Hexcel Corp (HXL) 2006 Q2 法說會逐字稿

Good day everyone. Welcome to the Hexcel Corporation's second quarter 2006 earnings release conference call. This call is being recorded. With us today are Mr. Stephen Forsyth, Executive Vice President and CFO, and Mr. David Berges, Chairman, CEO and President. At this time I would like to turn the call over to Mr. Forsyth. Please go ahead.

Good morning everybody and might I welcome you to Hexcel Corporation's 2006 second quarter conference call on today, July 25. Before beginning let me cover the formalities. First, I would like to remind everybody 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 2005 10-K and in today's Press Release.

Might I also remind you that the call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

With me today are David Berges, Hexcel's Chairman, CEO and President, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of our call is not just to review our second quarter earnings but also to expand upon our organization and portfolio decisions that we discussed in last night's Press Release. First though, I'll cover the quarter and then turn the call over to Dave for his discussion on our strategic direction. As always, we'll be happy to take your questions at the end of our prepared remarks.

So if I may discuss the second quarter of 2006, the second quarter produced revenue growth that frankly was below our original expectations but was consistent with our revised guidance that we issued on June 27th. While operating margins were over 11% using our definition that we set at the start of the year excluding business consolidation and restructuring expenses because they're lumpy, the growth in commercial aerospace and wind energy could not offset the almost 40% decline in the sales of our ballistic materials. If one looks at operating margins, again excluding business consolidation and restructuring expenses, they were again over 11% at 11.2%. But if you look at operating income itself on the first blush it looks a little lower than it was last year but there's a number of components I'd like you to consider.

First of all, like all public companies we adopted FAS 123R, the expensing of stock options, as of January 1st of this year. As a result, our non-cash stock compensation expense was $1.8 million higher this quarter than it was in the second quarter of 2005 at 2.5 million in total for this quarter. Secondly, you will be aware that we have our restructuring action to close our Washington, Georgia facility and consolidate the production from that facility into our remaining facilities and the costs associated with that action, which are predominantly being incurred in the first half of the year, resulted in business consolidation restructuring expense being $700,000 higher than a year ago.

Lastly, while this is a fairly clean quarter in terms of unusual items, the second quarter of last year included the benefit of a sale of assets, which gave us a net benefit in the quarter of about $900,000. If you were to normalize for all of these items our earnings this quarter, the second quarter of 2005, were about 36.8 million which compared to 36.4 million a year ago, so not a strong improvement year-over-year but still improvement compared to a year before.

Earnings per share for this quarter were $0.18 per diluted share. Now for those of you comparing that number to a year ago it's important to remember that this year we're providing a full tax provision on our earnings having released our valuation allowance against our U.S. deferred tax assets at the end of 2005, whereas a year ago because of that valuation allowance we are only providing taxes on our European earnings. As a result, the tax provision is significantly greater this year and also in that EPS number was the benefit of the asset sale from last year.

So maybe next I could turn to the question of revenue trends. Our comparisons as usual this quarter are in constant currency both from a practical perspective this quarter where currencies were pretty well matched in terms of the average rates for the quarter compared to a year ago and so the constant currency adjustment is of less significance this quarter.

Commercial aerospace sales for the quarter were up 11.4% in constant currency and as compared to last year's quarter and about 5% up compared to the first quarter of this year. That growth has been driven by our legacy commercial aircraft programs, the programs currently in production, Boeing Airbus, and the regional aircraft producers who are having a good year too, and that caused both year-on-year growth and sequential sales growth.

Now, of course, the Airbus announcement on June 13th of the push out in the A380 deliveries was a disappointment but it had little impact on the quarter itself due to the suddenness of this announcement. While we now do have some more information upon the schedule plans for assemblies of A380s over the balance of this year and going into next year, there's still a lack of clarity on how each location and each subcontractor in the supply chain will adjust their production schedules and their activities to support this revised production scheduling.

Nevertheless if we look at the total picture we do expect that production rates will slow for the second half of 2006 compared to the first half. But the degree to which those rates are reflected in demand will vary across customers and locations as they make their own decisions as to how best to manage their production capacity and their inventories. While this makes forecasting a little more complex, we still project that our commercial aerospace revenues will grow by 10% or better in 2006. And, of course, as we look forward to 2007 with the projected ramp up in 380 deliveries in 2008 as we deliver at least six months ahead of when an aircraft is delivered, we'd expect to start to see a ramp up in our A380 related avenues by the second half of 2007.

For the quarter though the largest story from a revenue perspective has been the fall of in ballistic revenues from those surge levels that we saw starting in late '03 and running into early '05. As we've discussed on many occasions, we anticipated that at some point once the military services requirements to re-equip all of their troops was complete we would see a decline back towards historic levels. There aren't clear forecasts of that from our customers so we made our own assumptions at the start of the year and the reality is that the decline is progressing faster than we had initially expected but, of course, the good news there is that it means that we'll get to the point of your reaching at some sort of steady state sooner if that occurs.

Now the impact for the quarter was to drive our total industrial revenues down by about 9.9% compared to a year ago. In terms of the ballistics revenues themselves, they were down 40% compared to a year ago and 21% compared to the first quarter. The guidance we provided in terms of our revenue outlook on June 27th assumed not only this reduction but that we would continue to decline sequentially over the remaining quarters of this year but this is obviously a market where we have less visibility than we have in other markets and so that pace will be something we have to monitor each quarter.

Wind energies this quarter grew by 9%, a little lower than what you've come to expect but still a steady pace of growth for an industry that is expanding rapidly. Wind growth for the first half of the year is 13.1%, so pretty much in line with our expectations of teen's growth from this market this year. You only have to look at any newspaper or read the industry association news releases to see that worldwide growth is projected for wind energy for this year, 2006, and it could well be another record year for installations and that should not be a surprise to anyone when one looks at the secular trends of rising oil prices making alternative energy more compelling or the interest in renewable energy in general as well as economic growth, particularly in Asia, all driving an increased demand for this form of renewable energy. And our customers are responding to that growth by placing plants both in the U.S. and in China to support that next leg of growth.

Our space and defense market this quarter was essentially flat in constant currency compared to a year ago. And again, as you'll have heard us discuss many times, we've long observed quarter-to-quarter variability in demand from this market as our customers tend to manufacture the components they need in campaigns for what are essentially lower production rates programs. This quarter there's nothing I can specifically point you to in terms of a program or a product that changed but there's clearly customers managing their inventories more carefully out there at this point in time.

If one looks at the fundamentals, the prospects of helicopter sales, both in the U.S. and Europe, continue to rise and in most of our markets there is the presence of the increasing penetration of composite materials to derive weight reductions and performance improvements. A notable announcement this quarter was the Eurocopter win of the U.S. light attack army helicopter program.

Well having talked about revenues and talked about operating earnings, just let me spend a couple of moments on some of the more technical aspects of our performance. Your taxes, as I noted earlier, reflect the release of the valuation allowance and the full provision on U.S. earnings as well as European earnings, so our reported tax rate for this quarter was 39.3%, at the top end of the range that we had given you earlier in the year. Where we fall in the range is driven by a multiplicity of factors including the composition of where we earn our income. The provision for the quarter as a whole was 10.7 million but with the benefit of those deferred tax assets we have on our balance sheet if you look at the cash tax payments, cash taxes for the quarter are only about 2.3 million and that compared to actually 4.3 million a year ago. So from a cash perspective taxation is still not a major component of our cash flows.

In terms of cash flow itself your total debt net of cash did reduce this quarter by a fairly modest amount of 10.1 million, but that's after incurring over $25 million of capital expenditure as we move forward with our carbon fiber expansion plans. Those expansion plans remain on schedule. In terms of working capital your second quarter is always the peak of our working capital usage in the year and we'd expect the normal seasonal decline as we progress over the balance of the year.

Before turning the call back to Dave, I'd just like to briefly talk about some of the financial dimensions we provided concerning the portions of our reinforcements asset for which we intend to explore our strategic options. This is preliminary thinking in terms of these assets. There's some definitions we've done to define the exact splits between the product lines we'll retain and the product lines are subject to this review but if you look at those initial assumptions, the sales for this business were around 220 million in 2005 and on a constant set of assumptions and obviously reflecting the impact of the decline in ballistics plus some modest growth in some other areas, we looked at having revenues of about 96 million in the first half of 2006 compared to 118 million in the first half of 2005. The investment in the assets associated with this business and I'm not attributing any debt or cash to this business. That net investment at the end of the last year was somewhere in the order of $120 to $130 million. Now that will have declined a little in the first half of 2006 as a result of our electronics restructuring actions.

To anticipate your questions, it's obviously a little too soon to talk about timing but this is obviously a process that will take some months and we will report to you as we move forward each quarter on progress against these goals. So with those comments, might I turn the call over to Dave for his comments on our strategic direction.

I trust those of you who read last night's release understand the importance of the critical decisions we've made to position Hexcel for the future. In my first five years at Hexcel I've come to learn that we have little ability to control global events, end market demand or for the most part the performance of our customers. For our products the most important thing we can do to influence organic growth is to maximize our position on new products in growing markets where we have a sustainable competitive advantage, growing markets and sustainable competitive advantage.

Today we begin a transition to align the entire Company around those two tenants of long-term growth. Hexcel's best opportunity for sustainable competitive advantage is in the area of advanced composite materials. We have knowledge and capability across a broad range and deep range. We have strong positions in high performing carbon fiber, specialty reinforcements for composites, epoxy systems, honeycomb, prepregs and unique structures products. More importantly fine tuning the interaction among these elements is increasingly becoming a differentiator in the most demanding applications. We will organize and focus around these products to allow us to leverage our marketing technology and product development resources and streamline and strengthen our supply chain. We will be better able to offer matrix systems and assembly solutions.

As for growing markets, ballistics, electronics and architectural product lines, each have the potential to grow though probably better with someone who has synergies with like products in like markets. The dedicated teams working in these product lines have done a wonderful job in their respective markets. These are well run profitable business lines with opportunities deserving of focused capital and resources. But the long-term growth potential seems to pale in comparison to the secular composite penetration story you've come to understand with Hexcel. The industry has long worked to demonstrate that advanced composite materials should replace traditional materials in aerospace and many other structural applications. We are now at an inflection point and we now have unbridled opportunities for our products, opportunities on which we must place all our energies and focus if we are to maximize their benefit to our shareholders.

If you've followed us for the last five years I hope you'll accept that we're not just about growth. We have been on a mission to expand our operating margin levels to a level appropriate to support the pace of technology change and the capital requirements. After September 11th we took painful cuts that allowed margin growth despite a dramatic sales decline. Since then our business model has been to drive operating leverage by holding costs better utilizing manufacturing capacity as we grow. As a result, our adjusted operating margins have grown from 7% for the calendar year 2002 to over 11% in the first half of 2006. This narrowing of our strategic focus gives is the opportunity to maintain a rapid pace of margin improvement. Organizational efficiencies, a better mix of products, a more pure path to growth and the leverage it affords, we want to make margin expansion a routine expectation.

The Farnborough Air Show last week provided timely evidence for the growth opportunities for advanced composite materials and for Hexcel that underpin the strategic importance of these changes. The demand for new commercial aircraft remains strong supported by growing passenger traffic worldwide and high aircraft occupancy despite the shock of higher oil prices. Lightweight new aircraft are in high demand. We are convinced the A380 will be successful. The new Airbus team seems committed to the program and hope to improve on the schedule. We are also encouraged by the continued customer support for the aircraft and the new orders from Singapore Air announced last week. It will be a great program for Hexcel, just later than we had hoped.

The Boeing 787 has gained an unprecedented level of customer acclaim and the order book continues its amazing growth. It is a statement of how composites can transform aircraft design. I am confident it will be our best Boeing airplane until a new GLAC 737 is launched. Airbus last week re-launched the new A350 with improved performance in part because they've upped the composite content to 45% from the 39% projected earlier. To our somewhat biased ears composites seemed to be the theme of the Air Show. From big jets to small, military and commercial, UAVs, nacelles, engines, propellers, the penetration of composites is relentless.

If you could squeeze into the crowded Hexcel stand, you would have seen many new materials and applications we are developing. They include HexMC, an advanced composite molding material, HexTool, a tooling material for building tooling to produce high performance composite parts, HexWeb acoustic cap, a noise attenuation honeycomb for aircraft engine nacelles and Fibrelam 2000, the lightest weight aircraft floor panel on the market today. The Show demonstrated that despite the turmoil following the Airbus announcement on June 13th the fundamentals remain unchanged.

With our new organization we will be stronger and fitter to respond to the many opportunities provided by the secular trends in the industries we serve. As we implement our strategic initiatives in the coming months you can count on the people of Hexcel to employ the same discipline and single mindedness that we have demonstrated in the past to drive our business to the next level of performance. I look forward to reporting on our progress each quarter and we are now happy to take your questions.

[Operator Instructions] Our first question today will come from Nigel Coe with Deutsche Bank.

Can you just give us some color on how long you've been considering this move and perhaps how far down the track you are? It doesn't sound you are that far but also can you give us some sense of what's involved? I mean are these standalone businesses already or do they need to be carved out with historical financials, all [that's hidden] and created?

First on how long have we thought about it, every year we review our portfolio, like most companies do, and talk about our strategies and determine where we want to go for growth. Last year the focus, of course, was on our investment in carbon fiber. While I can't specifically spell out when any conclusions were reached, remember we did have eighteen months of secondary offerings that were a focus of the Company and this is certainly something we've considered for some time. We are early in the process. There has been, as always, some expression of interest from some parties over the years but we expect that we're just starting this process and it will take some months.

And as for carve out, there with any such move are pieces and parts that are somewhat integrated that we'll have to sort out and decide whether we talk about supply contracts and the like but for the most part these businesses are fairly independent and easy to carve.

Okay and just a second question so I could get back in the queue, I was a bit surprised to see such a drag with the reinforcements notwithstanding the ballistics decline. How much was a factor were higher resin prices during the quarter?

In the reinforcement section, if that's what you're referring to, there are no chemistries that go in there. Those are strictly fibers. I think one of the things you have to think about is that when a specific product line has a very large drop it's pretty hard to shed and variabalize the overhead. We've done a good job of trying to variabalize always when we go down but five years ago when electronics dropped 75% we had a difficult time and it took a while to get us back in balance and the same could probably be said of ballistics with this recent decline.

Next we'll hear from Steve Binder with Bear Stearns.

Can you just maybe give a little bit more detail on number one, I'm assuming you sell these product lines; what do you plan to use the proceeds for? And two, what kind of restructuring actions do you plan to implement to consolidate the remaining-- is the additional restructuring just associated with consolidating the remaining reinforcements business or are there other actions planned as well?

Well, in terms of if there are proceeds what are those use of proceeds? Day one it would be simply a question of reducing the debt, but we're not doing this specifically to pay down debt. It's so that we have the financial wherewithal to make the investments that we believe will be necessary to respond to the great opportunities in the composites market so we want these resources and this liquidity to give us the ability to pursue vigorously the growth opportunities that we see over the balance of the decade and so that's the focus for this.

Secondly, in terms of restructuring actions, yes, there will be some pieces just associated with the realignment, but you'll also notice in our Release we said we're going to bring all of our businesses into one operation and sure there will be some costs associated there. You know we're not ready to really define what those are, but we said that probably by the end of the quarter we'll be able to give you a better picture on those.

All right. David or Steve, can you maybe just this is not-- I mean granted this is not a good test for incremental margin performance because the sales variance wasn't that much, but can you maybe-- when you look at your cost structure in the quarter either on a year-over-year basis or sequential I mean granted you had a profit decline on both directions part of that stock compensation expense year-over-year, but can you maybe just go over the puts and takes? What were the cost drags in the quarter that might have limited your margin performance?

I think you've got a good indicator if you just sort of look at the move in SG&A because you know that's a very visible cost element in the P&L. You know SG&A was up $2.3 million in the quarter. The biggest component of that increase is actually just the year-on-year stock compensation change. So of that 2.3 million most of that 1.8 change in stock comp expense went through that line, so you can see the underlying change in SG&A expense was low. Like all companies the primary driver of fixed overhead cost is people and obviously there are salary increases and those things each year and it's offset by efficiencies and how we do things. If you look up at the gross margin line you can see that we generated a comparable gross margin to a year ago. You know there were what, 5 million more in sales, so one would have hoped to have got a little bit more leverage out of those sales, but we still got something in the low 20s in terms of dollars. So there's nothing dramatic to report in the factory costs, you know more revenue and you've just seen a lot more leverage. I think that revenue is the missing component of the story.

And just two last things, receivables were up sharply in Q1. They were down a little bit in Q2. Second half you touched on working capital. You typically get seasonally better working capital performance the second half but is there any new efforts to improve collection activity? It seems like it's been an issue for a lot of companies in the industry. I'm just wondering do we see that number come down-- you know, will we see the 20 plus million improvement in the second half of the year in working capital?

You will see an improvement in working capital in the second half of the year, but it is more timed by some of the seasonality factors than a specific change in the number of days outstanding. What you see in terms of the growth of our receivables has really not much to do with collections. In terms of days outstanding we're pretty much holding and we tend to deal with large companies that operate in a pretty planned and normal manner. It really reflects the mix of where those revenues have been generated from. You know, obviously, Europe pushes a little harder in terms of days than the U.S. and different markets have their different payment terms, so you're really seeing a mix effect in the total receivables, but because in the summer you have the impact of the summer vacation period in Europe, that tends to push our receivables down by the end of the third quarter. And then at the end of the fourth quarter, again certainly Europe and more and more these days the U.S. tends to slow so December tends to be the lowest sales month of the quarter and as a result your receivable balances at the end of the year are lower too. And so we would expect a net reduction, but it's more to do with those factors than that collections will get better because really collections haven't changed in this period.

All right and Dave, any update on the additional 787 war packages that you might want to touch on?

Well, we talked about our new products introduced at the show. Those are obviously contenders on all new aircraft and I think it's fairly widely known that we've got a very good position on the GE fan blades. We did on the GE90 and we do on the GEnx, which of course, has also been selected for the 747-8.

[Operator Instructions] At this time we'll hear from Al Kaschalk with Wedbush Morgan.

I was wondering if you could comment in light of the strategic alternatives if there's any change in the capital expenditure program whether to accelerate or keep it at the pace you have laid out for us?

Al, most of the capital focus, as you are probably aware, is on carbon fiber and the growth in commercial aerospace we're still very excited about that, still very committed and dedicated to it. Whether we modify the timing on the European installation a few months or not might be something we consider, but basically we're as excited about the future for carbon fiber as all of the other fiber producers are and I'm sure you'll still see us investing in that.

While I realize you're probably not going to give more details, but is there certainly a balance here between time, price and strategy on how long your efforts are carried out to see what you can "get for the reinforcement assets?"

Well, sure there would be, but I mean we're running a public process. That's why we announced it up front in a very public fashion. I expect that we'll find whatever interest there is if we go down the sale route and I don't expect that we're going to have any surprises that would cause dramatic lingering or acceleration for that matter.

Other than perhaps pride, is there any reason you would not sell it having come out and announced it?

Sure there could be reasons, but pride isn't one of them I can assure you.

Thought I'd try. In terms of the commercial aerospace, Stephen, I was wondering if you could comment on what does 10% or better mean in terms of the revenue? Are we still in the low teens on the commercial aerospace efforts?

Well, it's the same guidance we gave on June 27th where we said let's assume that the same thing happens in the second half of 2006 that happened in the second of 2005 when Airbus had its first push outs and so a low, low level of Airbus revenues. And even if that occurs we'll generate 10% growth and if they do better then we'll see if we do better, but at this point where the guidance sits is at 10% or better.

Is there a scenario where Airbus comes out with some guidance that production or deliveries could be somewhat changed that this number would have to be reevaluated on the downside?

Apparently, they have twice before. One would hope that this is a very conservative outlook though I will say I hoped that last year. You know, I'm encouraged that it's still the discussion on wiring, which is clearly a difficult, tedious task that they're working through. I haven't read nor heard any other dramatic performance issues. The structure sounds to be doing very well in tests and the composites are doing very well so you know I would hope that we're more likely to be surprised upwards than downwards.

But is your confidence better this time around than it was the summer of '05?

Actually, my confidence in the summer of '05 was pretty good. It turns out to have been wrong.

And then finally, I was wondering if we could talk about, given the guidance and the assumptions and the results of ballistics, if the sequential decline we saw in Q2 is something we should be looking for in the out quarters as well for the balance of this year or relative to the year-over-year should we be seeing something in the 20 to 30% decline in revenues?

In ballistics you mean?

Well, ideally like yes, ballistics, but if we need to be up one level from there to talk about it that's fine, but ballistics--

Well, I mean we did our best, Al, on the guidance that we have. Ballistics is a bit of a question mark and has been all year and the A380 is a question mark. And what we did when we put out that guidance was gave it our best swing and we haven't changed our position on that today.

Steve Levenson with Ryan Beck & Co. has our next question

Can you tell us are you going to treat the businesses that are being considered for disposition as discontinued operations or is it going to remain part of the regular financial statements?

Well, let me try and answer that, Steve. There a set of pretty precise accounting rules for what is considered a discontinued operation and what isn't considered a discontinued operation and when you can make that determination. And so, today clearly they are not a discontinued operation. At some point in the future they could well be so, but it involves sifting through the pattern of facts each quarter and reaching that determination and so, I'm not ready to handicap when that pattern of events would meet the accounting requirements, but at some point it may well.

Everybody's talked about the commercial airliners, but one of the hits at the Farnborough Show was the V22 and I guess the Bell/Agusta 609 is coming up for certification sometime next year. Could you give us some details on what your opportunities are there, both on the military and the commercial side please?

We'll, we're pretty excited about the V22, not just for the current customers, but seemed to be quite a bit of interest beyond the U.S. Government, so we're encouraged by it. It's an important program for us. The 609 is much less interesting to me in the near term. I don't see a lot of near term upside on 609 though, but we root for any new airplane.

Thanks and I think your mention of R&T expenses related to getting material qualified for the 787 was your first printed reference to that. Can you give us details as to where that material is headed?

Well, the R&T numbers include qualification work for any or all programs. The fact that a 787, an A400M, A350 and a number of other UAV programs are underway just suggests we're going to be spending more on R&T on qualifications as we go forward.

And the last item is with the announcement of the A350, which I guess isn't 100% official yet, but assuming it will be and based on the expected capacity in Madrid, are you going to be able to produce enough material there or do you think there will be some future expansion required?

I will add capacity as needed to maintain our strong, strong position in commercial aerospace growth. So the A350 is far enough out that we'll have time to sort that out, but we're not building a plant in Spain for the A350 or we wouldn't have needed to start it yet.

[Operator Instructions] John McNulty with Credit Suisse is next.

Just a couple quick questions. With regard to the asset sales or potential asset sales it's my understanding these businesses while they're small they actually throw off a reasonable amount of cash and that was one of the things that was being used to help fund some of your future growth. Are you concerned at all about the cash generating abilities of the assets that you have that are kind of in the higher growth platform now and really won't necessarily have a cash cow to necessarily support them going forward?

As a generality I would say all of our businesses generate cash. So the fact that you're seeing us able to cover the level of capital spending we have at the moment is because everybody's contributing. It's not that these specific assets were sort of carrying the ship. You know these assets are profitable. They do generate cash flows, they make acceptable returns and so they are in and of themselves attractive businesses. Our decision in terms of focus though was that areas we wanted to focus on were the higher opportunities for composites. Now from an investment potential and a liquidity potential successfully if we were to pursue a successful sale of these businesses we've identified as non-core, clearly would dramatically improve our financial strength to be able to invest in the growth opportunities for our business. So I'm not concerned about the cash flow associated with these businesses. You know you could obviously get a proxy for looking at that just by looking at the segment for reinforcements in total and looking at what that means as a proportion of our total cash flows and we're only looking at about half of those revenues going away in this sort of realignment. So I'm comfortable we have the cash and while these businesses are cash positive they're not so significant to the totality of our picture that it's really going to disturb us.

Also, with regard to the potential for striated costs, can you address that issue and how you plan on dealing with that?

Well in terms of cost we will deal with it in terms of the specifics of the business and how we carve it out and how we merge the remaining pieces into our own operations, but I think everybody will see our track record is we don't tend to leave costs sitting around that's unnecessary, that we have a strong track record of tightly managing our costs and will apply that to this set of circumstances. There may be some consolidation expenses incurred in relation to that and we said we'd talk a little bit more about that probably at the end of the third quarter.

And then the last question, with regard to the 787 I know typically you see a pretty long ramp up time for new platforms and so deliveries happen as early as two years out. Are you starting to deliver for the 787 in any kind of meaningful way at this point?

Well, you're right that you start well ahead of programs and to the extent we're providing materials that are going into qualifications, that's certainly the case so I'm not sure of your definition of meaningful. I would consider it meaningful when you get to within a year, year and a half of launch.

Sarah Thompson with Lehman Brothers.

Actually most of them have been answered. I just had a quick one. You may not answer it, but is there a significant difference within the reinforcement segment detail in terms of what the profitability is of what you're selling versus what you're keeping?

I appreciate the question, Sarah. I don't want to get into the specifics in terms of the margins, but the businesses that we're selling are profitable and the businesses we're retaining are profitable. And so, this is not an issue about under-performing assets. These assets have great future opportunities. It's just that we think we're better focusing on the things where we have the greatest competitive advantage, and so I wouldn't try to lead anybody down the path that there's some inherent difference between the two attributes of the reinforcement segment.

At this time there are no further questions in the queue. That does conclude our conference call. Thank you for joining us today.