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Edited Transcript of HXL earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hexcel Corp Earnings Call

STAMFORD Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Hexcel Corp earnings conference call or presentation Thursday, April 20, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nick L. Stanage

Hexcel Corporation - Chairman, CEO and President

* Wayne Charles Pensky

Hexcel Corporation - CFO and EVP

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Conference Call Participants

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* David Egon Strauss

UBS Investment Bank, Research Division - MD and Senior Research Analyst

* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Howard Alan Rubel

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst of Aerospace and Defense Electronics

* Hunter Kent Keay

Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Michael J. Sison

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Myles Alexander Walton

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Robert Alan Stallard

Vertical Research Partners, LLC - Partner

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Hexcel Corporation 2017 First Quarter Earnings Conference 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 would like to turn the conference over to Mr. Pensky. Please go ahead, sir.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [2]

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Great, thank you. Good morning, everyone. Welcome to Hexcel Corporation's First Quarter 2017 Earnings Conference Call on April 20.

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 and last night's press release.

Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request.

With me today are Nick Stanage, our Chairman, CEO and President; and Michael Bacal, our Investor Relations Manager. The purpose of the call is to review our first quarter 2017 results detailed in our press release issued yesterday.

Now let me turn the call over to Nick.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [3]

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Thanks, Wayne. Good morning, everyone, and thank you for joining us today. As you have seen in last night's release, our first quarter sales were $479 million, 2.6% below the first quarter 2016 sales in constant currency. Our key growth programs remain on track and performed as expected.

While sales were below our original expectations, thanks to strong operational execution and cost control, we delivered first quarter operating income of $79 million with an operating income margin of 16.4%.

Our adjusted diluted EPS of $0.60 provides a good start to 2017 and is higher than last year. Free cash flow was about $44 million better in the first quarter of 2017 than the first quarter last year due to lower working capital usage.

Now let me turn immediately to our outlook for [ full ] sales for the year. You'll remember that in December, as we were releasing our 2017 guidance, Boeing announced an accelerated reduction in the 777 build rates. We now estimate this having an $18 million impact on our 2017 sales.

There've also been supply chain adjustments for other widebody aircraft as they transition to previously announce lower build rates. Together, the changes for these aircraft account for the majority of the reduction in our outlook for 2017. We believe the lion's share of the reduction for 2017 has taken place in the first quarter, and the remainder of the year will be closer to our previous quarterly expectations.

The other factor that continues to affect our sales number is foreign exchange rates, which we estimate will further reduce sales approximately $20 million below our initial guidance. Accordingly, we are realigning our sales guidance for 2017 to the range of $2,000,000,000 to $2,080,000,000, a reduction in the midpoint of $60 million. Build rates for the A350 and the narrowbodies continue to meet expectations and give us confidence in our revised outlook for the year.

Despite lowering our sales guidance for the year, we are holding our guidance for both earnings per share and free cash flow for 2017. To remind you, that is EPS in the range of $2.64 to $2.76 and free cash flow of more than $100 million.

We remain committed to delivering our earnings and cash forecast for 2017, and as demonstrated in the first quarter, our focus on cost control, productivity and continuous improvement gives us confidence this will be achieved.

Now let me briefly provide more detail on our markets. As usual, I'll discuss year-over-year comparisons in constant currency. As you are aware, currency movements influence our reported sales -- reported results, and some of the impact is not intuitive. But the bottom line is that when the dollar strengthens against the euro and the British pound, our sales translate lower while our income increases and so our margin percentages improve.

Commercial Aerospace now accounts for 73% of our total sales, and for the quarter, these sales were basically flat versus 2016. Sales growth from the A350, A320neo and 737 Max were in line with our expectations. However, as mentioned, this growth was largely offset by declines in the widebodies, the A380, 777 and 747. All these mature programs had production rates -- reductions announced last year, and we have been experiencing some supply chain adjustments in connection with these programs as they transition to the newer, lower rates.

Similarly, we experienced supply chain adjustments in the 787, as the rates have now leveled off for nearly a year and as the supply chain transitions from growth to steady state. We believe we are past the majority of these adjustments, except for the full year impact of the 777 rate reduction. All-in-all, we expect demand to align closer to our initial guidance over the last 3 quarters of the year.

Sales to Other Commercial Aerospace, which includes regional and business aircraft, were just above last year's fourth quarter and slightly lower than last year's first quarter.

Space & Defense sales for the quarter were about $77 million, down 1.7% as compared to the first quarter of last year. Demand has stabilized and continued to stabilize, and we are cautiously optimistic about the prospects for this market for the rest of 2017 and beyond. Rotorcraft now accounts for just more than 50% of Space & Defense sales with about 90% coming from military as commercial rotorcraft sales have significantly declined in recent years due primarily to the downturn in offshore oil and gas industries.

As a reminder, we have a diverse and broad range of products on more than 100 programs in the U.S., Europe and Asia, including rotorcraft, transport, fixed wing and satellite programs.

In Industrial markets, sales for the first quarter were almost $55 million, 16% lower than the first quarter of 2016 due primarily to lower wind energy sales. Sales in the first quarter of 2017 were roughly in line with the revenues we saw in the back half of 2016. We believe 2017's Industrial sales will be more level loaded and our year-over-year comparisons get easier as sales for the second half of 2016 were nearly 20% lower than the first half.

Wind energy sales were down more than 25% as compared to a particularly strong first quarter in 2016. We expect wind sales to be challenged for the year, however, we forecast wind energy sales in 2018 to exceed 2016 levels as various legacy programs with lower composite content transition to longer, higher efficiency blades with higher composite content. Finally, in the rest of Industrial business, we did see good continued growth in the automotive market.

Now let me turn the call over to Wayne to discuss some of the quarter's financial details.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [4]

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Thanks, Nick. For the quarter, gross margin was a solid 28% as compared to 28.7% in the first quarter of 2016. Strong cost control and productivity performances across our plants went a long way to offsetting the training and start-up costs at our new French and Moroccan facilities, which remain on track and will start to contribute in 2018.

Also, depreciation and amortization for the first quarter was about $2.7 million higher than the first quarter of 2016 on a constant-currency basis. For the quarter, selling, general administrative expenses were $4.5 million lower than in 2016. This was about a 7% reduction in constant currency and represents strong cost control across all support functions.

Research and Technology expenses were about 11% higher in constant currency than last year's first quarter as we continue to invest in innovation to support new technologies, products and process developments.

For the quarter, operating income was $79 million or 16.4% of sales as compared to $84 million or 16.9% of sales in 2016. For the quarter, exchange rates contributed about 40 basis points to 2017's operating income percentage as compared to 2016.

Our Engineered Products segment, comprised of our structures and engineered core businesses, delivered 14.2% operating income margin for the quarter as compared to the 12.1% margin in 2016.

To remind you, although margins across this -- the businesses in this segment are lower than those for composite materials, the Engineered Products segment employees a much lower level of capital, and therefore, the return on invested capital for this segment continues to be very attractive.

The tax provision was $8.6 million for the quarter, including a nonrecurring discreet benefit of $9.1 million from the release of evaluation allowance in a foreign jurisdiction. Excluding this discrete benefit, the effective tax rate for the first quarter was 24.4% compared to the 29% rate in the first quarter of 2016.

Both periods benefit from deductions associated with share-based compensation payments. This activity is typically highest in the first quarter of the year. This provided a $0.04 tax benefit in the first quarter compared to $0.01 of benefit in the first quarter of 2016. Excluding these discrete benefits, Hexcel's first quarter effective tax rate was 30%, in line with our full year expectations. Free cash flow for the first quarter was a use of $31 million as compared to a use of $75 million in the first quarter of 2016. Seasonal effects drive this first quarter use of cash for working capital, though it should be noted, the first quarter 2017 was significantly better than the same period in 2016 with a $40 million working capital usage as compared to a $91 million usage in first quarter of 2016.

Cash payments for capital expenditures was essentially the same year-on-year at $86 million. The midpoint of our CapEx guidance for the year is $280 million, and we do expect it to be loaded towards the first half of the year as we'll start up a number of carbon [ fiber-ing ] lines this year, including one at our greenfield site in France. As previously announced, we still expect 2016 to be our peak year in the current program of capital investment. 2017 will see lower expenditures followed by much lower spending in the next 2 years.

During the quarter, the company used $64 million to repurchase shares of its common stock, and now has $329 million remaining under the authorized share repurchase program.

Now let me turn it over to Nick for some final thoughts before we take your questions.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [5]

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Thanks, Wayne. By staying aligned with customer demand while keeping costs under control and operational excellence at the forefront, we delivered a solid start to 2017. Faced with a softer 2017 sales outlook, we responded quickly, took actions to reduce our costs appropriately. We're committed to achieving our earnings plan for the year and remain bullish on the long term.

Our spending this quarter demonstrated our strategic commitment to ongoing investments in research and technology as well as for CapEx required for future growth. We have very high confidence in our ability to deliver on our commitments, and we maintain our guidance for 2017, adjusted diluted EPS with a range of $2.64 to $2.76 based on reduced sales in the range of $2,000,000,000 to $2,080,000,000. We're also projecting free cash flow for 2017 of more than $100 million. Accrual capital expenditures are still expected to be between $270 million and $290 million.

Thank you. Tracy, we'd be happy to take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Myles Walton with Deutsche Bank.

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Myles Alexander Walton, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [2]

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I was hoping to start on the inventory adjustments or supply chain adjustments you mentioned and, in particular, how quickly you saw them in the quarter and why you're confident that it's a one quarter phenomena? And then, specifically, if you can adjust -- or address which are the bigger -- which were bigger contributors: the 47, 380 or 787?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [3]

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Yes, Myles. Again, as you remember, or hopefully remember, when we were announcing or communicating our guidance back in December, I think it was on the same day or right about the same time Boeing announced the accelerated -- reduced rate on the 777. So we had that built into our plan and long-term plan. We did not have the timing. So that, we had insight at the end of the year. As we got into the year, we certainly saw a little bit of softness as we wrapped up January and then through the rest of the quarter. 747 was obviously one of the big impacts. The other was the A380, where we have $3 million per ship set. And surprisingly to us was the 787, which was pretty much same type of impact as the A380. And again, being at a steady state of 12 on a build rate at Boeing, we view that as supply chain efficiency and optimization, and certainly, some of that will continue to spill into Q2, but we view the majority of that behind us.

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Myles Alexander Walton, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [4]

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Okay. And nothing on the 350 in terms of -- I mean, you said in the release, the 350 growth year-on-year, secures did grow in line with your expectations.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [5]

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It did. It grew in line with our expectations as did both NEO and the MAX.

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Myles Alexander Walton, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [6]

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Okay. And then one other one with respect to the Industrial end market. I think you initially in the guidance implied something closer to flat year-on-year as a whole in Industrial, excluding FX. It looks like it'll be tough to get there. But it didn't sound like Industrial was part of the mix in bringing down the sales range. So maybe give us the puts and takes there?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [7]

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Well, if you look at our initial guidance and what we see, we do see wind being a little softer than we first anticipated. So in total, you're right. We probably expect today Industrial to come in slightly down and not flat. On the other hand, we're optimistic on Space & Defense and it delivering more than flat. So if we look at these 2 segments together, we're pretty confident they're going to balance out and they're going to be stable.

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Operator [8]

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And we'll go next to Gautam Khanna with Cowen and Company.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [9]

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I just want to make sure I first understand the sales reduction. At the midpoint $60 million, $18 million from the 777, $20 million from FX, and so that just mean $22 million on the other platforms. Is that right?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [10]

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That's right. So it's about 1% FX, 1% -- just short of 1% on the 777, and 1% on the combination of the other supply chain adjustments.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [11]

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Okay. And was it fairly broad based across the intermediaries you sell to on those platforms? Or was it specific to any one?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [12]

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You're referring to the inventory rightsizing?

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [13]

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Yes.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [14]

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Yes. Again, it was primarily the A380, the 747, 787 and then the legacy 777.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [15]

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Okay. And you're pretty sure this is inventory adjustment and not some sort of a reduced content per ship set as yield has improved or anything else that could explain it?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [16]

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Well, during our [ strat ] process, we go through and we do an evaluation on ship set content. If you recall in December, we adjusted a couple of those, tweaked a couple down, a couple up. So we do that every year. There's always improvements in the supply chain, improvements with our customers, new solutions where more efficient composites and/or processing can be developed. So there are slight movements here and there. But the majority of what we're talking about here is clearly supply chain adjustments.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [17]

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Okay. And just one last one on this. How fungible is the product you're selling on these programs that are being destocked? How fungible is that product across other platforms? Can they redirect the material for 37, the -- et cetera? Just -- is this stuff that is isolated to those programs? Or could there be a spillover on to the...

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [18]

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Yes. So again, when you look at the advanced materials and the composite carbon fiber, that is very fungible. So we'll take that, put it into our capacity model, and tweak and adjust our CapEx going forward. With respect to parts, Engineered Products, there -- that does tend to be a little more product specific and program specific, but again, those resources can put together other parts. So it's not a huge issue for us going forward.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [19]

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And most of this -- how much of the 60 is that Composite Materials versus Engineered Products?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [20]

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Wayne, do you know?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [21]

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Yes, so with respect to the inventory reduction, I'd say that's probably mostly Composite Materials. With respect to the 777 rate reduction, then I -- to be honest, I don't know off the top of my head how much of that is Engineered Products, but that would be part of that CapEx share...

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [22]

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There's a portion.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [23]

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There's a portion, so that would be prorated for that.

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Operator [24]

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And we'll go next to Howard Rubel with Jefferies.

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Howard Alan Rubel, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst of Aerospace and Defense Electronics [25]

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Nick, you continue to spend a lot on research and technology. Could -- and also, a little bit, you spent some more money on Oxford. Could you first address whether you've made some break-throughs at Oxford or -- so that, that is part of the reason for the incremental investment? And then, second, how soon do you expect some of this R&T to turn into incremental sales?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [26]

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Okay. I'll start with Oxford. And Howard, you're referring to the second tranche of investment first quarter, which was about $10 million. That takes our ownership in Oxford Performance Materials to about 17%. And for those that may not remember, OPM is a additive-manufacturing firm, cutting edge, using carbon fiber filler and PEKK thermoplastic resin systems to make 3D parts. We remain very bullish with that, Howard. We're on the board. We participate with them. We're working with customers on qualifications, and we're huge -- very bullish on the opportunity for 3D printing and the opportunity to include our carbon fiber and provide products that enhance the performance versus not only existing higher-weight materials but providing a stronger solution. So we're really excited with the direction and the progress we've made with them. With respect to our internal investment, I think Wayne went through we continue to invest internally with a plan to invest more than 10% this year than we have in the past. And that's a combination. There's no one program. I would say, in summary, we're working on advanced composite solutions for the next-generation wing, for the next-generation fuselage, for new engines and the cells that, obviously, will be derivatives as we've seen for the history of commercial aircraft. In the -- we're also working on secondary structures, advances in technologies and processing as well as interiors. Switching over on Industrial, wind energy, both glass and carbon fire composite solutions for the longer blades, we're very excited with the opportunities we're working with Vestas and others. In the automotive, you may have seen we had a release on -- last couple of weeks, where we signed an agreement with Mubea for -- a new contract for a high-performance automobile. We're not allowed to name the automotive supplier yet, but it's a great entry into a one-piece composite chassis for a high-performance vehicle. And we're really focused on quick-cure high-performance systems where we can increase the lay-down rate, we can increase the cure rate and we can drive further penetration on composites, both in Aerospace and Industrial applications.

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Howard Alan Rubel, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst of Aerospace and Defense Electronics [27]

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That's very helpful. And then I'm going to just go back to gross margins for a moment. It's pretty interesting that you were able to expand profitability at structures -- or Engineered Materials rather, whereas, composites, which is obviously the larger business, saw a little bit of deterioration. How or what was the focus there that got the engineered numbers up? And is that sustainable?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [28]

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So let me start by taking the Composites. I just want to remind everyone -- and if we looked at our plan, we believe we're doing exceptionally well. We have hired over 100 people and are training them, as we speak, for our new plants in Roussillon, France, and Morocco -- Casablanca to support the growth in the future. That is impacting us to the tune of about $2.5 million a quarter. So that was in the plan. We're on track. And that was as expected. So that, obviously, has hit our margins in that segment. With respect to the Engineered Products, as we said all along, we have programs coming in, going out. We have mature programs that are fully learned and some new ones coming in. And as you've seen, the sales have come down slightly. We always continue to push productivity to drive those margins as high as we can. Again, we're very happy that they're at 14%, and we've said for the past couple of years that, anywhere in the 12% to 16% range, we're happy, but we're always pushing for more.

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Operator [29]

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

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Michael J. Sison, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [30]

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When you think about the cadence for Commercial Aerospace from 2Q to 4Q, you essentially suggested you'd be back to mid-single digits type of growth. Is it going to be fairly even? Or is it a little bit less in 2Q and maybe ramps up and gets stronger as the year unfolds?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [31]

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Well, Mike, we don't really want to get into quarterly guidance. But we see Commercial Aero being a couple percent positive for the year based on our updated forecast.

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Michael J. Sison, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [32]

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Okay. And then, when you take a look at the orders and maybe the backlogs from the widebodies, the 387, 747 and 787, do you think the dealer expectations that you've been given from Boeing and Airbus kind of make sense and kind of support the outlook that you see for the rest of the year?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [33]

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Well, we do have line of sight to their build rates, and we believe that's what they're building at. I think the surprise was the timing and how quickly the supply chain contracted and adjusted for those rate reductions. Now you have to keep in mind, if you looked on a percentage basis what the A380 and 747 went down, the percentage basis is huge. So when you're talking about 6 and 12 per year, the supply chain just took some of that inventory out and tried to rightsize for what is the new reflected rate. So we feel comfortable where we are. Again, we're-- we certainly expect to see some spill into Q2, but we really believe the majority of it hit us in Q1.

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Operator [34]

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We'll go next to Robert Stallard with Vertical Research.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [35]

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I'd just like to follow-up on this destocking issue. The thing that's giving you confidence, is this coming from the actual customer? Their schedules giving you this (inaudible) assurance that we're -- to some extent done with this [ and some ] in 2Q, but then it's over. Or is it your assessment of just how much buffer inventory has come out already.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [36]

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Well, I'd say, it's mainly driven by our sales team and their communication with our customers on a regular basis on what they're seeing, what their inventory levels are and what their order patterns are. That in combination with what's come out and what build rates are planned, gives us confidence that -- we do have confidence at the range that we've updated our guidance to and very confident on our midpoint.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [37]

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Okay. And then on the narrowbody, specifically, the A320neo. There's also been some issues getting the engines onto the new aircraft. Have you had any indication from Airbus that they'd like you to slow down some of your shipments on that program?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [38]

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If you look at our numbers, A320neo pretty much came in where we expected. If you look at the rate Airbus is building, they are climbing, as we speak, over 50. So I think the question is the mix, and they committed and communicated that whatever they cannot deliver in NEO engines, they'll backfill with the legacy airplane. So we're pretty much on track and pretty much aligned with what we had forecasted and what we had included in our initial guidance.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [39]

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Okay. And then, just finally from me. I was wondering if you could comment on what the pipeline might be for potential acquisitions or other investments going forward.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [40]

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Well, we mentioned the incremental investment in OPM, and we're very excited about the Formax integration, and I would note that Formax played a big part in a couple of our new automotive contracts. We're very happy with carbon conversions and the recycling efforts we're doing, and we continue to work with them and drive new opportunities. We've already talked about OPM. And then, Luminati, we're focused on technology and lightweighting fabric. So our pipeline is active. We are looking at things. Again, they are technologies and opportunities that would enhance our ability to position our advanced materials even better with our existing customers or even possibly with new customers in the aerospace and defense or industrial space. So I can't get ahead of ourselves and announce anything that we're not ready to close on, but I can tell you, we're actively working that channel.

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Operator [41]

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

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [42]

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Nick, I just wanted to first start off on the -- on your space and defense market. Again, I'm not looking for quarterly guidance. But as you look at where you are now to sort of stable for the full year, are there any particular programs you'd highlight, considering the down first quarter numbers as particularly important to hitting or getting to the stable numbers for the full year? Or any things you'd highlight as maybe inflection points as we look at the cadence from here through the end of the year?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [43]

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Yes, I think we continue to give more optimistic on Space & Defense. And you've seen everything in the press on spending and budgets, and obviously, that'll take time to trickle down through the supply chain. But the encouraging things here are that our big programs, i.e., the F-35, the A400M, the V-22, the Blackhawk, those are at or above what we had forecasted initially. So we feel real good there. The one area that we pointed out that is still weak is civil rotorcraft. I think first quarter is the lowest we've seen. We do believe that it's in the trough and are optimistic that maybe it'll start picking up. Even saying that, we expect 2017 civil rotorcraft sales to be below last year. So I think there's momentum. The big programs that are driving our growth look good, and we're optimistic on the F-35, especially.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [44]

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Okay. All right. No, that's helpful. And I guess, if you were to parse out the civil -- which sounds like it was weaker, civil helicopter, weaker than expected. It's fair to say that the other parts of the business were performing as expected in the quarter?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [45]

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As expected or better.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [46]

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Or better. Okay. Okay, that's helpful. And then if I could, on your 2 new facilities in Morocco and France, when do you expect them to be at full-rate production, and when do you expect to maybe start to see some of the margin benefit as you anniversary, obviously, the start-up or the incremental costs you're incurring now?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [47]

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Well, just as a reminder, we will wrap up the investment this year and begin our qualification process. So we expect those sites to become productive next year. Now as you know, the volume doesn't get up to 100% immediately. So it'll take some time for us to ramp up through next year to provide the demand. Wayne, do you have any more to add on contribution?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [48]

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Not really. I mean, the lines in France will start up fairly quickly. Take a few months to commission, and then we'll go through the qualification process. But by the first quarter of 2018, hopefully, they're starting to contribute.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [49]

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Okay. So neither facility is shipping product yet or generating revenues yet, but both should be by first quarter of '18. Okay.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [50]

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Yes, we're hiring and training people. And as Nick said, we're literally nearly 100 people that are being trained to operate the lines there, and other sites right now are doing that -- learning how.

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Operator [51]

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We'll take a next question from Robert Spingarn with Credit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [52]

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A lot of this has been covered, but I just want to go back to the 87 destocking a little bit. And then, just given how sudden it was, is it really rightsizing the inventory, or does this have to do with the production rate perhaps not going to 14? Or is this too soon for that?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [53]

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Well, again, I'm not going to speak for Boeing, but I suspect there were -- again, as a reminder, these supply chains are very long, very complex, and there's a lot of players when you go down the Tier 1s, 2s and beyond. So there's probably no doubt in my mind that some of the supply base probably were still on a growth trajectory, probably we're still holding inventory and safety stock because of sole-source positions to be able to deliver at a rate 14. And maybe there's a little bit of an adjustment for that, maybe there's a little bit of an adjustment from a supply chain steady state and just the ability to take waste out. So it really -- if you'll look at this and look at how long Boeing has been at 7 -- the 12-per-month rate, I guess it shouldn't be so surprising.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [54]

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That's what I was thinking. Separately, where are you with regard to any upcoming programs? So middle of market, MAX 10, in terms of discussions? And then, how do we think about just -- what's the latest update on your CapEx wind-down? How should we think about CapEx trending over the next, I don't know, 8 quarters or so?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [55]

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So I guess, I'll answer it this way. You can assume for sure that we're working on any and all new programs with respect to new platforms or derivatives or new wings. I really don't want to get ahead of our customers. And as you know, nothing has been announced officially. So we're working alternate technologies, new technologies to provide even better solutions going forward. Now on the CapEx, we really do not see a change from what we guided to. And that is, this year we're going to be in the $270 million to $290 million range. And if you recall, we said that the cumulative CapEx in 2018 and 2019 would be $320 million. So we're still pretty much on that. I'd also point out, remember, our CapEx spend that we're spending this year is for volume required and demand required in 2018 and beyond.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [56]

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So what's a good maintenance level?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [57]

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I'd say it's in the $60 million range. Put $10 million on either side of that, so $50 million to $70 million.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [58]

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And -- so you're not going be -- you don't get there until after '19. I mean, it's unrealistic to think you're going to be at $60 million in '19.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [59]

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Well, I mean, it'll be disappointing, meaning that, if we go to that level that we haven't identified new growth. So we would not get there till -- until beyond '19 if growth completely stoped.

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Operator [60]

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And we'll go next to David Strauss with UBS.

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [61]

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Just wanted to clarify your comments on 777. So I think, back in January, you had talked about a $15 million to $18 million revenue headwind on 777. Now you're talking about, I guess, another -- are you talking about an incremental $20 million on top of that? Or is this still kind of in line with what you had talked about before?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [62]

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No. It' the same number. I think we -- in January, we said $16 million to $18 million because we're still working through the math. But it's the same number. It's about $18 million impact this year.

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [63]

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Okay. So relative to January, really, really what we're talking about here is currency and then, inventory reductions on other programs?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [64]

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Exactly.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [65]

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Correct.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [66]

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Correct.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [67]

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1% on FX and roughly 1% on supply chain optimization here.

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [68]

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Okay. And then that, that $20 million FX headwind from a sales perspective, how much does that help the EBIT line?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [69]

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Where it's -- it's -- Dave, we're fairly heavy -- fairly heavily hedged for 2017. So it's probably in the range of maybe $0.01 is all that we're -- (inaudible) just to be clear, for the benefit -- small benefit...

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [70]

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Okay. And then the start-up costs. So it's fair to think about that in your guidance for this year, you have $10 million of EBIT headwind related to your start-up costs for the full year?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [71]

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Yes, it's in a range -- it's in the range. I think in the fourth quarter, you'll -- if I remember correctly, they'll start generating some revenue, and that number will go down a little bit. But it's in that range.

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [72]

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Okay. And then Wayne, cash taxes. Did you have a fairly significant cash tax payment in the first quarter?

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [73]

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The answer is no. We did not have (inaudible) not in the first quarter.

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David Egon Strauss, UBS Investment Bank, Research Division - MD and Senior Research Analyst [74]

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All right. And then last one from me. I know you typically don't provide kind of quarterly guidance, but any help you want to provide in terms of EPS cadence? I mean, typically Q2 is pretty strong and Q3 is little bit weaker on Europe shutdowns. Is that going to look a bit different this year? It would seem that it's going to.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [75]

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So we'd like to stick to the process of not providing quarterly guidance, just to be clear. But if you look back, typically, you're right. Second quarter is a little strong. Third quarter is always a little bit lighter just because of the summer holidays. I think the -- what we'll have to say for this year is that fourth quarter is maybe stronger than normal. You got the -- you've got Christmas holidays at the end of the year. But as the growth looks a little bit stronger going into 2018, you'd probably expect a little bit better fourth quarter then maybe we might normally do.

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Operator [76]

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And we'll go next to Hunter Keay with Wolfe Research.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [77]

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The cost savings you guys disclosed today, is that sort of a onetime thing that you kind of had in your back pocket in case of these slower sales dynamic developing? Or is it sort of the start of a bunch of opportunities or initiatives that we should expect to continue to ramp as time passes?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [78]

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Well certainly, we're always pushing productivity and continuous improvement, and I expect cost reductions always. The fact that sales dropped below what our initial expectations were, it gives us an opportunity to take a step back and focus and double down on productivity and cost takeout. It also allows us an opportunity to take a breath as we've been ramping up and optimize some of our supply chains, some of our processes and some of our organization structure. So again, we're still growing. This hasn't changed. This is an adjustment. We're still very bullish. Our 2020 vision has not been impacted based on this inventory reduction, as they were already built in. So we're going to hire the required people. We continue to hire in R&T. We're going to hire the right people to drive the productivity enhancements and the operational excellence. But they will have payback justification and will continue to drive those opportunities going forward.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [79]

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Okay. Then, I guess, what I was looking for is, is it sort of the beginning of sort of like a cost theme that might sort of repeat itself in time to come. And it sounds like -- not necessarily yet more of an ongoing thing is what you're saying?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [80]

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Right.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [81]

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Right, okay. And then on bizjet, sort of -- believe in the past you've said that you've seen some little more resiliency out of the Gulfstream programs relative to, say, Bombardier. Is that still the case there? And maybe you want to give us a little bit color on how that market is behaving in general and at a specific level by customer?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [82]

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So in total, the sales levels are down just a little bit from the prior year. If you look, Gulfstream remains the largest customer, and the G650, I think, remains the largest individual program. As you go through it, I don't think there's anything special to -- I mean, we got a little bit of ups and downs throughout, but it's still about Gulfstream Bombardier and Embraer, even the C-Series, we include in that, you start to see a little bit of that come up, but in absolute dollars, it's still not that big yet.

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Wayne Charles Pensky, Hexcel Corporation - CFO and EVP [83]

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And I think, sequentially, it was prelevel. Which gives us some hope that'll hold.

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [84]

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Right.

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Operator [85]

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And we'll take our last question from Ron Epstein with Bank of America Merrill Lynch.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [86]

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It's Kristine Liwag calling in for Ron. Nick, you mentioned several technological advancements for a next-generation aircraft. Specifically, you mentioned additive manufacturing and also quick-cure technologies. And so with this in mind -- I have a three-part question, just to warn you. First, conceptually, how would these advancements change the aerostructure manufacturing process? And then second, how mature are these technologies today? And then third, how are your areas of investments different from other players in the industry?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [87]

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Well, you weren't kidding. That was a loaded question. So let me try to take -- and if I don't address all of them, come back at me. So with respect to the technologies we're looking at, there are multiple technologies for the same application. So we're providing our customers with a diverse set of technologies, processing, enhancements that we can work with them to optimize the mechanical performance as well as the productivity performance. So things such as, if you think of narrowbodies running at rates in the 50s or higher and coming up with technologies that allow us to double the laydown rate or reduce the cure rate by half, the throughput, the investment savings from our customer base on capital and the timing, it's a significant cost reduction in the whole process. So that gives you a flavor for things that we're looking at and providing. They can be fabrics. They can be unidirectional. They can have multiple resin systems. So the nice thing is we have our own fiber. We have high-strength intermediate modulus, high modulus. We can mix and match. And we're in a position to offer solutions that we believe no one else can offer. So that answers the one part. How mature are these technologies? It varies. Some of them could be ready within a year. Some of them are probably 3, 4, 5 years away. Now the question is, when will they be needed? And we continue to work with our customers, and that's part of why we provide options. Depending on the launch, we want to have the right solution at the right time. And there was one other part you asked. Remind me what it was.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [88]

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How different is your investments from other players in industry today? And I mean, part of that is we're hearing that, as early as in the next few years, we might see an A322 type NEO aircraft with cold cure composite wings. I mean, that's just industry chatter, nothing confirmed. But just trying to see where your technology is versus other players out there?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [89]

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Well, again, I'll reiterate the point that we have our own fiber. We have various grades of fiber. We're continuing to push the technology and advancing the fiber performance. We have our own fabrics. We have noncrimp fabrics. And the breadth of what we can offer, we don't believe anybody can compare with. When you look at the parts, the engineered core, the Acousti-Cap, the positions we have, not only on the airplane structure and secondary structure but on engines and the cells and fan blades. We are poised to position ourselves for growth going forward as new derivatives are launched, as new wings are launched, which, inevitably, they will be.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [90]

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For the -- the piece that you mentioned on cost reduction and being able to reduce cure rate by half and things like that. When you're able to reduce cost, how much of that will you be able to keep versus how much of those cost savings would you have to pass through to the customer?

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Nick L. Stanage, Hexcel Corporation - Chairman, CEO and President [91]

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So that is to be determined. I mean, we basically provide solutions -- advanced solutions. And we certainly know what margin levels we need and we value price. And we value work with our customers on providing them a solution that meets their ultimate need. So I don't worry about margin erosion, if that's what you're saying. I'm very proud of the job our team does in looking at ways at cannibalizing our technology to have a leg up on the next technology. The last thing I want is to be surprised on a technology shift. So we push it ourselves. So I'm comfortable in maintaining and quite honestly, in expanding our margins, which we fully intend to do through the balance of this year and into next year. Thank you. And Tracy, as we wrap up, I just would say that nothing has really changed from our perspective on the markets we serve, on how those markets are doing with respect to end demand. Backlogs are still high; passenger travel is high, airplane build rates, both Boeing and Airbus, are increasing this year; the mix and the transition is going through for a total refresh, and that's kind of the bump we addressed in Q1, maybe a little bit in Q2. So I have to say, I'm excited. I'm proud of the job our team did in reacting realtime to our customer needs. I'm excited that we continue to focus on our future, continue to invest in our future, and it's never been brighter. So thanks for the time today. Have a good week.

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Operator [92]

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This does conclude today's conference. We thank you for your participation. You may now disconnect.