points.

We expect the impact of incremental fixed and start up costs to subside over the next couple of quarters, though until the new facilities are fully utilized their contribution to margin leverage will be less than average.

The large movement in exchange rates make year-over-year comparisons difficult. While we always give the impact on sales, which is easy, its impact on our operating income is more complex. Obviously, exchange rates do sort metrics as a percentage of sales. But our objective in hedging is to limit the impact of exchange rates on our operating income dollars.

Our Euro hedge rate for third quarter was around 1.43, more favorable than the actual rate of about 1.51. But still about 10% worse than the hedge rate for the third quarter last year of 1.28 dollars per Euro. Our Euro hedged rate for the fourth quarter is similar to this year's third quarter rate. If the dollar can hold on to its newfound strength it will eventually help future results as the hedges are replaced.

As for commodity and energy related cost, there is a two to three month lag in the lower crude prices working their way through the supply chain. Thus if oil stays around current levels we should start to benefit as we go in to next year.

Selling, general, administrative expenses were well contained, up only about a half a million dollars to $26.9 million for the quarter. In fact on a constant currency basis, expenses were lower than last year as we have tightened control on spending. At 8.1% of sales, SG&A expenses were the lowest in recent history.

Also during the quarter, we recorded the previously disclosed $11.7 million after tax gain in Hexcel's sales of its share BHA Aero Composite Parts. The pretax gain of $12.5 million is included in equity and earnings, while the $800,000 of tax provision related to China withholding tax is included in the tax provision. The net gain increased diluted earnings per share by $0.12.

Our effective rate for the quarter was 36.1% as compared to 29.5% in last year's periods. This includes a FIN 48 reversal of $1.8 million in 2008 and $1.1 million in 2007. This year's third quarter tax benefit related to the BHA gain. After including the one time adjustments in the first half of the year, the tax provision for the reinstatement of deferred tax assets, our year to date effective tax rate is 37.6%. And we continue to review strategies to improve our tax efficiencies.

Our net income from continuing operations was $33 million or $.034 per diluted share on a GAAP basis. If you adjust for the one time gain from the BHA sale, then our adjusted non-GAAP was $0.22 per share as compared to the $0.19 per share for the third quarter of 2007.

Our net debt decreased by $30 million in the quarter to $346 million dollars. The reduction was the result of $21.5 million in after tax proceeds from the BHA sale and improved working capital.

We ended the quarter with almost $49 million in cash in hand. And we had no amounts have borrowed under $125 million revolver facility. Our lead banks on the revolver are Deutsche Bank and Bank of America. We remain in compliance with the covenants in the revolver and we believe we have full access to these funds.

We expect capital spending for the year to be $175 million and we continue to expect net debt for the year to be in the $340 to $360 million as we announced in the second quarter.

Now let me turn the call back to Dave for some comments on our current outlook.

David E. Berges

Thanks Wayne. I know some of you were frustrated when we removed our guidance because of the Boeing strike. Until it's resolved we can only say that we estimate the impact to be about a penny per share for every week on strike. Plus some potential spill over if there's not a quick and orderly supply chain restart.

Since the start of the strike, credit and equity markets have taken a dramatic turn for the worse. And while we don't want to reset guidance until the strike impact is understood, I do think it's prudent to cover our current outlook with respect to cash flow.

Clearly, Hexcel has some great growth prospects for the future. And despite the recent gloom and doom, the A350 wind, the dramatic growth occurring in our wind business, and the increasing demand for our intermediate modulus carbon fiber requires our continued investment.

We expect billions in revenues from the years ahead, from new wins this year and we must complete recently started carbon fiber capacity to begin the payback. Remember, it takes two to three years from putting the first shovel in the ground until carbon fiber capacity is certified for aerospace use.

As previously disclosed, we expect to spend 175 million in CapEx this year to realize our revenue goals and to meet our customer commitments.

For 2009 we are undergoing a thorough review of our capital spending and its phasing so as to modulate it with the outlook that unfolds. We have challenged ourselves to fund capital spending from operating activities for the year. Though as usual, we would expect to require seasonally higher cash usage in the first half.

As for our revenue prospects we expect to see steady growth in space and defense and see no slowing in wind energy. With the recently extended production tax credit, expanded capacity, and the global focus on alternative energy sources we feel good about both the short and long term prospects for sales to this market.

As for commercial aerospace, our major customers report solid 2009 schedules and significant backlogs. Both Airbus and Boeing have said their customers have financing in place for deliveries through 2009.

While the clarity and certainty of the longer term is not what it was, we see no evidence to cause us alarm or to change our belief that Hexcel can continue to grow well into the future.

Backlog for Airbus and Boeing is now over 7,500 planes and surprisingly they were again twice as many net orders as deliveries this quarter. To date, slots created by cancellations and delivery delay requests have been taken by other airline customers, some with new found funding from oil income or other such as American airline seeking to improve the fuel economy of their aging fleet.

Last week, Airbus announced they were holding the A320 narrow-body rate at 36 per month rather than increasing them to 40 per month as previously planned. But they also said they would increase the wide-body rate from 8 to 10 per month by 2010. This growth of wide-body demand is a most important point for Hexcel and one worth further discussion.

By narrow-body, we mean the Airbus A320 and Boeing 737. Wide-bodies include the A330, 40, 50, and A380 at Airbus and principally the 777, 787, and 747-8 at Boeing. The wide-bodies are much bigger on average and they happen to be newer designs and thus much more composite intensive.

Year-to-date, there are four times more narrow-bodies built than wide-bodies, 4 to 1 ratio. But the current Boeing and Airbus aircraft backlog reflects a 2 to 1 ratio. Our average content on a wide-body is dramatically more than in a narrow-body and mix shift to larger planes is a very important element to consider in any modeling. We continue to believe this mix shift and the secondary penetration of composites will allow us to grow even in the event of a modest build rate pull back after 2009. We hope to give you further guidance in both 2009 and the future in mid-December should the strike be finished and we’ll now be happy to take you questions.

Question-and-Answer Session

Operator

(Operator Instructions). Let’s take our first question from Richard Safran with Goldman Sachs.

Richard Safran – Goldman Sachs

Good morning.

David E. Berges

Good morning, Richard.

Richard Safran – Goldman Sachs

David, I understand your comments about 2009, I wanted to know if though you can give us an update to the long-term guidance that you provided previously, also any changes you may have made in your assumption, I think last quarter you did reaffirm your 2010 sales.

David E. Berges

So the long-term I think you are referring to is that meeting we had last December where we outlined the prospects for our $1.7 billion 2010. Of course the concept, if you recall, was that rather than predict when the 787 was going to – how it was going to ramp up for the A380, that if you took them at rate they would amount to something like 300 million incremental revenues and we could easily get to 1.7.

First the world has changed quite a bit since then. The oil has gone through wild swings, jet fuel, foreign exchange rates, LIBOR have been through a rollercoaster. We even learned this week that Joe the plumber isn’t a licensed plumber. On the other hand, wind capacity has been expanded. We’ve got some new Helicopter Blade Programs that are giving us growth that we had not expected. And we are at the much higher base due in part to the weak US dollar.

So if you think about it, we are on a pace for about a 1.4 billion year this year and it only takes 10% growth per year to get to 1.7 by 2010. I’m not giving new guidance beyond what we have already said but I – we’ll have to understand a little bit more about the build rate scenarios are but this penetration in this sudden shift, a pretty dramatic shift to wide-bodies for fuel economies does give us some significant encouragement.

Richard Safran – Goldman Sachs

Okay. And then just quickly, on a separate topic back on, I guess, on wind energy, a lot of alternative energy stocks are really have been getting beaten down, concerns about lower oil price obviously and concern over the ability to finance new energy project, etc. You commented that wind energy sales were on track, I just want to know if you have any comment on how, what has been happening to these alternative energy stocks might affect wind energy growth going forward.

David E. Berges

Well if I paid attention to what happened to stocks and consider that an indicator, what is happening in our end markets, we’d be pretty sad today but I can’t even say I know it specifically what happened to the wind energy stocks. I think fuel prices have come down pretty significantly but this trend to alternative energy sources and to reduce global warming has been pretty dramatic for three or four years, I think it was very strong, we are $20 a barrel and just $150 a barrel just made it looked more interesting but I still think that real driver for this is independence from oil and carbon emissions, renewable energy targets are not about trying to save money. I think the demand is going to continue there.

Carbon emissions, renewable energy targets are not about trying to save money. I think that demand is going to continue there. As for financing, I think the financing tends to be a little bit more reliable in many of the end markets with government assistance and large utility companies. But I haven’t seen any indications from our customers that they feel any softening.

Richard Safran – Goldman Sachs

Thanks very much.

Operator

And we will take our next question from Steve Levenson from Stifel Nicolaus.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Thanks good morning, David, Wayne and Michael.

David E. Berges

Hi Steve.

Steven Levenson – Stifel Nicolaus & Company, Inc.

You quantified what you think the strike impact is in terms of earnings per share at a penny a week. Can you give us a little more detail as how it impacted gross margin?

David E. Berges

I would say not much in the third quarter, because we had some backlog or pent up demand that we were able to put in its place. I think it remains to be seen what will happen in the fourth quarter, it starts to affect more operations and we’ve run down what past due positions we had. A short duration strike, I guess, we’re already past that. But a shorter duration strike. I think we have a chance to sail through without a great deal of difficulty, but the more you take a plant down, the more you have stranded fixed cost you can’t exactly shed.

So, I am a little bit concerned about what impact it might have on gross margins, but I think the penny per share per week is sort of the bottom line indicator.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Okay, thanks. Do you see A380 with a positive comparison in the fourth quarter, do you think it’s going to take a little longer.

David E. Berges

I think it’s been gradually creeping up, it hasn’t been as dramatic as we might have hoped. If we put the 787 and A380 together at this stage, they are about in the neighborhood of 10% of our commercial aerospace sales. So we’d like to see it continuing to grow and it has been gradually but it’s no great shakes, not back to what it was two years ago.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Okay, thanks. On the China wind plant, it’s going through qualifications, do you see it generating actual revenue in the fourth quarter, do you think it’s going to take till ’09.

David E. Berges

I assume we’ll have some revenues in the fourth quarter, depending on qualification . The wind qualifications are little less rigorous than aerospace.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Okay, thanks. Last two items, any more updates on HexMC for A350 or other models?

David E. Berges

Well, I meant to look.

Steven Levenson – Stifel Nicolaus & Company, Inc.

For (inaudible 00:25:05) that is.

David E. Berges

In respect to R&T - we don’t break it up. Our R&T is starting to see some HexMC spending for the 350. But as with Boeing, Airbus isn’t familiar with HexMC. It is a new concept to them. The fact that we’ve had some more time under our belt and experience and I am hopeful. But nothing starts out as HexMC baseline on a new program, if they haven’t used it before. So, they’re always competing against baseline technology which might be aluminum or titanium. And then there are others that you don't think can compete with HexMC. And in the case of the 787, we have a bit of a late start but we’ve won most of the battle that we’ve fought.. So, I am hopeful for the A350 that will start to convince Airbus the benefits of the HexMC. And we’re starting to send money to prove that part.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Okay thanks and on the tooling, anything with Hex tool?

David E. Berges

No dramatic progress from where we were last time. A lot of good trials going on out there, a lot of people testing it. A lot of people doing prototype. We’re hopeful for some incremental sales from that product line.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Okay and last item is, your customer for the uranium enrichment centrifuges had a press release yesterday about things ramping up. Can you give us an update on how that program and contract are looking for Hexcel.

David E. Berges

Still looks to be exactly what we negotiated in the initial contract with them.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Which means the bulk of the revenue doesn’t really begin until 2010. Is that correct?

Wayne C. Pensky

Yes. Steve, you'll see sales and starting in 2009 - I guess 2010 will be a bigger year than ’09, but we’ll see steady sales in 2009.

Steven Levenson – Stifel Nicolaus & Company, Inc.

Great. Thanks very much.

David E. Berges

Sure.

Operator

And we’ll take our next question from Cristina Fernandez with UBS.

Cristina Fernandez – UBS

Hi, good morning.

Unidentified Corporate Participant

Good morning, Kristina.

Cristina Fernandez – UBS

For 2009 your cash flow guidance to be neutral, what are assuming for working capital? And then as you look out after 2009, at what point do you think free cash flow can turn positive?

David E. Berges

Cristina, with respect to 2009 we haven’t got into any of the – we’ll get into details and the guidance in December when you get into 2009. We are expecting some modest growth but we’ll get more into that in December.

With respect to becoming positive cash flow of significance, it really will just depend on how quickly the A350 ramps up and how much money we spend there.

Cristina Fernandez – UBS

Okay, and then on your hedges, where are you hedged against the euro for 2009 and ’10 and at what rate?

David E. Berges

Yes, for 2009, we’re probably about half hedged and it’s roughly speaking is probably in the low 140s and just a small amount into 2010

Cristina Fernandez – UBS

Okay, thanks.

Operator

And we’ll take our next question from Al Kaschalk with Wedbush Morgan.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Good morning guys.

David E. Berges

Hey, Al.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Dave, I realize you may not want to answer specifics on this question, and given what’s going on or what you may not have clarity on Boeing, but where are you at in terms of personnel or idling some of the facilities or potentially going forward, given what you know today?

David E. Berges

Well, the plants that ship directly to Boeing have had pretty significant temporary layoffs that took place very soon after the strike started. It’s expanded a bit since then. We, obviously, have done some of the easy things, cut back on overtime and minimized expediting freight charges. So far we’re pretty comfortable with how we’ve lined up. I’m hopeful that the talks that are restarting Thursday lead to some quick results here, but we’ll do what we need to do to adjust as best we can.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Secondly, on gross margins, and I realize it was asked earlier, but I think startup costs – the drag has dropped from, if I recall correctly, 200 basis points, or accountability now down to 120. Where do you see that over the near term? Does that get cut in half again in Q4, or is it because the volume’s maybe slowing here that maybe that ramp down isn’t as successful in the next quarter or two?

David E. Berges

I would expect it to likely be in the neighborhood of 100 basis points for a couple of more quarters. We’ve got the additional startup of China, which we didn’t really have in the first half. We’ll have that followed by work on the Colorado facility. Right now, in two of the prepreg plants in Europe were awaiting qualification approvals on a number of key materials. So, we ran pretty strong in the second quarter and now there’s a little bit of an idling while we await the qualifications. So, by the time we’re done with five new plants, I think you’ll see some pretty nice results. But, in the meantime, we do expect to continue year-over-year pressure. At least until we get to the second quarter, where we’ve got the easier comparisons.

Al Kaschalk – Wedbush Morgan Securities, Inc.

And, clarification on the capital expenditures. Did I sense that the number you’ve kept to, 175, there’s probably some flexibility? And that, given if we get a little bit longer strike on Boeing, in terms of what you plan to do? Or is it really on the balance of the 175 that’s not spent yet you really have allocated and plan to spend? Could you just touch on that a little bit?

David E. Berges

Well, the 175 is fully committed. There’s not, you know, any modification we’d do with that. We’ve got equipment that’s coming, and that we need to get up and running, and start producing revenues. So, really not any chance of changing the 2008 outlook.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Okay, and then finally, I was hoping you could give a little bit more color on the wind business, and visibility on your customers. And, specifically, maybe if possible, a geographic breakdown on what you did see in Q3, and if that plans to change going forward. Namely, U.S. installations versus European.

David E. Berges

Well, remember, we’re selling to people who are making blades. And, to date, or at least until last year, almost all of the blades for our customers were made in Europe. So, we manufacture and Europe, ship to European blade making factories, and then our customers ship turbines to elsewhere in Europe, U.S., Canada, Asia. So, our sales and our production was all in Europe. In the last two years both Vestas and Gamesa have built blade making facilities in the U.S. and in China. Our manufacturing is still in Europe, so some of our materials were being exported to the U.S. or exported to Asia, but most is still in Europe. As our planet comes up in China, we’ll obviously be supplying China from China, and the same will be true in the U.S.

Al Kaschalk – Wedbush Morgan Securities, Inc.

So that could, technically, help margins in that segment? Or should?

David E. Berges

Well, I think – I always expect that increased volume would give us some increased leverage. But, all of these factors are done in concert with our customer, and factor in transportation costs and the like. So, we work pretty closely with our customers, and I wouldn’t expect any big margin swings because of the location of production.

Al Kaschalk – Wedbush Morgan Securities, Inc.

Thanks.

Operator

And, we’ll take our next question from John McNulty with Credit Suisse.

Matt Curtis – Credit Suisse

Yes, good morning, this is actually Matt Curtis sitting in for John.

David E. Berges

Good morning.

Matt Curtis – Credit Suisse

Hi, my first question is on your space and defense platform. You said that part of the growth you saw was being driven by a range of U.S. military programs. Which programs have really been driving your military business?

David E. Berges

I wouldn’t point to any individual program. The across the board helicopter demand, both civil and military, both U.S. and Europe, has been driving it the most in the last, I’d say, two years, maybe three years. Recently the F22 and some of the start-up for joint strike fighters starting to show up, and as I said in the last three quarters we have some incremental helicopter blade programs, some related to outsourcing by our customers that gave us a bit of a step function in our run rates in space and defense. So, it’s mostly helicopter programs.

Matt Curtis – Credit Suisse

Okay. For the JSF program, it seems like basically that’s just starting to ramp up now, when do you expect to see sort of a size that’ll ramp up that people have been waiting for, for awhile?

David E. Berges

I would always take the long on anybody’s bet on that, the way it’s been going. I would say in a couple of years, which start to register.

Matt Curtis – Credit Suisse

Okay. You’ve also spoke that the space and defense business can historically, has been a little bit lumpy at times, has any lumpiness results in some of your sales, maybe hitting in the third quarter that you thought might have come in the fourth quarter?

David E. Berges

I don’t think there is anything in particular in the third quarter that seemed out of whack, we had a very strong four quarters in a row. I think the only difference that I point to is that we did have a tooling revenue lump in the fourth quarter of last year. We might even have to disclose it Wayne, could we?

Wayne C. Pensky

Yes, I think that’s great.

David E. Berges

Which was?

Wayne C. Pensky

$5 or $6 million.

David E. Berges

So, we’ve got that comparison and then mostly its helicopter blade programs, we will have lapse, so. The historical 8% to 10% growth seems like a pretty good proxy; just this year was different because of the incremental programs.

Matt Curtis – Credit Suisse

Okay, great! Thank you.

David E. Berges

I think, you know one other one that occurs to me is the A400M, which is obviously been delayed or being delayed, we have some pretty significant sales to A400M through recent quarters as a number of major components where manufactured in a batch in some cases, re-manufactured with materials that weren’t originally designed, so we had a pretty good run of A400M sales this year that we would expect to see slow going forward.

Matt Curtis – Credit Suisse

Okay, thanks.

Operator

We will take our next question from Karl Oehlschlaeger with Macquarie Capital. I’m sorry your line is open.

Karl Oehlschlaeger – Macquarie Research Equities

Sorry about that. Good morning. Dave you spoke about the step function in the space and defense business, to follow-up in the last question, that step function is something that’s going to continue to go on, going forward, where it’s not like it’s they’re going to go back from outsourcing to you guys?

David E. Berges

Yes, I don’t think so. I think we just have sort of a new level from which to have our growth going forward. I don’t currently envision it, you know, moving up or down dramatically from this new base line.

Karl Oehlschlaeger – Macquarie Research Equities

Okay. And in one of the things…just sort of follow up on the question about come 2010, you know exactly how it’s going to play out, but you’ve also previously said that sort of the mid-teen margin would be something that you be looking at in 2010, but more recently given what’s happened with their facts and commodity cost, I guess that, that was going to look a little bit more difficult, how does that sound now with our facts in commodity prices sort of moderating?

David E. Berges

Well, I don’t we’re ready to get 2010 guidance much less 2008 guidance, but you know, I am encouraged that oil is you know, come back down and hopefully acryl and nitro would come down in coming quarters. Freight and resins generally are tied to oil, so we’re encouraged that that craziness seems to be settling out.

The dollar seems to be strengthening, so we’re encouraged by that and as I said the PTC. On the other hand we’ve got live ore, who knows where that’s going to end up, but that’s definitely bit of a hurt and program delays like 787, A400M are certainly worse than what we saw before.

I think, you know the FX adjustment year-to-date, I believe is about a 110 bases points and you know, that’s real and I don’t know how we get that back. And then you have to think about the start-up cost, I think, year-to-date we’re about 140 bases points. So adjusting for those two we'd be at a 30.5 so, from a 13.5, 15 doesn’t look too, too terrible. Too far to go if we can get the growth, but assuming that FX doesn’t go back to where it was, you know we be off by a 110 bases points if nothing else changed.

So, you know we still believe that we should be in the mid-teens. We still aspire to be in mid-teens to still hope to find a way to get there.

Karl Oehlschlaeger – Macquarie Research Equities

Okay, and then you spoke about the difference between the wide bodies, the narrow bodies and how that mix is going to benefit you going forward. Can you talk about the magnitude? How much more content you have on the wide body versus the narrow body, sort of in general?

David E. Berges

We might give a little more on that in upcoming investor meetings and we have disclosed the 787 as a million and a half and we have disclosed that the A380 north of 3 million. There’ve been some speculations of the A350, which is out of ways of being a pretty big number in 3 or 4 million range; we haven’t given a number yet.

And if you were to go back two or three years and do some backwards calculation on what our average sales per airplane built was, you’d see we used to average half a million dollars. So you’re talking about a pretty significant multiple that the newer wide bodies versus the older narrow bodies. And we’ll have to see if we can find a way to give you a better color on that in the future. But it’s a multiple, it’s not a percentage.

Karl Oehlschlaeger – Macquarie Research Equities

Okay. Alright, that’s it. Thank you.

David E. Berges

Sure.

Operator

We will take our next question from Nigel Coe of Deutsche Bank.

Nigel Coe – Deutsche Bank Securities

Hi, Good morning.

David E. Berges

Morning, Nigel.

Nigel Coe – Deutsche Bank Securities

So, I take it – you said the Boeing strike’s about a penny a week. Did you actually give the actual impact on the 3Q numbers?

David E. Berges

No, we didn’t. And it wasn’t as big a hit just because it only affected a couple plants, which we were able to downsize pretty quickly. So it’s probably inside that penny a week with some of that cost carrying over into the fourth quarter.

Nigel Coe – Deutsche Bank Securities

Okay. And then secondly on the SG&A, 8 % is a great number, 8% of sales. It was about 8.4 last quarter. Are we transitioning to a new plateau in SG&A?

David E. Berges

Well as a percent of sales I would expect it to continue to get better as long as we grow top line. I don’t mean that we won’t add any SG&A but the fact is we’ve really zeroed in on a couple of key markets, really focused down. It’s part of what all the restructuring and reorganization was in the last two years. So I guess the answer is yes, I wouldn’t expect to see double digit SG&A as a percent of sales as long as our sales continue to grow. I’d hope that it will continue to improve.

Nigel Coe – Deutsche Bank Securities

That’s pretty big. Because that’s two points lower than it was in 2006.

David E. Berges

Well, 2006 we had three or four business units, and we were weaving Kevlar for people and selling to 500 electronics customers to get $50 million of sales. So we’re very focused, now. So you should expect it to be lower.

Nigel Coe – Deutsche Bank Securities

Okay. And then on CapEx, there’s been a couple of questions on this already, but 175 in 2008— if the environment is as bad as we think it is in 2009, and all of a sudden the backlog starts to erode a little bit, where could that CapEx number go? I mean it has been significantly below $100 million in the past, close to $50 million. Could it get down to those kind of levels, or do the programs you’re working on keep it at–still these high levels?

David E. Berges

Well, you’d have to give me some specifics. I mean if you had said Airbus canceled the A-350, we’d do something pretty radical, maybe. If USEC canceled the uranium enrichment program, if Vesta said they’re going to shut down their China or U.S. blade-making plants, all those things would require some adjustment.

Otherwise, the global economy and revenue passenger miles are indicators that we keep an eye on, but our customers’ schedules and built rates are what we have to support, and have capacity for. So I don’t see 2009 turning bad. There’s a question of what ‘10, ‘11 and ‘12 will look like, and hopefully we’ll be able to adjust as we go.

Nigel Coe – Deutsche Bank Securities

Well let’s say 2010 production went down 20 % of Boeing Airbus. Is there much slack in that CapEx budget?

David E. Berges

At 20 %? Narrow body? Wide body? 787? A-350?

Nigel Coe – Deutsche Bank Securities

Let’s say narrow body.

David E. Berges

Narrow body? I don’t know if we’d do much of anything.

Nigel Coe – Deutsche Bank Securities

Okay. And then just a quick one for Wayne. When do we start to see D & A starting to ramp up?

Wayne C. Pensky

Nigel, you’ll start seeing it next year even more so than next year.

Nigel Coe – Deutsche Bank Securities

Okay, thanks.

Operator

And moving on to our last question from Michael Loo from State (inaudible 44:20).

[Michael Loo]

Hi, thank you for taking my question. You’ve seen the penny a week impact related to Boeing and the immediate actions that were taken. If the strike is unresolved by year end, let’s say it extends into 2009, how much would the impact be? Or do you believe that you would be able to hold to the penny a week? And if so could you highlight what additional actions above and beyond what you’ve taken already?

David E. Berges

Jeez, Michael, I don’t want to be thinking about this going past the end of the year! We’ll do what we need to do. We did that after September 11th, and we’ll deal with that if the time comes.

I think the infrastructure that we have in place that has been scrambling for two years to catch up with demand is just to the point where we’re operating in a normal, take a deep breath, kind of mode. I don’t really see–I don’t have any desire to take out significant amounts of fixed costs for a temporary problem when I know the long term prospects are still so strong.

[Michael Loo]

I understand. You also mentioned the wind business was on track for the mid-teens growth. But then based on the current and near-term opportunities do you believe growth can accelerate above and beyond the high teens level in the near-term? In other words, are you in discussions with later stage negotiations with—

David E. Berges

I do think it can grow better. I think 15 % year over year growth is the worst year that we had. We have been limited by the industrial capacities, the capacity of bearings or gear boxes or blade manufacturers.

So to the extent everybody’s added capacity to grow, if all suppliers can keep up, I do think that the growth could get better. I am very encouraged that there are new blade molds now available in China and the U.S. so that our big prepreg using customers are not trying to compete by shipping out of Europe. So I do think growth could get better in that market.

[Michael Loo]

Okay. And also yesterday the congress had cancelled two commercial imagery satellite programs. Was Hexcel involved in either of those programs?

David E. Berges

If we were, I probably couldn’t disclose it. But I wouldn’t say that it would cause me to change my guidance–that I haven’t given.

[Michael Loo]

Thank you.

Operator

And ladies and gentlemen that does conclude the Question and Answer session. That also concludes today’s conference. Thank you for your participation and have a wonderful day.

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Source: Hexcel Corporation, Q3 2008 Earnings Call Transcript

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