Slide 1: Hexcel, April 2008
@ HEXCE ew April 2008
Slide 2: Forward Looking Statements
Forward Looking Statements 1 Risks, Uncertainties and Other Factors with Respect to “Forward-Looking Statements” Certain statements contained in this presentation constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements that
Slide 3: Agenda
2 Agenda Overview of Hexcel Hexcel Performance Hexcel’s Board and Corporate Governance OSS Capital’s Proxy Fight Conclusion
Slide 4: Overview of Hexcel
3 Overview of Hexcel
Slide 5: Hexcel Today
4 Hexcel Today Hexcel is a strong, well-managed company: - Market leader with $1.2 billion in sales and 4,000+ employees - Focused on markets with both secular and cyclical growth drivers - Global manufacturing, sales, management to take advantage of world-wide demand Track record of aggressive acti
Slide 6: Hexcel Performance Over Last Five Years
5 Hexcel Performance Over Last Five Years Source: Publicly available financials Note: Market data as of April 9, 2008. Historical share price from April 9, 2003 to April 9, 2008. (1) See Exhibits for reconciliations to GAAP operating income and net income Sales (US$ in millions) Adjusted Operating I
Slide 7: Hexcel / Shareholder Relationship
6 Hexcel / Shareholder Relationship Hexcel management stays in touch with shareholders - CEO, CFO have over 100 face to face meetings with investors per year - A major shareholder survey was conducted before this OSS action and a number of actions were taken to address issues identified - Investor D
Slide 8: Overview of Hexcel
7 Overview of Hexcel Leading advanced composites company for sixty years Our composite materials are used primarily in commercial and military aircraft and wind turbine blades Recently restructured the Company by selling slow growth industrial businesses Reorganized to focus on aerospace and wind en
Slide 9: Hexcel Sales by Market
8 $622 M Growing 16%/yr $293 M Growing 11%/yr $256 M Growing 9%/yr Industrial Space & Defense Commercial Aerospace Hexcel Sales by Market Boeing Airbus Engines/Nacelles Regional/Business Helicopters Military Aircraft Launch Vehicles Satellites Wind Energy Recreation Transportation Other Divested non
Slide 10: Commercial Aerospace Wide Range of Products
9 Commercial Aerospace Wide Range of Products Covering a Wide Range of Applications Largest Application for Composites Hexcel Sales Well Balanced Fuselage Wings Empennage Control Surfaces Airframe Radomes Gear Doors Nacelles Engines Thrust Reverser Interiors Floors HexMC Septum Core Thermoplastics A
Slide 11: Commercial Aerospace – Composites Penetration
10 Commercial Aerospace – Composites Penetration Step Change Underway with Intermediate Modulus (“IM”) Carbon Fiber Prepreg as the new standard... Hexcel’s Specialty A380 A320 B777 A340 787 A350 A310 B767 A340 -500/600 10-15% 50+ % 23% 1980 1985 1990 1995 2000 2005 2010 2015 14% 7% 20% 52% 7% Al / A
Slide 12: Commercial Aero – Cyclical & Secular Growth
11 Commercial Aero – Cyclical & Secular Growth Composites Penetration Allows Hexcel to Outperform Very Strong Market Over 7,000 planes in backlog or over 7 years based on 2007 deliveries Global growth -- US legacy carriers yet to order Secular Penetration Results in a Faster Growth Rate for Hexcel 3
Slide 13: Hexcel Performance
12 Hexcel Performance
Slide 14: OSS Assertions
13 OSS Assertions 1. Operating Margins vs. Cytec and Toray - “Hexcel’s operating margins have consistently lagged behind the margins of its two main competitors, Cytec Industries and Toray Industries” 2. Margin Improvement - “For too long, Hexcel’s management has been communicating to stockholders t
Slide 15: 1. Operating Margin
14 0% 3% 6% 9% 12% 2001 2002 2003 2004 2005 2006 2007 1. Operating Margin Hexcel Margins have Consistently Improved, and EXCEED BOTH Cytec and Toray... but this debate is clearly about a Subset of these Companies Hexcel1 Cytec Toray... “Hexcel’s operating margins have consistently lagged behind the
Slide 16: 1. Operating Margin – OSS Segment Argument
15 1. Operating Margin – OSS Segment Argument Composite Materials Segment Hexcel Product Key Input Major Competitors Carbon Fiber Acrylonitrile Toray, Teijin (Toho Tenax), Cytec Reinforcements Glass Fiber Carbon Fiber Private Companies, JPS Industries Carbon Prepregs Carbor Fibers Resins Cytec, Tora
Slide 17: Toray is Predominately a Carbon Fiber Producer
16 Toray is Predominately a Carbon Fiber Producer • Very High Price – Not for • Commercial Aero • Rigorous Qualification • New Aero Standard • Long Term Contracts • Can Sell Excess to Industrial IM is baseline on new A350 • Supply / Demand Sensitive • Spot or Short Term Pricing • Commodity Like All
Slide 18: Carbon Fiber Focused Companies
17 Carbon Fiber Focused Companies... Hexcel and Cytec are Prepreg Companies Fiber Companies are not a good Comparison Carbon Fiber price index vs. Operating Income % for Carbon Fiber focused companies (1) MRC reorganized their Carbon Fibers and Composites Materials business in April 2007. The old se
Slide 19: Same Technology & Equipment
18 Same Technology & Equipment Carbon Fiber Resin Mix Carbon Composite “Prepreg” – Hexcel and Cytec Focus Impregnation Carbon fiber Film of Resin Prepreg = Preimpregnated Make, buy and sell Formulations are key to developing right properties Composites are combinations of two materials with a distin
Slide 20: Hexcel/Cytec Segment Comparisons
19 Hexcel/Cytec Segment Comparisons Cytec Operating Margins are good - but Hexcel is steadily closing the gap and is better Positioned for IM Carbon Prepreg Aircraft of the Future Cytec Engineered Materials Div. (“CEM”) 2005 acquired Surface Specialties business for $1.8 Billion – nearly doubled the
Slide 21: Other Product Margins vs. Competitors
20 Other Product Margins vs. Competitors Competitor best Comparable Unit OI% Hxl sub-Segment Adj OI% Hexcel vs Comp.(2) Cytec (1) Toray (1) Teijin (Toho Tenax) (1) y t e Umeco y t e Gurit JPS Industries y t e SGL Carbon (1) 22.2 Carbon Fiber + Carbon Prepreg - Glass Prepreg 15.6% + Reinforcements (3
Slide 22: 2. Margin Improvement
2. Margin Improvement 2001-2003 21 Hexcel has demonstrated Aggressive Cost Control in Good times and Bad without Sacrificing The Future... Electronics meltdown and September 11th aerospace impact cause 26% drop in sales - $60m cash cost reduction - 30% headcount cut - Closed 2 U.S. plants - Expanded
Slide 23: 2. Margin Improvement (cont’d)
22 2. Margin Improvement (cont’d) As a Company, Hexcel OI% is now above 75% of its Customers and the Aerospace/Defense Index (49 Companies) (1) Represents the average of the Hemscott General Aerospace/Defense Products and Services Index (49 companies). Top customers where public data available. (2)
Slide 24: Hexcel has not lost Share
23 Hexcel has not lost Share – it’s Stock has not “suffered” Sales Growth for Composites 70% 85% 100% 115% 130% 145% 160% 2001 2002 2003 2004 2005 2006 2007 Hxl Composites Mtls Cytec Engineered Materials Segment ("CEM") Hexcel’s key carbon prepreg competitor is Cytec’s CEM segment. Both have grown e
Slide 25: 4. Intrinsic Value
24 4. Intrinsic Value Our Strategy and Execution have Significantly Enhanced our Intrinsic Value OSS’ simple analysis assumes Hexcel can increase its OI by $60 million if Hexcel raises its entire composite materials segment margin to that of Toray and Cytec segments In fact, only parts of these segm
Slide 26: Stock Price Performance
25 Stock Price Performance Hexcel vs. Top Customers1, Aerospace / Defense Index2, Toray, Cytec and S&P500 Source: Factset as of April 9, 2008 (1) Top Customer Composite includes General Electric, Goodrich, United Technologies, Gamesa, Spirit Aerosystems, Lockheed Martin, Cytec Industries, Textron, A
Slide 27: Research Analyst Perspectives
26 Research Analyst Perspectives A Very Positive Research Outlook... Analyst Recommendations Analyst Price Targets BMI Carbon Fi ber HS & IM Prepreg Secondary & Primar y Structure Research Commentary Strong Buy 12% Buy 50% Hold 38% $30 $30 $30 $24 $22 $28 $26 CSFB Stifel Jefferies UBS Wedbush DB GS
Slide 28: OSS Assertions
27 OSS Assertions 1. Operating Margins vs. Cytec and Toray - “Hexcel’s operating margins have consistently lagged behind the margins of its two main competitors, Cytec Industries and Toray Industries” 2. Margin Improvement - “For too long, Hexcel’s management has been communicating to stockholders t
Slide 29: Hexcel’s Board and Corporate Governance
28 Hexcel’s Board and Corporate Governance “In our opinion, the Hexcel Board needs new members with operational expertise to help maximize Hexcel’s business potential...” - OSS assertion 5. Hexcel Board
Slide 30: Hexcel has an Excellent Board
29 Hexcel has an Excellent Board 9 of 10 Independent Engaged – 3 year attendance of 97% for group Fresh perspective - 6 new directors (including Mr. Hill) in 3 years Each (except newly nominated Mr. Hill) has participated in: Plant visits and reviews Customer visits Succession planning Strategic pla
Slide 31: Audit Committee
30 Audit Committee Active committee that reviews (at least annually): Financial statements and quarterly review of key accounting issues Compliance with legal, tax, ethics and regulatory requirements SOX compliance and internal audit function Key exposure items such as FX, insurance and tax Only one
Slide 32: Compensation Committee
31 Compensation Committee Independent consultant reports solely to Compensation Committee Peer group revised by Committee to better match size and markets Eliminated CEO perks in 2006 Introduced performance shares – vest only if targets achieved CEO base held flat in 2007 Short-term incentive goal c
Slide 33: Nominating and Governance
32 Nominating and Governance Shareholder Friendly Regular Updates to Meet Best Practices 73% 88% 97% 2006 2007 2008 CGQ Scores* Annually-elected Board No poison pill Lead director and process established Non-management executive sessions now at all in-person Board meetings Stock ownership guidelines
Slide 34: Nominating and Governance: Director Search Process
33 Nominating and Governance Survey of Board for desired background “Wish List” (ie, Public Company board experience, aerospace, chemical, diverse, etc.) Retain professional search firm Search firm vets all candidates regardless of source Nominating and Governance Committee interviews candidates Can
Slide 35: Nominating Process Results
34 Nominating Process Results Board Composition by Year – Targeted Search Process Total Financial Expert Public Board Exposure Aerospace Manufacturing Technical Diversity Director Selected Aug ’01 9* 6 3 2 3 0 0 Derickson Apr ’03 10 9 4 2 3 0 1 Campbell Apr ’04 10 9 5 3 3 0 1 Apr ’05 10 9 6 3 3 0 1
Slide 36: OSS’s Director Nominees
35 OSS’s Director Nominees Edward A. Blechschmidt 2007 (5 months) – Interim CEO of Novelis, a supplier of aluminum rolled products and aluminum can recycling. 2000-2002 (30 months) – CEO of Gentiva Health Services, a health care services business 20 years in information technology industry Director
Slide 37: OSS’s Nominees – Most Recent Margin Performances
36 OSS’s Nominees – Most Recent Margin Performances Operating Income % 1999 2000 2001 2002 2003 2004 2005 2006 2007 Edward A. Blechschmidt Gentiva Health Services (0.3)% (9.4)% (2.8)% (4.7)% 2.8% 4.5% 3.4% (Chairman, CEO and President from March 00 to June 02; then Director) Novelis (CEO from Dec 06
Slide 38: Hexcel’s Board of Directors
37 Hexcel’s Board of Directors W. Kim Foster (1 year tenure) CFO of FMC Corporation a $3B chemicals company VP GM FMC Agricultural Products Group Director FMC International, GM Airport Products and Systems David E. Berges (7 years tenure) Chairman, CEO and Director of Hexcel Corporation Pres. Automo
Slide 39: OSS Capital’s Proxy Fight
OSS Capital’s Proxy Fight 38 @, HEXCEL! @
Slide 40: Background to the Proxy Contest
39 Background to the Proxy Contest OSS criticizes Hexcel’s operating performance; requests Board retain an investment bank for advice on maximizing shareholder value OSS indicates desire to submit a director nominee to replace Martin Solomon, who was retiring – N+G search firm finds candidate under-
Slide 41: Background to the Proxy Contest (continued)
40 Background to the Proxy Contest (continued) Hexcel’s Nominating Committee meets with and interviews each of OSS’s director candidates, along with other candidates identified by a retained professional search firm December 2007 – January 2008 Ms. Derickson writes OSS offering to Immediately expand
Slide 42: What’s the Harm with Replacing Directors?
41 What’s the Harm with Replacing 1,2 or 3 Directors? Shareholder Value: Fundamentally, we believe it is not in the Shareholders’ best interests to replace experienced, proven aerospace directors who have provided excellent insight and contacts with OSS Directors who have: -No evident aerospace expe
Slide 43: Change Needed? We Request ISS Support for Hexcel’s Full Director Slate
42 1. Operating Margins vs. Cytec and Toray - “Hexcel’s operating margins have consistently lagged behind the margins of its two main competitors, Cytec Industries and Toray Industries” 2. Margin Improvement - “For too long, Hexcel’s management has been communicating to stockholders that margins wil
Slide 44: Exhibits and Appendix
Exhibits and Appendix 43 @, HEXCEL! @
Slide 45: Exhibit A – Adjusted Operating Income
44 Exhibit A – Adjusted Operating Income Reconciliation of GAAP and Non-GAAP Measures Fiscal Year Ending December 31 $ millions 2003 2004 2005 2006 2007 GAAP Operating Income (1) 46.8 $ 62.1 $ 84.3 $ 103.4 $ 114.9 $ Business Consol & Restructuring Exp. 3.9 2.5 2.9 9.9 7.3 Litigation Settlements/Lega
Slide 46: Exhibit B – Adjusted Net Income
45 Exhibit B – Adjusted Net Income Reconciliation of GAAP and Non-GAAP Measures 1) The Company adopted FAS 123R as of January 1, 2006. Prior years have been adjusted to reflect stock compensation expense as if it was adopted on January 1, 2003. 2) The 2007 tax adjustment include a $1.9 million benef
Slide 47: Exhibit C – Composites Materials Segment Adjusted Operating Income
46 Exhibit C – Composites Materials Segment Adjusted Operating Income Reconciliation of GAAP and Non-GAAP Measures Fiscal Year Ending December 31 $ millions 2003 2004 2005 2006 2007 GAAP Operating Income 68.8 $ 98.7 $ 118.3 $ 119.1 $ 142.8 $ Business Consol & Restructuring Exp. 2.8 2.6 2.4 9.9 6.4 O