Hexcel Corporation (HXL) Q2 2009 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to this Hexcel Corporation Second Quarter 2009 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.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2009 Second Quarter Earnings conference call on July 28, 2009. 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 statement today. Such factors are detailed in the Company's SEC filings, 2008 10-K and last night's press release and the filing of the second quarter 10-Q. 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 Dave Berges, Hexcel's Chairman and CEO and Michael Bacal, our Communications and Investors Relations Manager. The purpose of the call is to review our 2009 second quarter results detailed in our press release issued last night. First, Dave will cover the markets, then I'll cover the financials, then Dave will return with some final comments.

Thanks Wayne. The second quarter revenues were about 23% lower than last year, 19% lower in constant currency, due to a broad-based decline in our commercial aerospace market coupled with recent weakness in our wind energy business. But operational improvements, along with good cost controls and some exchange help, enabled us to increase adjusted operating income margins by 70 basis points over last year despite the dramatically lower level of sales. The lower sales volume and our focus on cash enabled us to generate $47 million of free cash flow for the quarter. And as a result, we're now 22 million positive free cash flow year-to-date, 114 million better than last year at the same time. Adjusted net income of $17.9 million was down only $2.4 million despite a $64 million sales drop. As usual, let me first cover our markets using constant dollars to describe sales trends. While the dollar lost significant ground to the Euro in the second quarter as compared to the first quarter, it's still 13% stronger than last year's comparable period causing some compression in our parent sales, but helping our margins. Commercial aerospace sales were about $138 million from the quarter, down almost 28% in constant dollars from last year. While there've been few near-term build rate changes announced by large OEMs, the inventory destocking reported by many other suppliers also hit Hexcel. This was more pronounced for Airbus programs due to the anticipation of higher build rates last year and the resultant lag effect in inventory corrections. Beyond Boeing and Airbus, our other commercial aerospace sub-segment dropped over 40% from last year and 30% from the first quarter. This sub-segment has grown over 25% CAGR for five years in a row and last year represented $200 million in sales. The second quarter run rate was closer to $110 million sales. We still believe this sector is vulnerable to further declines over the course of the year. Finally, revenues from new programs were slightly higher sequentially for the second quarter in a row, but down year-over-year, due primarily to the 787 delays. This grouping includes sales for the A380, A350, Boeing 787 and now the 747-8, and have accounted for about 10 to 15% of our commercial aerospace sales for the last few quarters. Sales to space and defense were 74.7 million for the quarter, up about 3% in constant currency. Rotorcraft programs, including the B-22, constituted over half of the space and defense sales again this quarter and continued to be the growth driver for this market. Sales for our industrial markets of $64.8 million were down nearly 16% versus the second quarter of 2008 on a constant currency basis, though the as-reported sales were down almost 25% due to the strength of the dollar. Our glass prepreg sales for wind turbine blades are predominantly in Europe historically and were uncharacteristically down on both an as-reported and a constant- currency basis. Year-to-date sales to wind are now flat versus 2008 on a constant currency basis after a double-digit decline in the second quarter. Financial issues by end installers seems to be the problem, particularly in Europe. The estimated installed megawatts in Europe were down 18% for the first half of the year as compared to last year, and the order intake is well off the expected pace. U.S. government guidelines for 30% wind-related investment cash grants were finally favorably clarified in July, and they expect to see a gradual resumption activity here in the States. China demand and stimulus incentives are sharply up. While the interest in clean, renewable, domestically produced energy is still very high worldwide, without government help, credit availability is needed for the return to growth that the underlying demand suggests. Sales to the rest of the industrial market were down slightly on the year, as weakness in more mature markets like auto and recreation more than offset the growth we received from sales for uranium enrichment tubes. As you know, USEC announced this morning that it was denied a loan guarantee from the Department of Energy for the American Centrifuge Project. It's too early to determine the outcome or impact on Hexcel, but just to further calibrate you, our sales year-to-date on this program have been about $2 million a month, or 2% of our total sales. Now, let me turn the call back to Wayne for some additional comments on our financial performance.

Thanks, Dave. Gross margin of about $63 million for the quarter represented 22.8% of sales, an increase from the 21.2% gross margin for the second quarter of 2008, but down from the first quarter of 2009. As compared to last year, improved product mix, execution of factory productivity initiatives, incremental improvements at our new European facilities, and lower freight costs helped offset the impact of lower sales volume. A stronger dollar and lower commodity costs also contributed, but significantly less than in the first quarter. Selling, general and administrative expenses remained well controlled. They were down $4.7 million or 15.7% to $25.3 million for the quarter, aided by the weaker Euro and pound. Our effective tax rate for the second quarter was 26%. This reflects the release of $1.1 million of FIN 48 reserves for uncertain tax positions as a result of the European audit settlement. Excluding this benefit, our year-to-date effective tax rate is 31.7%, which is in the range of our expected run rate. As you may recall, on last year's quarter, we had one-time tax benefits, which added $11 million or $0.11 to net income per share to last year's second quarter. In May, we refinanced our senior secured credit facility. The new $300 million facility includes $175 million of term loans expiring in 2014 and a $125 million revolving loan expiring in 2013. While we are quite pleased with the new facility, the rates reflect current market rates, which are higher than those under our old facility. Overall, at the current borrowing levels and rates, the new facility should add less than $2 million of interest expense per quarter. We also took a $1.7 million charge to interest expense this quarter for the accelerated amortization of deferred financing costs as a result of the repayment of the old facility. We define free cash flow as net cash provided by operating activities less capital expenditures. After generating $47 million of free cash flow this quarter, our year-to-date free cash flow is $22 million, well ahead of our original plan. As sales volumes and the near-term growth prospects have declined, we have successfully put increased emphasis on cash flow generation. A big driver in this quarter's cash was the reduction in accounts receivable and our concerted efforts to reduce inventories. In the first half of 2009, our receivables and inventories generated $37 million of cash as compared to the use of $64 million of cash in the first half of 2008. Also, we spent $38 million more in capital expenditures in the first half of last year as compared to this year. Net debt decreased by $12.3 million for the first half of the year to $331 million. The primary difference between the changed net debt and the free cash flow is the $10 million of issuance costs related to the new senior secured credit facility. We ended the quarter with about $73 million in cash on hand, and we had no amounts outstanding under our new $125 million revolver facility. So after considering the outstanding letters of credit, we had about $185 million of cash in available borrowings at the end of the quarter. Now, let me turn the call back to Dave for some final comments.

The magnitude of the aerospace inventory destocking and the slowdown in wind energy sales put more pressure on sales in the quarter than we'd expected, particularly in Europe. We don't expect this to moderate as we go into the summer holiday period while sales related to business jets are likely to further decline. We do expect our sales to large commercial aircraft to stabilize by the fourth quarter as the inventory correction subsides, barring any additional line rate announcements. Sales to wind turbines, however, is likely to take a few quarters to return to growth. In the meantime, in addition to ongoing productivity initiatives, we're taking a more aggressive approach to temporary plant shutdowns this summer to be certain we stay aligned with the near-term downdraft in sales. While this may make for a more painful third quarter, it will allow us to further manage down our inventories, yet remain well positioned to support the subsequent quarters when we expect a modest step up in aerospace sales, post destocking, and the return to growth of the wind market if credit markets continue to thaw. In fact, we are now raising our free cash flow target for the year to over $40 million. The USEC announcement is a reminder that despite having the best products, good cost control and a great secular penetration story, the global markets can't thrive without the support of credit markets. We remain focused on managing the things within our power to control such as costs and cash. We are encouraged that we, unlike many, can look forward to the coming payoff for the relentless transition to composite intensive aircraft and our role in the global push for clean energy. Now we'd be happy to take your questions.

Thank you. (Operator Instructions) All right, we'll take our first question from Howard Rubel with Jefferies.

Just two questions. One, Dave, CapEx was 47 million in the first half. It sounds like the second half will be a little slower. Could you give a sense of where you're going to be, and will that be a new run rate for a while?

We said we're still going to be under 100. We haven't defined our second half yet internally or externally. We are clearly redirecting our focus from what was a frantic capacity expansion mode to what can we do to increase productivity mode. So we're reviewing a number of projects to look at both quick payback projects that were perhaps sacrificed in recent years as we were ramping up and had some covenant problems and also a debottlenecking project. So we're starting to realize that, in the lull, if we can improve the capital efficiency, particularly on carbon fiber lines, the payback will come for years and years with respect to cash flow. So, we're in the midst of reassessment. I am sure it will still stay under 100. I think we've said we'll still stay under 125 next year. But in all likelihood, particularly if the USEC project ends up being delayed or entirely stopped, we would expect that we'll come back to you with some lower future spend rates.

Just to follow up, I think, two years ago, you had this unexpected drop or this fairly rapid drop. Your gross margins would not have been as good as they are today. So, I guess I'm going to give you a little bit of -- I'm going to give you some credit for that, which is pretty good. But that's yesterday, and so going forward you talk about debottlenecking and thinking a little bit more carefully about how to improve productivity at these rates going forward. I mean, what sort of margins or gross margins do you think are achievable?

Seems I get that question every quarter, and I should have a quick answer for you.

But you're not going to tell me, right?

Well, that's the short answer. But let me fill it in a little bit. It doesn't help a lot to go back and reset the clock. I don't know that anybody a year ago could have predicted so many things could go wrong in the global economy. But I do appreciate that we managed to hold margins despite opening five new plants. We've improved our absolute performance of the plants. But when you think about the production that we are getting out of these five new plants, clearly, if we could redo all of this, we probably would have been starting those plants up this year or next year instead of last year and the year before. So, if you took the sales volume that came out of those plants and said we could absorb it in all of the existing plants and never have spent that fixed costs, we'd probably be a couple of hundred basis points better on the margin line. So, that's not a direct answer to your question. But the fact is those plants will be a bit of a drag on us, it's just a fact of life, until volumes get up to the point where they're running at full capacity, or, in some cases, the additional lines for like wind and prepreg for the A350 are there. So, clearly, there is some upside left there. I am encouraged that we were able to hold margins with this rapid decline. I think, sequentially, we've done a real good job of lowering factory fixed overhead, SG&A and RNT. On the other hand, we cannot stop supporting A350, 787 that aren't really contributing big numbers to sales yet. We have efforts going at almost every airplane in military and commercial maker in the world about their next aircraft. We can't stop that. We haven't slowed the launch of Hexcel Academy, where we're developing our next generation of leaders. So it's about being bifocal and trying to manage the near term without sacrificing the long term.

Thank you very much.

Sure.

Howard, you need to cheer up.

Oh, I am all right. Thanks, Wayne.

The next question will come from Steve Levenson with Stifel Nicolaus.

Thanks. Good morning, everybody.

Hi, Steve.

On the material that was targeted for USEC, is that something that was in production? Will you be able to resell that material to another customer? And if that's the case, how much of a pricing differential might there be?

Well, it's too early to say much about that, Steve, because we don't know for sure whether other financing will be available or what -- if there is an ending -- or what it might look like. But, essentially, that was a contract to sell our high-end intermediate modulus carbon fiber, which, as you know, is fungible and is essentially the same asset we need to produce for the A350 and other military programs like Joint Strike Fighter. So, if, in the extreme case, there were a sudden stop on that, it's a matter of finding -- or of the demand for such fiber growing back into using it. And otherwise, we'd likely need to sell it into industrial markets, just like when any other new line comes on. So, the new line is up and running and is supporting USEC as well as some other programs, and I would see it as a delay in the demand, which would reduce our capital spending and perhaps put a little bit of margin pressure on our mix for a number of quarters. But again, to calibrate you, it's not a big, big number.

Okay, that's good. Thanks. Can you give us updates on China and Colorado, and what's going on?

The China plant is up and running, and has a number of qualifications and doing well. Colorado is on or ahead of schedule. We're actually fairly well-staffed now and in training and making trial runs, and we'll start working on qualifications yet this quarter -- in the third quarter.

Very good. Thanks very much.

Sure.

Our next question will come from Noah Poponak with Goldman Sachs.

Hi, good morning.

Good morning, Noah.

So you guys have said in the press release that the minus-five sales number you had talked about is clearly not happening. Can you give us any direction at all on what the second half can look like? It kind of sounds like third quarter may be down slightly sequentially from the second, and then fourth quarter higher than second. Is that fair, or is there any direction you can give us?

Well, I can you a couple of pieces, but as always, there are a couple of unknowns. I'll give you some thoughts on it, but you kind of need to pick it, as do we. In the case of regional and business jets, we're kind of at a run rate that looks to be less than 120, and I don't know where that's going, but I'd be real surprised if that comes back any time soon. So, I don't see that getting stronger. In fact, I still think it could drift a little further. It's important, if you're trying to model us, that you go back and look at when the comps start to change in each of these markets. In the case of our other commercial, the drop really was this quarter -- a little bit last quarter, pretty serious this quarter. Whereas commercial aerospace, we had Boeing strike in the fourth quarter of last year, Airbus started to trend down in the fourth quarter of last year, and then inventory destocking hit us pretty hard in both the first and second quarter this year. So we're approaching a bit of a lapping in commercial aerospace. Furthermore, this inventory destocking -- I'd have been a little uncomfortable talking about it because it's so hard to quantify it. But having seen that almost every other aerospace supplier said the same thing and had numbers that look similar, I guess one must presume that it's a fact. We did try to find a way to just do some back of the envelope calculations that you could do yourself, if you haven't already. If we look at our model of what we would expect to ship in a steady state mode, with the Boeing and Airbus current projected line rates -- if you did that math, you'd say that we were over- shipping by, in the neighborhood of 10% the second half of last year. That is, we were anticipating an Airbus step up, and suppliers were calling for more materials, and the 787 was on whatever track it was on. And, conversely, the first half of this year, or at least the second quarter, it looks to be in the neighborhood of 10% below what is the steady state run rate. So, if that crude math gives you any sort of calibration, it would say -- and again, I am talking about the large commercial jets. So our large commercial jets, excluding the other commercial aerospace. If line rates stay where people say they're going to be, we would expect that we are under shipping by about 10%, and we ought to be able to get some of that back. And I would think and hope that we'd start seeing some of that in the fourth quarter. Now, we've got a 777 line rate reduction, going from seven a month to five a month next summer. We are typically six months ahead, so that'd be a little bit of a hurt starting in January. On the other hand, one has to think that the A380 and 787 deliveries do start to at least show up on the radar, and could offset that. So I am hopeful that, unless there are further line rate reductions, that we are looking at the bottom of the large commercial jet sales. Now, I know a lot of you think that build rates are going down, but I remind you that if they do go down next year, it's likely to be in the A320, 737 size, despite both Boeing and Airbus insisting that they think that looks pretty good for next year. And the decline there is much less painful to us than delays on new programs. So that's sort of how I look at commercial aerospace right now. And then wind energy is really about credit markets and how soon the recovery goes. I think the recovery in the U.S. could go pretty quickly, assuming financing is there. And I think we'd start seeing growth again in the U.S. Our customer, of course, has better share in Europe, so we're keeping a close eye on Europe. Europe seems to be struggling with government aggressiveness and financing. So there the step down clearly took place this quarter. The third quarter last year, you might recall, was a very strong quarter; it was the strongest of the year, despite being in Europe, on wind. So I'm expecting wind will be a little disappointing for a number of quarters. But it's really credit market dependant. So, I guess a long-winded answer. The third quarter, as we talked about -- plant shutdowns, inventory correction, wind energy. We expect not a very pretty third quarter. And I really think the fourth quarter, depending on what happens with wind, could look a little bit like this quarter.

Okay. That's actually very helpful. I really appreciate it. You sort of alluded to what appears to be our consensus view of narrow body rates. I wonder if you might give us your own personal view of what's going to happen there.

I think I always decline on this, because I've got customers listening and reading. I will say I am encouraged at the fight Boeing is putting up with all of you guys on what -- why they think the rates are okay for next year. They've taken a pretty strong position on it, and I am encouraged by that. EADS released this morning or today, and had their call. I'm encouraged by what I heard and read there, though, I am still, sort of, dissecting it. I heard or read that deferrals were more active in the beginning of the first half, and that they don't see a panic in the market. They feel customer -- the portfolio for 2010 has grown stronger. More stable airlines due to receive planes. The A350 is on track. The A400 launch -- customers have reiterated support and agreed to extending negotiations. That's great news. So I can only tell you what my customers say.

Okay. Thanks a lot guys.

Yes.

Our next question will come from John McNulty with Credit Suisse.

Yeah, good morning. Just a couple of questions on the USEC contract. In terms of the outlook for 2010, was that -- was the run rate for revenues supposed to be somewhere in the 30 to $40 million range? Is that about right?

That's the neighborhood. We said that it was a three-year contract worth 100 million, and it had a slow start in 2009. So that's as good a guess as any.

Okay. And then, just, considering that you had to put some capital to work to actually prepare for the contract, was there anything in terms of the contracts with USEC where if something were to go wrong, you'd at least get something recouped back?

I have said a number of times that we recognized the risk associated with this contract when we began discussions a number of years ago and developed what we thought was an appropriate and fair contract. And beyond that, I'd rather not comment for obvious reasons.

Okay, thanks a lot.

Our next question will come from Cristina Fernandez with UBS.

Hi, good morning. My question is on SG&A and RNT. You did a good job by controlling those this quarter. How shall we think about those as we go into the second half and into 2010? Are these lower levels sustainable or if some of that's temporary and could come back?

I think you always have to look at seasonality, and you should be looking at absolute numbers. I often get comments on how the percentages look. I don't think of SG&A, RNT or, for that matter, factory fixed overhead as things that should track with sales. They should be fixed when sales are growing and variable when they are going down. At least that's how we try to behave. There's always some seasonality with respect to variable pay, payouts and such. So if you just look at the seasonality, I don't have anything on the top of my head that should say SG&A or RNT are expected to step up dramatically over the coming quarters or if someone thinks they are, they haven't cleared it through me yet.

Okay. And then on FX, can you quantify what the benefit was in the quarter and is it fair to say that if the Euro stays where it is now that this is not going to be much of a help in the second half of the year?

I think the benefit was in the neighborhood of half of what it was last quarter, and I believe the big switch last year happened in December. So we will have lacked the sudden -- there was a pretty sudden surge in the strength of the dollar that began in the fourth quarter of last year. So third quarter probably, if it stays where it is, is a little bit of a benefit and the fourth quarter, it's a wash, maybe even goes under. I don't know. Wayne, do you have any...?

Probably nothing else to add. The second quarter of last year was the peak. I think the fourth quarter of last year kind of looks like most of this year has.

Okay. Thank you.

Moving on, we'll hear from KeyBanc's Mike Sison.

Hey, good morning, everyone.

Good morning.

In terms of the second half of the year, how much cost savings do you expect to generate in anticipation of your new programs as volumes have weakened here?

As I said, our main focus right now, until we get better visibility on what's going to happen on wind next year, our main focus right now is maximizing our plant shutdown schedule for the summer, for the third quarter. So it's fairly common in the U.S. that we have annual maintenance and customer alignment shutdowns. But it's not as common in Europe. Our biggest declines, from a sales perspective, are in Europe. If you think about it, EADS, this morning, acknowledged that they've got an inventory issue. They, of course, were the ones who had ramp-up schedules in place as we went into the end of the year, and now they've been pulled back. So we've got slack in the rope that has to be taken up, particularly at Airbus and EADS. Secondly, the wind hit is particularly in Europe. So, we've taken out temps and done those kind of things. But as those of you who have been in the business know, taking out permanents is a very expensive process in Europe, and you don't want to do it if you think business is going to stabilize or return at all. So our current strategy is to take some serious shutdowns in Europe. And many of the regions have some government assistance for a temporary shutdown. So that's our focus. When we get more clarity in September/October as to what the run rate is going to be for 2010, we'll look at more major realignments.

Okay. And then, space and defense, that business has held up fairly well relative to others in the second quarter. Can you give us a sense of what the outlook looks like for the second half and maybe into 2010? And then, on the Joint Strike Fighter, there's been a little bit more of a buzz there. What's the potential do you see in that business or that platform maybe in 2010 and beyond?

I often get asked questions platform by platform. But the fact of the matter is, and history would support me on this, that the breadth of our participation in over 100 active programs sort of mix all the ins and outs of various programs not really do much to our sales. Our sales sort of have this steady growth from the secular penetration because most of what is being built are in fewer numbers than were built 10, 20, 30 years ago, but they're more composite intensive. So we're very well spread amongst U.S., and Europe, the military programs. Our carbon fiber is the fiber of choice for most Western world military programs. So, even when we don't win the prepreg, we typically ship the carbon. So, for us, we sort of look at if something is getting canceled or delayed or pushed out, what's taking its place? So on the plus side, we've got A400 potential coming along. And while there's not a lot of buzz about how quickly that'll be successful, it's a fairly large plane, and it has an all carbon composite wing as well as propellers. So it is a significant program for us, and even in development we're shipping materials to that. Helicopters, as we've said, the demand is still pretty strong and replacement blades are strong and reblading programs. On the offset -- and the Joint Strike Fighter is starting to be talked about again. But it's sort of in place of the F-22. The F-22's a good program for us. So often times a program slows down, but the money goes to another program and almost every new program has more composites than the past. So this sort of steady, single-digit growth rate of space and defense is because of that, it's not because of any sudden what-happened-in-Congress-last-week discussion.

Right. And you think that low single digits is sustainable for what you see in the future?

Based on history, yeah, if you suddenly canceled three or four programs all at once, it might take us a while to cover it back. And we always do have quarterly lumpiness as people tend to order in campaigns because of the low volumes. So, we often have little blips up and down, quarter-to-quarter, but yeah, single digit seems just the norm in that business.

Right, thank you.

Yes.

Our next question will come from Michael Lew with ThinkEquity.

Hi. And the question I had is can you tell us what the current utilization rates are for the carbon fiber lines? How many lines are currently in operation, and how many are currently shutdown?

We're not going to go into that level of detail. We have focused a lot of effort on efficiency and optimizing, now that we've got a little breathing room on capacity. We have choices of running lines and selling into industrial markets. We have moved our bias a little bit more towards implementing some of these debottlenecking projects and plans that we've been developing in RNT over the recent years but haven't had the room to implement. So, we're focusing a bit on that. As I said, we are taking a look at summer shutdowns in Europe, and that would include consideration on our plant in Spain, carbon fiber plant in Spain. So, our utilization of fiber can be 100% anytime we choose to and sell into industrial markets. Right now, we are doing cost and productivity and CapEx productivity trades to determine what is the optimum way to use the assets for the next few months?

Okay. And then with regards to the wind business, Dave, could you -- you mentioned China and the start up of the Colorado facility. How do you see the revenue distribution in a more steady state environment?

Well, wind actually doesn't have a steady state other than an upward trajectory. So, I would say there is no such thing as steady state, or at least I hope there won't be. Today, what I see is an unusual slowdown in Europe, partly credit markets, partly countries like Spain are slowing down a little bit. On the other hand, people like the U.K. are racing to catch up to get to their commitments to the EU agreements of recent times. So, Europe is a little bit of a question mark to me and for our sales to Vestas and Gamesa who typically manufactured in Europe. Now that they're building capacity in the U.S. and China, they are more likely to build in those regions than build in Europe and ship. So, we're in a bit of a transition there. In the U.S., I really do think we're going to get back to growth in the not-too-distant future, depending a little bit on financing. But, the incentives are clearly going to motivate some activity that had been in a bit of a lull, waiting to see more cards in the U.S. In China, the move to wind is massive. There is clearly some maneuvering going on by the Chinese government to get some domestic preference, which is not as helpful. On the other hand, a small share of what China has announced in the last three, four, five months; a small share is a very big number. It remains to be seen if the local startups can rise to the occasion and deal with the complexity and technology and reliability requirements of this industry as it matures. History would suggest that there would be all sorts of learning curve difficulties with new startups who tend not to use prepregs. And, finally, low cost facilities from Vestas and Gamesa and others, once established in China, will obviously end up serving all of Asia and then maybe even Australia. So, I think China will be a strong growth engine. I think the U.S. will return to a very strong growth engine, and I hope that in two, three quarters time, Europe returns to the fray.

Okay. And could you also discuss, like, the non-wind industrial sub-segment such as automotive, recreational PCs and what you might be seeing, or where you might be seeing some signs of improvement or stabilization?

Recreation, I would say over the history of Hexcel, 10 or 20 years, my guess is that if we did a deep dive on it, it would show that it stays about the same as new products replace old products. So, there's kind of a constant turn in recreation clearly moving more towards composites, particularly, and things like bikes and other such things. But it's replacing other business that has gone to Asia and isn't attractive. So, not much goes on in recreation; it's not that big a market. I don't expect a whole lot to go on it. Automotive is, I would have said a year ago, is a pretty small part of our industrial. That's before I knew what small was. Now, I would say it's a very small part of our industrial. We did have some U.S. programs and those, not surprisingly, have pretty much slowed or stopped or approaching same. We did still and do still have a niche, very high end market, in Italy and in Germany. It's a small market and Lamborghini sales, I think, are down this week. So, it's not something we talk about a lot. It's not a big hitter. We have a very large -- short of wind, our next biggest category, I'm sorry to report, is other. And if you do a deep dive on it, you find other again. So there is this churn that goes on in the other. We think, based on the sequential step downs, that it's pretty much taken the adjustment that we would have expected. We think it'll stabilize at this stage. We had hoped that the American Centrifuge Project would give us growth in the non-wind part of industrial, and that remains to be seen. But, not a lot of activity up or down in the other industrial markets.

Okay, thank you.

Next, we'll take a question from Al Kaschalk with Wedbush Morgan.

Good morning, guys.

Hi, Al.

Obviously, most of the questions have been answered, but maybe you can touch around some of the edges here on a few of these. Dave, in terms of the rate of change going into Q3, from an operations standpoint, would you characterize it as you slowed down again or have you picked up from how you've exited Q2?

I'm sorry, the rate of change of sales?

No, just in terms of volume of throughput that you foresee in Q3 across the plants, across the facilities.

Let me think about that for a second. I think aerospace is probably pretty much stabilized with the possible exception of business jets, sort of, late in the program European business jets caught into the fray. My concern about the whole other aerospace market is it seemed not to really step down until the second quarter. So, not exactly sure whether we've got a little further to go in that. We suspect that we might, and that's why we said so in the release. Wind, I think we said in the release, was -- the slowdown came mostly in the latter part of this quarter. Last time we had the call, Vestas had just released that morning, indicated their guidance for the year was the same. We didn't really know what to do with that. We still don't know exactly where it's going. But June was not a strong month. So, I think from a run rate standpoint, we ended the quarter down lower than we began the quarter, which is either an inventory correction or it's a lower run rate going into the third quarter. Everything else, well now the question on USEC, but otherwise I would expect the third quarter looks less encouraging than the second. But, again, some of these things are temporary. I think of it like a ski boat, and you are in the water and you've got slack rope. That inventory -- the boat is moving, we know the boat is moving on the commercial airplane build rates. What we don't know is how much is left in the stock, in the slack is left in the rope and how fast the boat is going to move and if we can get out. So I do think we're going start to feel better in the fourth quarter.

Can you share thoughts on, maybe it's commercial aerospace specifically, but how do you feel your inventory levels are relative to commercial aerospace.

Our inventories are good; always can be better if anybody from manufacturing is listening. But we don't have finished stock inventory. Prepreg, in particular, has to be kept in freezers, so people tend not to do that. When we talk about inventory and the supply chain, we are talking about Tier 2 and Tier 3 manufacturers who build too many tails or flaps or components. The inventory destocking that I think we're seeing is people who realize build rates are going down, trying to preserve their cash or improve their cash flows and are just looking at their inventories, realizing that they built ahead a little bit too much and so a slowing order pattern for us.

Finally, are you able to share, at least generically, have you talked internally or the folks internally have an idea of the plant shutdown scheduled for Q3?

Yes, we're spending a lot of time on that. We've -- we're reviewing plant by plant, and it's a pretty dynamic process because we're getting more information from customers looking at any demand that's coming up to try to determine how we can maximize the shutdown so that it gives us a better chance for a good running start in the fourth quarter. If it's inventory destocking we want to get it behind us, and so we're trying to work with customers and maximize the take out, particularly in Europe where we think we can get some government help for employees and reduce the cost of debt. It's not going to be as clean to take out as what you'd have on a permanent basis from a fixed cost perspective, but we also will avoid severance charges. So, that's, sort of, the activity of the day.

But did I hear correctly then or did I conclude correctly that you don't see this as further overhead reductions, but it's just really trying to get production and volumes in line with demand...?

We have steadily been reducing overhead as we talked about a little earlier on the call and particularly on the fixed -- what, quote unquote, fixed overheads in factories in SG&A and RNT, and we will continue to look at those things. But right now, what we're talking about is a significant focus on special intervention in the third quarter and doing things differently to maximize the cash and get the pain behind us when we get a better visibility on wind in Europe, in particular, we'll figure out what we need to do with respect to cost structure, if anything, next year.

Excellent. Thanks a lot.

Sure.

At this time, there are no further questions. I'd like to conclude today's teleconference. Thank you all for joining.

Thank you.