Nick Stanage – Chairman, President and CEO Wayne Pensky - SVP and CFO Michael Bacal - Manager, Communications and IR.

Myles Walton - Deutsche Bank Steve Levenson - Stifel Nicolaus Ron Epstein - Bank of America Merrill Lynch Lucy Guo - Cowen & Company Steven Cahall - RBC Capital Markets Greg Konrad - Jefferies Ken Herbert - Canaccord Genuity Michael Sison - KeyBanc Capital Markets.

Good day, and welcome to the Hexcel Corporation Fourth Quarter and Full-Year 2014 Earnings Call. Today’s conference is being recorded. Hosting today’s conference are Mr. Wayne Pensky, Chief Financial Officer; and Mr. Nick Stanage, Chairman, Chief Executive Officer and President. At this time I’d like to turn the conference over to Mr. Pensky.

Please go ahead, sir..

Great, thank you. Good morning, everyone. Welcome to Hexcel Corporation’s 2014 fourth quarter and full-year earnings conference call on January 23, 2015. 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 2013 10-K, our third 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 express permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President, and Michael Bacal, our Investor Relations Manager.

The purpose of the call is to review our 2014 fourth quarter and full-year results detailed in our press release issued yesterday. First, Nick will cover the markets; then I will cover some of the financial details. Then I’ll give it back to Nick for some final comments before we take your questions.

As a reminder, we issued preliminary 2014 results on January 12 in connection with providing our 2015 guidance. There have been no changes in amounts we provided on January 12 versus what we’re presenting today..

Thanks, Wayne. Good morning, everyone, and thank you for joining us today. As you have seen in last night’s release we delivered another strong quarter with record fourth quarter sales of about $472 million, up 12.5% in constant currency from last year.

Our operations continue to perform well, delivering fourth quarter operating income of $77 million with margins of 16.3%, up 60 basis points from last year’s period. Our diluted earnings per share of $0.54 was 17% above the fourth quarter of last year, overall strong conversion on our top line sales growth.

For the 2014 full-year, our sales were up 10.5% in constant currency from 2013. 2014s adjusted operating profitability also grew nicely to 16.8%, up 70 basis points on 2013. Adjusted diluted earnings per share was also up 17% for the year to $2.16.

As an organization we’re very proud of these results and that quarter after quarter we continue to improve and raise our margins and our expectations. Now let me turn to our markets, and as usual I’ll discuss year-over-year comparisons in constant currency.

Our sales growth this quarter was led by an almost 10% increase in Commercial Aerospace revenues over 2013, as Q4 sales totaled over $307 million. Total revenues from new Airbus and Boeing programs increased by about 25% primarily driven by the A350, which as you know had its first delivery in December and entered commercial service last week.

For the full-year, new programs increased 35% from 2013 levels. Airbus and Boeing legacy sales grew 3% for the year. This quarter we did change our definition of new Airbus and Boeing program sales and it now includes the Boeing 787, Airbus A350, the A320neo and the 737 MAX.

Contributions from the new narrow bodies are still small as these programs progress through their development phases. Sales to other Commercial Aerospace, which includes regional and business aircraft were slightly higher compared to last year’s quarter and remained at about the same level we’ve seen over the past three quarters.

For the year, sales to other Commercial Aerospace increased by more than 10% from 2013 levels, led by business jet sales. After three quarters of Space and Defense sales that were below our expectations the fourth quarter revenues were at a record $99.6 million, up over 14% versus last year and we ended 2014 in line with 2013 levels.

Rotorcraft sales led the increase, as we realized orders that had been shifted to the right from Q3, 2014 as we had communicated last quarter. Rotorcraft sales continue to account for just under 60% of our sales in Defense sales. In Industrial Markets, sales for the fourth quarter were about $65 million, up almost 25% year-over-year.

Wind Energy sales were about 30% compared to 2013 and the rest of industrial was up over 15% year-on-year. Wind Energy sales were at a comparable run rate to the past several quarters at constant currency. For the year, our total Industrial sales had a nice rebound from a weak 2013 with sales up about 21% over the prior year.

Year-to-date sales increases were across the board, including Wind Energy which was up over 25% as compared to the 2013 period. Now let me turn the call over to Wayne for some additional comments on our financials..

Thanks, Nick. Gross margin for the quarter was 27.2% of sales as compared to 26.5% in the fourth quarter of 2013, a strong result for both quarters. For 2014 and full-year gross margin was $509 million or 27.4% of sales as compared to 27.1% of sales in last year’s period.

For the year, selling, general and administrative expenses were about $149 million, up 5.4% from 2013, reflecting added infrastructure to support our growing business. Research and technology costs of $13.3 million in the quarter were up $2.9 million from the comparable 2013 period.

Year-to-date, our research and technology expenses were $48 million or up $6.2 million or nearly 15% over 2013 as we continue to invest in new product and process developments supporting our growth in productivity initiatives.

We expect 2015 research and technology expenses to be 8% to 10% higher than 2014, which put to that about the fourth quarter expense run rate. Our operating expense as a percent of sales was 16.3% this quarter. This compares to the 15.7% last year’s period.

For the full-year 2014, operating expenses as a percent of sales was 16.8%, an increase of 70 basis points from 2013’s 16.1%. Exchange rates had a nominal impact as compared to last year. For the year, our operating income leverage was 23% on the incremental sales and 23.4% if you adjust for the impact of exchange rates.

Our Composite Materials segment reported a 10.4% increase in external sales for the year and Engineered Products segment was up 11% for the year. For the full-year, the Composite Materials segment had an operating income margin of 20.8% as compared to 20.4% in 2013 and the Engineered Products margin was 15.3% in 2014 as compared to 15% for 2013.

Our Composite Materials segment is significantly more capital intensive than the Engineered Products segment, so higher operating margin is required to achieve the same returns on invested capital as Engineered Products. Both segments were in line with our expectations.

Our effective tax rate for the quarter was 29.9%, up slightly from last year’s effective rate of 28.7%. Our fourth quarter rate benefited from the extension in December of the U.S R&D tax credits for 2014 which added a penny to our earnings. Excluding this benefit, our fourth quarter effective rate would have been 30.9%.

For the full-year, our effective tax rate was 30% as compared to 28.9% in 2013. If you exclude the impact of discrete items, our adjusted effective tax rates for 2014 and 2013 would have been 30.6% and 30.7% respectively and our guidance for 2015 is an estimated tax rate of 30.5%.

For 2014, the free cash flow was $58 million compared to $78 million in 2013, primarily reflecting higher capital expenditures, partially offset by higher earnings. As we previously announced in December, we purchased a 50% interest in a U.K.

company who is a leading manufacturer of composite reinforcement, specializing in the production of lightweight multi-actual fabrics. We paid a little over $10 million for interest as shown in our statement of cash flows. During 2014, the Company used a $160 million and repurchased about 3.93 million shares of common stock.

We have $100 million remaining under our currently authorized share repurchase program. The impact on our earnings per share from the buybacks versus our original 2014 guidance is about $0.04 on 2014 full-year earnings. For the year, exchange rates cost us about $0.015 of earnings for the year versus our initial guidance.

Remember, we do benefit from a strong dollar and while it was a bit of a headwind in the first half of the year it was essentially neutral for the quarter; and provides a nice tailwind heading into 2015.

For 2015, after considering the impact of our hedges, every 5% strengthening of the dollar against the euro and the pound provides us with $3 million of operating income.

Finally, as previously announced last week, Hexcel’s Board of Directors declared a $0.10 quarterly dividend payable to shareholders of record as of February 3, 2015 with a payment date of February 7, 2015. This is the first dividend paid by Hexcel since 1992.

Now let me turn it back to Nick for some concluding thoughts and our guidance before we take your questions..

Thanks, Wayne. 2014 was a great year for Hexcel in which we set records for our financial performance, which we expect to do every year going forward. Almost two weeks ago, we announced our guidance for 2015 and we remain committed to deliver another record year.

We expect sales of between $1.9 billion and $2 billion, as growth in Commercial Aerospace with some gains in industrial markets lead our sales higher. We expect our full-year adjusted earnings per share to be in the range of $2.26 to $2.38.

We expect between $260 million and $290 million for capital expenditures in 2015 and we expect to generate between $10 million to $60 million of free cash flow. We also increased our adjusted operating income leverage target to 25%.

We remain confident in our operational focus and continuous improvement mindset, while working to position the Company for the forecasted growth ahead as we support our customers by investing in technology, capacity expansion, manufacturing innovations and our people. David, we’d now be happy to take questions..

Thank you. [Operator Instructions] And we’ll take our first question from Myles Walton with Deutsche Bank..

Thanks. Good morning..

Good morning, Myles..

I just wanted to -- just first start off with the growth expected in 2015.

Is it fair to expect kind of virtually all the top line growth within the Composite Materials sector given the A350 is expected to be your driver for ’15?.

Yes, that’s correct..

Okay.

And so the incremental margins of 25% would be helped by that, but also on the FX side, you think sort of sensitivity with respect to the 5% move, what’s the kind of starting off peg that we’re looking to draw the line from?.

So Myles I will answer this question as if it was last week because things are moving too quickly for me, all in the right direction. But as of last week, I’d have said we’re already up about 5% versus our original guidance if you compare it with the assumed versus where the euro and the pound are.

Obviously, today and yesterday has been good -- the dollar strengthened quite a bit more, so that just adds to it..

So just so I’m clear though, the baseline is maybe 5% below where last week’s analyst [indiscernible]?.

Yes, that would be fair. Correct..

Okay, great. Thanks so much..

Thanks..

And next we’ll go to Steve Levenson with Stifel Nicolaus..

Thanks, good morning..

Good morning, Steve..

So, thanks for giving us all this information today, which is pretty much like you did on the tour, which was really good and thanks for having that.

So how come you’re not out buying back stock before it runs away?.

So Steve, our priorities haven’t changed. We continue to focus on investing in our core, putting in capacity that’s required for programs that have been awarded as you know like the A350 in the LEAP and supporting the Neo and the MAX.

At the same time, we’re looking at our M&A pipeline and looking at opportunities to enhance our portfolio and offer even better, more advanced, more innovative solutions to our customers. And then last, but not least stock buyback as well as our new announced dividend, all remain levers that we intend to pull going forward.

So it’s a balance we look at it quarter after quarter and we trade what the highest opportunities are and make those decisions real-time..

Okay. I appreciate that. Thanks.

Can you give us an idea how the spending will go? Will it be more skewed to the front half of the year, the back half or is it really a balance through the year?.

From a capital deployment standpoint as you know we’ve about $100 million remaining on our share repurchase ….

No, no, I meant for the new capacity..

Oh, the new capacity throughout the year is as you know we’re going to spend between $260 million and $290 million and that requires us to deploy our resources pretty evenly throughout the year. So we did have pretty high spending at the end of 2014.

So that cash will go out in early part of the year and as you know we’re a cash user in the first quarter typically. But as far as the effort and the capital coming online, it will basically continue to ramp throughout the year going into next year..

Got it. Thank you very much..

You’re welcome, Steve..

And next we’ll go to Ron Epstein with Bank of America Merrill Lynch..

Good morning, guys..

Hey, Ron..

Good morning, Ron..

Just maybe a couple of quick questions. In the past, you’ve spoken about potentially doing some M&A.

How should we think about that in terms of what you could bolt-on? I mean, broadly how can we think about that?.

Well, I guess, you need to look at who we’re and we don’t intend to change that. We are a technology driven company, looking to provide more cost efficient, effective solutions for our customers to help them succeed going forward.

If I just draw your attention to Formax, not a big deal, but a company we’ve been working with on technology for the last several years. Their knitting technology and unique processes around weaving provide a technological advancement that strengthen our portfolio and that’s kind of an ideal scenario for us.

So if you think of that, where we’ve executed here over the last couple of quarters, that’s going to be very similar going forward..

Okay, okay.

And if we were to kind of move a little bit off the reservation, would you guys be open to doing things like ceramic matrix composites or is that just like too far away from what you do?.

Well ceramic matrix composites certainly get back into the hotter portions of the engine. We know that technology, we know GE is leading the force there. It is different technology. It’s an advanced material, but with respect to processing, with respect to assets to produce it’s totally different.

I wouldn't say it's out of the question, but at the same time recognize you don't just plug that technology into our existing plants..

Sure, sure. Okay, great. Thanks a lot..

Thanks..

And next we’ll go to Gautam Khanna with Cowen & Company..

Lucy on for Gautam. I wanted to ask questions on aerospace, defense and biz jet in particular.

On defense, rotorcraft, you had some pickup from Q3, but can you maybe also talk about the programs that are subsiding versus picking up V22, C17 versus A400M and the JSF, and whether you’re seeing any pickup in international rotorcraft orders?.

So I'll start with first on the V22. We see modest declines coming into this year, but not significant. C17 is winding down. At the same time, we expect the JSF and A400M to offset that. We did see an increase in the European aircraft - rotorcraft, which was soft for the first three quarters and picked up nicely in the fourth quarter.

So overall, we’re confident that we'll stay at 2014 levels there about through ’15..

Biz jet you mentioned there was some strengthening in that end market.

Was it tied to new platforms and maybe you can give some color on that?.

Yes, Lucy. With respect to -- I mean the business jets did pick up a little bit. I wouldn’t say it’s new platforms too particularly, but on the other hand, it’s just up a little bit. Gulfstream was probably the single biggest driver, but as we look into 2015 we expect this to continue at 2014 levels, maybe little bit higher..

Yes. And again going back to the Space and Defense rotorcraft again, remember we ran over 100 active programs. So there is a lot of moving parts. There is bits and pieces. It's a little bit lumpy. So it is not one major driver that influenced our results..

And your Q4 incremental margin was just marginally below 23%.

Is that just kind of a function of year-end expenses and R&D costs increasing?.

Yes, we did have a -- the target on a quarter basis is always tough to -- too short of a time to measure it, but our R&D was particularly high this quarter. Absent that, the incremental leverage on gross margin line remained good..

Great. Thank you..

[Operator Instructions] Next we’ll go to Steven Cahall with the Royal Bank of Canada..

Steve, you there?.

Mr. Cahall, your line is open..

Hi. Sorry about that. Maybe just -- first question on the long-term cash flow target.

As we look at this and the shape of that, is it fair for us to think about 2015 as probably the low watermark for free cash flow conversion compared to net income?.

Well, 2015 certainly is in one of the steep parts of our capital expenditures. As you know, we’re investing for 2016, 2017 and beyond, since some of our capital investments take two to three years to get installed and qualified.

With the leap engines, the neo, the MAX, the A350, we’ve a couple of years of investment to continue and then towards the backend of our vision 2020, it will certainly taper off..

Okay. That’s helpful. And then, on the industrial side, as we start to think about the growth rate for this year, it’s obviously a much tougher comp but, Nick, you suggested that you were seeing a rebound in all the markets.

So where do we think about a reasonable kind of medium-term or 2015 growth rate for those sales?.

So we see ’15 fairly steady on the Wind front and then for the balance of Industrial single-digit growth going forward. So overall for Industrial, low to mid single-digit for the year..

Okay. And maybe just a last one, housekeeping for Wayne.

What’s going to be the difference between adjusted and GAAP EPS this year? Is that just going to be FX?.

No, no, no. Well, hopefully they are none, but none that we planned for. We don’t -- let me try again, on the EPS line the only items we’d make a difference is between GAAP and adjusted would be unusual expenses that are outside the normal course of business.

If you notice this year for example, is the environmental reserves related to items that were businesses we sold 30 years ago. So we don’t plan on any of that and we don’t expect any. With respect to FX, we’ll just give you the impact of the FX on our adjusted operating income. So you would see what the impact is as opposed to ….

So as of now there is no difference between your adjusted and GAAP EPS [indiscernible]?.

Right. Yes, we’re not -- right, we’re not planning any..

Great. Thank you..

Thank you, Steven..

And next we’ll go to Greg Konrad with Jefferies..

Good morning..

Hi, Greg..

Just a couple of quick questions. We noticed on the new programs, the A380 and 747-8 were not included in this quarter.

Have the comparisons changed? And maybe if you could help us size some of the new aircraft programs, particularly the new narrow bodies?.

So Greg, for the new narrow bodies they’re still quite small. So the impact is not big yet, but the goal -- and the hope is that they will be bigger as we go along.

With respect to the A380 and the 747, if you look at our dollars per content and you look at the publicly announced build rates, our dollar sales are consistent with those, so if that helps you..

They’re still included in that number for new programs?.

No, no, no. We took out the A380 and the 747..

Oh, okay. And then, just to follow-up, in terms of rotorcraft volumes, they were obviously very strong in the quarter.

Have you had any indications from the OEs on any impact from the oil and gas end market?.

Well, there is a lot of talk on oil and gas as well as commercial aircraft backlog. I think some of the markets, the end users are more profitable and may be inclined to invest a little heavier, whereas oil and gas may be pressured and some of that platforms that deliver resources and supplies to risers and fields may be down a little bit.

But overall, puts and takes we haven't seen anything that materially impact our forecast for 2015..

And then, just quick housekeeping question.

In terms of the cash on the balance sheet, how much of that is overseas?.

Greg, generally most of it is in Europe. But generally speaking, we have access to it..

Okay. Thank you..

Thank you..

And next we’ll go to Ken Herbert with Canaccord..

Hi. Good morning..

Good morning, Ken..

Hey, Nick and Wayne, first, just wanted to ask, for the aerospace growth assumptions in 2015, are you assuming again with the new programs, sort of 25% to 30% growth and relatively sort of low single-digit or limited growth on the legacy programs, or how should we think about the mix there within growth in ’15?.

So if you look at legacy, new narrow bodies, the rates continue to creep up which obviously help, at the same time, the 330 and the 747 will decline. So we see that is fairly flat or stable for 2015. The growth is really driven on A350 and then maybe some pick up on the neo since its going into service at the end of the year.

And then the MAX will start ramping up after that. So it is new program driven, Ken..

Okay. Okay. That’s helpful.

And then, safe to say that, with an expected step up again on the 787 in ’16, you’re probably not going to see much of that in ’15? Is that a fair statement?.

Yes, that is correct..

Okay. That’s helpful. And then, I wanted to ask, Nick, just to follow-up on your Formax discussion earlier as maybe some insight in terms of your M&A thinking. I mean, obviously, a relatively smaller deal; it looks like a joint venture or 50% acquisition.

Is it fair to say that the real benefit of Formax is the technology it brings you and maybe the capabilities there and that’s how we should think of that as an example moving forward from your M&A standpoint? Or is there maybe a potential to push the envelope from a risk standpoint on the acquisition front if the opportunity comes up?.

Well, clearly Formax provides technology and that is what we’re striving to achieve going forward, to be able to expand our portfolio and drive to better solutions for our customers. So clearly, Formax fit that. Going forward, it’s hard. We’re certainly open.

Again, it’s looking at areas that enhance our core position where we’re today and deliver technology, so more of the same size. It depends a lot on availability and timing and relationships..

Okay, all right. Well, thank you very much..

Thank you, Ken..

And next we’ll go to Mike Sison with KeyBanc..

Hey, guys.

How are you doing?.

Hi, Mike..

Nick, when you think about the range you’ve provided us this year, you guys have tended to do a good job of hitting the high-end of the range or exceeding it.

What could happen to -- what’s the scenario that really gets you to the top or relative -- or gets you to the bottom? Is there sort of variables we need to keep an eye on as we think about the range for ’15?.

Well, I will start with the bottom end and that is if development programs get delayed, obviously that’s not a good thing from a top line or from our capital that’s deployed. So that is the risk on the bottom side. On the top side, its continued execution, it’s continued operational excellence and a focus on productivity.

We mentioned a little bit of tailwind on FX. Oil provides a little bit of tailwind on input costs such as AN, a little bit on transportation and maybe a little bit on utility. So I think there are some tailwinds coming into the year, but the primary driver will be program schedules..

Okay, great. And then, I think you’ve talked about a bigger ramp in ’16 and ’17. It sounds like that will be clearly on the top line as some of these production ramps start to kick up.

Any particular reason in those years your incremental margin -- I know the goal is 25%, but wouldn’t it be higher in those two years as sales accelerates?.

Well keep in mind, our depreciation and step up and depreciation is continuing to accelerate as it did last year, well, this year and for the next few years. Clearly, we’re going to work productivity and clearly we’re going to work volume leverage. At this time, though, 25% is a nice step up. We remain confident, we can deliver that.

And as always, we’ll evaluate it as we continue to improve going forward..

Great. And then, just one quick one, Wayne, when you think about the seasonality in space and defense in ’15, ’14 was pretty choppy.

Any current thoughts on how that could flow in on a quarterly basis as we model through?.

It’s lumpiness as opposed to seasonality, so which means I really can’t predict it. I mean, we’re not expecting anything of substance, but we’ll just see how it goes..

Okay, great. Thank you..

Thanks, Mike..

And next we’ll have a follow-up question from Steve Levenson with Stifel Nicolaus..

Thanks again. Just a question there, it seems to be some pressure on Airbus from airlines to introducing A380neo, and I know some of the chatter suggests Rolls-Royce will build the engine.

Do you think that could be the first engine that would have a composite fan and fan case?.

Well, as you know GE has led the charge on this. Going back to the GE 90 and followed up with the Gen X and ….

Right. No, I mean, the first Rolls-Royce engine to have one..

Yes, and Rolls obviously is working on that. I’m not in a position to know if they will be ready to launch that. I can tell you, we continue to work with them on composites for fan blades and fan cases. I’d like to hope that it would be the first opportunity. That’s a great area where we believe we’re very strong in.

We have a lot of experience to help provide the optimum solution..

Great. Thanks for the additional color..

Thanks, Steve..

And that does conclude today's question-and-answer session. Thank you, ladies and gentlemen, for joining today’s conference..