Hexcel Corp (HXL) 2008 Q1 法說會逐字稿

Good day and I want to welcome to the Hexcel Corporation First Quarter 2008 Earnings Conference Call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I will now turn the call over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2008 First Quarter Earnings Conference Call on April 22, 2008. 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 results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the Company's SEC filings, including our 2007 10-K 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 express permission. Your participation on this call constitutes your consent to that request.

With me today are Dave Berges, Hexcel's Chairman and CEO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2008 first quarter results detailed in our press release issued last night. First, Dave will cover the markets, then I will cover the financials, before taking questions.

So let me hand the call over to Dave.

Thanks, Wayne. 2008 started out with a bang with top line sales almost 22% higher than last year's first quarter leading to record sales and operating income for the second quarter in a row and a 50% year-over-year increase in net income when adjusted for one time items.

As importantly, we made good progress on our global capacity expansion programs. Our new prepreg facilities in France and Germany are now engaged in material qualification runs. And next Tuesday is the formal opening ceremony for our new carbon fiber plant in Spain. Our next new fiber line in Salt Lake City has been accelerated into the third quarter of this year when we hope, also, to begin wind energy prepreg manufacturing in our new plant in China.

All of these projects have put some short term stress on our results but are essential to keep pace with demand -- the demand profile we see from our customers. We expect the new European plants to at least fully cover their incremental fixed and startup costs in the second half.

As I'm sure you're aware, this quarter has seen a 14% year over year decline in the value of the dollar versus the euro. For reference, a reported top line sales of $344.5 million dollars were 22% higher than last year as reported but only 16% on a constant currency basis. So the apparent sales growth of $62 million was $47 million in real volume terms.

Commercial aerospace sales were $192 million for the quarter, up almost 30% even in constant dollars from last year. Sales to Airbus and its subcontractors were up over 35% for quarter principally due to the continued growth in build rates.

While sales related to the A380 were up both sequentially and year-over-year, they're still lower that the first quarters of 2005 and 2006. Sales to Boeing, regional and business aircraft OEMs and their subcontractors are up over 25% in aggregate for the fifth quarter in a row.

It's still too early to comment on the impact of the 787 but as a result of detailed demand reviews with our customers, we are raising our estimated content per plane to $1.3 million to $1.6 million dollars up from our prior estimates of $1.0 million to $1.3 million.

As for the A350, I have nothing new to report. We still expect the primary structural prepreg supplier or suppliers to be defined in the near future and we still like our chances.

At the macro level, Boeing and Airbus again had year-over-year growth in quarterly aircraft orders in a very positive book-to-bill start for the year. Their combined backlog is approaching 7,300 aircraft over 7 years at current production rates. As I'm sure you're all aware, most of this backlog is international. A lot of it from oil rich regions who have a different view of the economy. Domestic legacy carriers are certainly being stressed by high fuel costs and increased FAA scrutiny. But this only adds to their need to find a way to renew their fleets with new light weight aircraft.

Sales to space and defense markets were $74 million for the quarter, up almost 11% in constant currency. Although sales to this market are often unpredictable quarter by quarter, we're off to a strong start and we're confident of achieving at least our typical 8% to 10% growth target in this space.

For the quarter, strong global demand in helicopters and U.S. Military aircraft were again the main drivers of our growth. Rotor craft sales now amount to almost half of the total segment. We're pleased to see that Bell-Boeing received orders for an additional 167 V-22 Ospreys, an important program for Hexcel.

Overall reported sales for our industrial markets of $79 million were actually down almost 5% in constant currency versus last year. What we call our Other Industrial Applications were again lower than last year's period principally due to carbon fiber availability.

As usual, wind energy sales were very strong, up double digits both sequentially and year-on-year. We now expect revenues in wind to be more than 50% of our industrial sales for the year.

We have prepreg capacity coming online in Austria this quarter will help us meet near term demand. And China comes online in the second half. We're also reviewing alternatives to add significant wind prepreg capacity in the U.S to follow our blade-making customers.

Now let me turn the call back over to Wayne to go through the earnings story.

Thanks, Dave. First let me spend some time discussing currency impact in detail because it affects all of our reported results and one of the items we have to manage. As Dave mentioned, the average dollar to the euro was 14% weaker for the first quarter of 2008 as compared to the first quarter of 2007. In fact, the spot rate at March 31, 2008 was nearly 19% weaker than the spot rate one year earlier.

Our income statement has two different impacts which helped act as a natural hedge. First, more than one third of our sales are denominated in Euros and pounds so the weakening dollar causes those sales and their related costs and profits to translate higher. A weak dollar helps these sales and this impact is easy to understand.

Second, the more complex impact is our European aerospace sales, primarily denominated in dollars but have a significant portion of their costs in Euros and pounds. The net result from these two impacts on our 2008 income statement is that the Euros and pounds are in an estimated $75 million equivalent net cost position.

For the year we have hedged approximately 75% of that net position. Specifically, the average actual rate for the quarter was about $1.50 per Euro. We had about 75% of our net exposure hedged at $1.33 for the quarter and last year's first quarter hedge rate was $1.24. The difference in the hedge rates on the 75% of our exposure was factored into our plans and guidance, but the impact of the run-up to $1.50 per Euro this quarter on the 25% unhedged was not.

The rule of thumb you can use for 2008 is every 5% weakening of the dollar results in an increase in sales of approximately $25 million on an annual basis with the reduction on 2008 operating income of less than $1 million. These impacts, of course, reduce our gross margin and operating income percentages. The difference in exchange rates lowered this quarter's total company and gross margin by about 150 basis points and operating income by over 100 basis points as compared to last year.

I know this isn't easy or intuitive, but we thought this discussion might help you better understand our performance.

Gross margins for the quarter increased to slightly more than $80 million or 23.3% of sales as compared to last year's record 25.3% gross margin for the first quarter. As just discussed, exchange rate caused about 150 basis points of difference with the rest caused by incremental fixed and startup costs related to our new facilities in Spain, France, German and China. While we expect the currency pressure to continue, as Dave said, we do anticipate our new facilities to at least cover their incremental expenses in the second half.

Adjusted operating income increased $8.7 million, a 28% increase over last year. Our adjusted operating margins increased from 11% in 2007 to 11.5% this quarter. While our incremental operating leverage is about 14%, if you do adjust for exchange rates, it was nearly 23%.

Selling general administrative expenses were up less than 3% and would actually be 2% below last year on a constant currency basis, thanks in great part to the restructuring programs implemented last year. Sales general administrative expenses as a percent of sales was 9.3% of sales compared to 11% last year.

As in prior years, the largest portion of stock compensation expenses recorded in the first quarter. The first quarter expense this year was $5.2 million with the expected expense in the remaining quarters to be in the $2 million range.

As previously noted, we completed the termination of our legacy U.S. defined benefit pension plan. The final charge on this item was $2.7 million or about $0.02 per diluted share as we anticipated. Our savings are approximately $2 million per year in pension costs so we've eliminated what was effectively our highest cost of debt.

Our taxes remain somewhat volatile with the quarter's provision at $9.6 million. This included a $2.5 million benefit from the reversal and valuation allowances as against U.S. deferred tax assets. Excluding the benefit, our effective rate was 38.5% for the quarter, a little above our 38% target for the year. We continue to review strategies to improve our tax efficiency.

Our net income from continuing operations was $23.2 million or $0.24 per diluted share on a GAAP basis. If we adjust for the items I just discussed, then our adjusted non-GAAP net income is $0.23 per share as compared to the $0.15 per share for the first quarter of 2007.

Our net debt increased by $57.5 million in the quarter to $345 million. Approximately $35 million of the increase came from accounts receivable as a result of higher sales with growth in Europe playing a major role in the increase. Other uses of cash included the previously mentioned pension termination, which contributed $6.4 million to the increase and the annual cash incentive rewards as well as other working capital needs to fund sales growth.

The first quarter, historically, has been the biggest consumption period for cash for the company and this year includes almost $44 million in capital spending because of our capacity acceleration program. But we still target year end net debt to be under $320 million.

So now let me turn the call over to the operator to take your questions.

Thank you. (Operator Instructions). We'll pause for a moment to give everybody an opportunity to queue up for questions.

And we'll go first to Howard Rubel with Jeffries.

Hi. I'm going to ask the obvious questions, Wayne. If you do the math on this, it would seem to me that you shouldn't be talking about the high end of your guidance because the deferred tax benefit reversal kind of pushes you a little bit higher than you would have thought three months ago, or in December anyhow. So shouldn't we really have been looking for even a higher number for the full year?

Yeah. Actually our guidance has always been on the non-GAAP basis excluding both the pension termination costs and many tax related adjustments.

And then just one follow-up, Dave. Even though you said -- even though you're not going to get ahead of your customer on the 350, could you talk about what kind of couponing you're doing for them and what kind of feedback you're getting?

As I told you, last summer we were selling materials for development trials and certification testing, verification of performance even last year. So we had sales of the A350 last year and will again this year in any case. And we're very happy with our materials and hope they are too.

Just to follow-up on that. R&T spending was down and I now you talked about that a bit in the release, what might we see that -- for the full year?

We've taken up our sort of base run level for R&T spending in recent years as we tried to develop new materials to improve our carbon fiber. But the big step-up last year, as we pointed out I think in each call, was the certification process for HexMC parts. It's a procedure that we had not gone through in the past because it's a new product range. So we had this pretty significant step-up as we had -- as we participated in getting FAA certification for a -- on a part by part basis for HexMC parts in our engineered products business. We've now left that year and those parts are for the most part defined and cleared for production. So I think whatever that increment was, I don't know if you pointed that out last year, it's be down by that amount but not as low as what it was two years ago.

Thank you.

And we'll go next to John McNulty of Credit Suisse.

Yeah. Good morning.

Hi, John.

A few quick questions. This strength in the military business, how much of it is just from lumpiness as versus, is there a reason to think that you may do better than your 8% to 10% range this year?

Any time we start out ahead of our expectation, we're encouraged. And any time you start out behind, we are cautious. So of course, we have one quarter under our belt and we're at 11% and we got it to 8% to 10%. That product range as you've heard me say before goes to over 80 different programs around the world and it is -- each one of them can be lumpy so it's a little early to declare on that.

Okay. Great. On the startup expenses that you were seeing with some of the plant ramp-ups, what was the impact of that on the first quarter? And, again, you said you'd be covering it with the revenue, it -- will you be covering it in the profitability so the margins will actually kind of bounce back to where they should be or is there still going to be a little bit of a margin hit on that going forward?

We call them start-up on occasion but it's incremental fixed costs plus start-up. So the bigger piece of that at the beginning is new facilities with new leases and new depreciation and new supervision staffing, indirect staffing that are working in the facility and spending money without getting any sales. So that's the incremental cost -- incremental fixed costs and then there are startup costs in training and those kinds of things. The fixed costs, of course, don't go away. The startup costs would go away. And then we start producing revenues that have margins. All we've said so far is that in aggregate those three plants, that is, Spain, France and Germany, will at least cover all of those increments so that they won't pull our margins down. We've not yet given you any more detail on whether they'll contribute or accelerate margins.

Can you give us some color as to how much they pulled you down, this quarter so that that part, at least, won't be pulled down for the next few?

Yeah. $3 million.

$3 million. Okay. And then in terms of the weakness in the industrial business, can you give us some clarity as to how much of it's just tied to a weakening of the overall economy versus how much of the weakness or at least non-wind related weakness is tied to just not having carbon fiber for industrial applications?

If there's an economic impact or an economy impact, I wouldn't know about that or it's too far down the -- too far up the supply chain for me to figure how out how to assess it. It's principally availability of carbon fiber. Either our surplus to be able to sell into those markets or to put into prepreg where the availability of reasonably priced carbon fiber from the industrial markets. Where we have prepreg capacity, we could conceivably buy carbon fiber if it was available and sell it into those markets if we started those businesses back up. So it's principally a carbon fiber tightness. There's a possibility that that will loosen up at least short term as the 787 delay will likely create some excess carbon fiber capacity coming out of [Torey]? So it might loosen up a little bit. I would say that's the main driver.

There are still those other lesser important things such as the winter recreational market was hit from last year's very warm winter. So there's an inventory burn-off at most of our European recreation customers. And we did do some pruning after the divestiture of those weaving businesses, some weaving operations that remain such electronics business in Europe. I think that we start to lap that -- those latter two items in the second half. Actually, a little bit in the second quarter. So I think in the third quarter we had easier comps to the extent we have carbon fiber available either from our startup of our next line is Salt Lake or just from the open market, I think that'll ease some of that pressure.

I don't think it's more --

I don't have anything more. Thanks a lot.

-- less than 12% of the total company that's being impacted by these factors.

We'll go next to Steve Binder with Bear Stearns.

Hey, good morning, Dave.

Hi, Steve.

Hey, Wayne. Can you maybe just touch on, you called the kind of the dilution startup costs or overhead absorption issues in the new lines and you talked about FX. But, in the past you've talked about other headwinds, whether it's expedite costs, productivity issues, energy costs. And when you look at your cost of operation standpoint, how would you kind of characterize the puts and takes in the business?

I thought we had a pretty good quarter. We've still got past dues at certain plants which means we left money on the table with respect to sales. And usually where we have significant past dues, we also have expedite and air freight. I don't think it was as bad as previous quarters.

On the other hand, we had a big increase -- have steadily had a big increase in (inaudible) [nitro costs] for carbon fiber which is a commodity based priced not on long-term contract and it generally tracks with oil. That hurt us a bunch. But we just -- we have to be able to absorb that. It's not really a mix-up. And transportation costs have definitely gone up significantly with the costs of fuel surcharges and the like.

And also on MRJ and C Series can you maybe is update us a review or is there, as far as content potential there?

I don't really have any detail on that yet. I mean the early looks that the C Series design approach are a little more infusion and a little less prepreg so it's sort of a different way to value and think about things. MRJ, we're presenting our wide range of capabilities but I don't have much of a sense yet of what the potential is of that. I think it's awful early to be able to say much.

Okay. Thank you.

Once again. (Operator Instructions). We'll go next to Steve Levenson with Stifel Nicolaus.

Thanks very much. Good morning.

Hi, Steve.

Can you tell us where the extra $300,000 on each 787 is coming from?

Well, I would tell you that we have tens of products that go to tens of customers for hundreds of parts and sub-assemblies put on --

But it's not directly to Boeing though.

Well, most don't go to Boeing, correct. Each of these products and customer sub-assemblies has per aircraft assumptions. We try to monitor it regularly and the reason we give you a range in partly because of different configurations and engine selections. But also because these assumptions at this level of detail keep moving around. So we always sort of monitor exactly what the range looks like. In this 787 push-out exercise, we've engaged all of our top Tier 1, Tier 2, Tier 3 customers in the detail review to try to make sure we've got a good deal of what their inventory is and what the build rate changes will do to us because I think you're going to ask me.

Now we haven't got it all totaled up yet because we don't have real good guidance on what the build rates are going to be. But in the process of that review, we also reviewed the actual requirements, the pounds, or the yards or whatever per airplane because you have different scrap rate assumptions and so forth. When we roll it all up, our low end of the range was higher than previous guidance and we felt the need to update the market.

Okay. You did answer what we were going to ask. The other question, when the new carbon fiber lines come on, do you see that replacing purchased fiber or is that just going to be all incremental fiber sales or used in other products inside the company? And how much additional margin can you capture as a result? Which way is better for you, replacing purchased fiber or selling it outright as different product?

Well, there's no simple answer. But always at the beginning of new line startup, our first priority is to get the line fine tuned and optimized to the point that we can start the qualification. Because once you get it qualified, you can't change the settings. So our first priority is to get the line running at its optimum performance both in speed and quality of product coming off.

In that process, we generate some carbon fiber that is usable in industrial markets. And we're always easily able to sell that into industrial markets. We can also put in into prepreg but because we don't know how long that period's going run or how much we're going to do, we usually have customers lined up to take that fiber.

As we start to run steadily, we now have a steady supply of fiber that can be used or sold into industrial. So it starts the transition from going into prepreg or going to industrial customers as a straight outright sale.

And as we get our aerospace qualifications, hopefully, in addition to the demand being there, the percentage of the plant that start -- the line that starts to go into aerospace products starts to increase. It can be third party sales but it tends to be a gradual introduction into our aerospace mix.

So at the beginning, if you're not running 100%, the margins are not great. As soon as the plant is running full time, which is usually two or three months into the startup process, then you've got industrial sales and you get margin from them. And then in the industrial segment of our -- the cardboard and fiber industry done in the industrial level is got a sort of a supply and demand elasticity that looks a little more like a commodity. So prices range from a few years ago when there was an excess down in the $6, $7, $8 range and they got as high as $13, $14, $15 last summer. So it just depends on what the market -- what the pricing is when we sell down into industrial as what the margin is.

Ultimately though, the real purpose for our fiber capacity expansions are to put into our advanced prepregs or to apply to high end, premium fiber markets that require intermediate modulus fiber such as military aircraft and the [Yusak] project and so forth.

Thanks for all the details.

I don't know if that answers your question but...

The last thing is, have you seen anything about a 737, 700 light where some metal components might be replaced with carbon fiber and do you think that's something again that would be a sale to Boeing or is that something where you maybe have a little of an edge selling to some of the suppliers?

I don't see anything that really excites me. They're both Boeing and Airbus, actually all of the aircraft makers are always trying to do upgrades and improvements and upgrade their engines and so forth. Sometimes you get winglets or something that presents some good but small incremental opportunity. But usually the whole structural composition of an aircraft stays the same. So it's unusual that we'd get a significant pop out of a fix up of an old airplane unless it's a whole re-engining kind of a project like the 747-800.

So I'd always prefer a brand new airplane to be developed than an old one to be updated.

Okay. Thanks very much.

Yep.

And we'll go next to Nigel Coe with Deutsche Bank.

This is actually Nicole DeBlaze, asking questions on Nigel's behalf.

Sure. Good morning, Nicole.

Good morning. Good quarter. Congratulations. A couple things. First of all can you kind of share some of your current thoughts on the 787 and pass through to half '08 and 2009?

It's a little early for that. We are comfortable enough with our outlook in total that we left the guidance on the high end. And that's factoring in sort of a range of scenarios on the 787. But, from what I can gather, they haven't put out much detail on this but just from listening to the Boeing earnings call, from what I gathered, they are now talking about a more gradual or more conservative ramp-up instead of the big jump start that they had in mind. As they were starting to have appearances of delay some months ago, they were still holding to their commitment to build 109 airplanes by the end of 2009. They obviously aren't going to do that. Beyond that, they seem to be a little bit unclear or not committed. So it's something softer than what we thought a year ago but it's not radically different from what probably all the suppliers have been anticipating and planning for in the last 5 - 6 months.

Okay. Got it. And then if the Euro stays at current rates, what kind of impact can we expect for the full year on gross margins?

Yeah. In terms of -- if the Euro stays at its current rate, in terms of absolute dollars, we're probably talking a few million dollars. In terms of the margin percentage, I think you'd still see the same impact that we saw in the first quarter of '08 versus the first quarter of '07.

Okay. Got it. And then how should we model a ramp-up in D&A?

Of what?

Wayne, I'm sorry. You said the ramp-up of G&A?

D&A, depreciation.

Oh, I'm sorry, okay. I mean we've -- the earlier guidance we gave was depreciation to be $8 million to $10 million higher for the year versus 2007. I think we're up $1.3 million, I believe for the first quarter. We'll probably -- you'll start to see that ramp-up a little more in the second and the third quarter.

Okay. And one more. What drove -- you guys had a really strong quarter in commercial aerospace. Can you kind of give some more color on how much growth the A380 provided and how much revenue there was from the 787?

They were both about equal and they're a minor part of that explosive growth. That growth has been very strong from everything across the board, turbo props, something that we hardly even paid attention to because they stopped being popular with fuel prices like they are. Turbo prop build rates are going great guns. Regional, (inaudible) Air and Bombardier are real strong. All of the business aircraft that use composite stuff, they aren't a big big number. Business jets are having a booming year selling to international customers. So it's just a widespread thing, this quarter and the last and the one before it were strong because of the whole market, not because of the new airplanes.

Okay. Got it. And one more for you related to your ramping up and capacity. What does it do to 2008 CapEx?

We gave guidance for $150 million for this year and that's -- we haven't changed that.

Okay. Great. Thank you.

Okay.

We'll go next to Christina Fernandez with UBS.

Good morning. Going back to the capacity question, with the acceleration this year, does that change the guidance you have given for '09 and beyond of $120 million or and $150 million or should we see more capacity expansion?

It depends a little on how successful we are on programs, particularly the A350. We like the $150 million pace because if we're successful and we need to add carbon fiber -- I know this is about carbon fiber expansion. All of the prepregs and other kinds of things we do tend to be in maintenance CapEx in the $30 million to $40 million and if you add prepreg capacity expansion for wind, the addition of China and so forth, we'd be well under $100 million. It's really about carbon fiber build-out.

So we have, for instance, we want a big position on the A350. Right now, they're a new carbon fiber application. The lead times are such that we think we'd be able to lay down a couple of lines per year, which is what we've been doing recently. And so it's not firm guidance but we like the pace of the $150 million a year assuming a win on the A350.

Will you talk about the trends and pricing for carbon fiber in the past couple of months. And also, you spoke about capacity easing up as a result of the 787 delay, does that affect price -- I mean, do you expect that to affect pricing going forward?

I'm not real close to what industrial prices are in the spot market but the industrial range is clearly -- history would show clearly, dependent upon supply and demand equations and so starting at about 2002, the prices dropped pretty dramatically, maybe even before that, 2000, I think, as new capacity came online. And the prices stayed low until, I'm thinking, 2003 or '04. And then they spiked a lot. Then the availability became really difficult the last couple years. Most users of industrial carbon fiber were on allocation so prices went up pretty high. I'm just speculating. I have no data that if there's a significant 787 delay, there's a lot of capacity that's been built to support it and there might be some availability that would help us with our industrial sales.

And on last one. Your 12% margins in engineer products, is that in your run rates that we should expect going forward?

Well, I think that business used to be in the 12% -- in the low teens. The last year with the start-up of the HexMC products and all of the certification products, they all were in that business and they knocked down below 10%. So I'm not surprised to see the 12% not having those incremental costs as with every product run, I'd like to see improvement but I'm happy to see it's back to 12% and I'd like to see it go north from there.

Thanks.

We'll go next [Maddie Cross with West Hall Capital.]

Good morning, everyone. I know you've seen good growth in the wind sector. I was just wondering how the operation margins for your product for the wind sector are compared to your operation margins for the other products, that Hexcel offers?

Well, carbon fibers our highest by far as you would expect of the capital expenditures that required though that's a small part of our sales. And generally, aerospace carbon prepregs like for space and defense in particular and commercial aerospace are probably next. All of our other products are good. Not as high as those two, but they're good.

In wind we look a lot more to return on our capital because it's a very high volume, very high velocity business. So it's a very attractive business to us in all respects but a little lower on average on operating income percentage.

Okay. That's great. Thank you.

And we'll go to Al Kaschalk with Wedbush Morgan.

Good morning, guys.

Hey, Al.

I just wanted to follow up on the engineering materials because, yes, it was very strong at 12%. What would maybe push that down in a given quarter as we look out over the next 4 to 6 quarters?

I'm hoping nothing. If we were to get into another big HexMC qualification program such as on the A350, for parts, we'd have those incremental R&D expenses which are recovered generally though, at least in current contracts, recovered through amortization in pricing as the parts are shipped. So it's just a little different from the historical model and that's why we spell that out, break that out. But, you know, the 12% is where it was, so we're really just where we were. I'd really rather see it go up as we go forward. I don't expect to see big drops unless we had a big qualification program.

Is it fair to say then, Dave, that most of on cost amortization pricing has been achieved?

Most of the incremental qualification costs on parts for the 787 is finished. That window's sort of closed. While there might be incremental parts developed for say the -9 or the next variant, unless Boeing opens up the door for changes on the current configuration, I would expect that to stay stable until we get into HexMT parts the next program. Now the A350 is out a ways. The spending usually isn't this far ahead of a program for HexMT parts but this is sort of a new product line and a whole new concept so I'm not real clear on that yet. But--

Okay.

I think you should expect margins like that or better as we go forward.

Okay. We'll make sure we put that on the score card here. Secondly, and I don't know that from your prepared remarks a previous answer to a question, I'd like to ask and see, what should we expect over the next three to six months in terms of a communication from you or the Company as it relates to build rates at Airbus, specifically on the A380 and then Boeing 787. Because I have to believe there's discussions that you've had at least with your customers to get back to production rates. And I realize, I don't want to take anything away from the strong performance across the board here but, clearly this is something that continued to help the stock price.

I'm not sure if I understand the question. The ramp-up we started on A380 a couple of years ago. It got us up to 10% of the commercial aerospace segment in the first half of 2005, and again, in 2006. And we were on our way to ramping up -- I mean you can also triangulate and figure out what full run rate would be if you figure the $3 million or so our airplane and pick your run rate for Airbus. If you believe they're going to get to 40 a year, you can do the math. So we're just -- I mean, again, it's 10 or 20 different sub-tiers around the world and we're feeding that ramp rate. So somewhere from where we are today to full run rate is going to be a path that isn't real clear to us. And we'll try to give you a little of sense of whether it was a big pop in the quarter but it's not going to be a real easily predictable sort of growth path, I don't think.

Okay. Just so that it may not detract any slowdown like it did here in the quarter. It also may not have any material impact necessarily in the near future given the strength and health of the other parts of your business.

You said that it didn't detract -- oh, the slow down or the push out, 787 didn't hold us back, you mean?

Yeah, I think investors are looking for some type of time frame in which there's an acceleration in production rates at those two new, the two larger component deals.

Yeah. I can't tell you.

And I just want to settle that, see if that's really a fair assessment or if you believe that the health of your other businesses are going to be more than compensate for any detraction there?

I can't tell you on the -- when the 787 acceleration will look yet because I don't have enough information. It was not a detractor this quarter. It was about equal to last quarter and about equal to the quarter before. The A380, I would expect to start seeing some acceleration assuming we don't have further delays from Airbus as I think we're now taking up the slack in the rope and we've had three quarters of growth. They're just not overwhelming numbers. The strength of this quarter was on everything else is my point.

As we go forward, I expect continued strength in all of these other markets. And then incremental contribution probably first from the A380, more significantly from the A380 until the 787 gets sorted out. I mean, I don't know. That's as close as I can get you.

Very good. And then, just finally, with all of the changes on the acceleration and CapEx et cetera, it appears that we're still focusing on free cash flow positive or at least break even for '08. Is that fair, Wayne?

Right. If we keep the -- Sorry, Wayne.

Yeah. We're -- I mean when we looked at 2007 and '08 together, we said we'd be basically cash flow neutral and we're still targeting that.

Great. Thanks again.

Okay.

And this does conclude today's conference. We do appreciate your participation. At this time, you may now disconnect.