Hexcel Corp (HXL) 2008 Q2 法說會逐字稿

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

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2008 Second Quarter Earnings Conference Call on July 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 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 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 this call is to review our 2008 second 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. Our top line continues to race ahead of expectations in the second quarter with sales over 24% higher, or 17.5% in constant currency terms than last year's quarter, with a particularly strong showing in Europe. Startup costs for our four new facilities, further weakening of the dollar, and some high input costs put some pressure on our results, but we still grew adjusted net income by 16% for the quarter and 32% year-to-date. We do continue to expect EPS of $0.90 to $0.95 for the year.

As we discussed last quarter, the incremental fixed and startup costs of new facilities in Spain, Germany, France, and China, have slowed our margin expansion record and cost us about 200 basis points of gross margin in the second quarter.

Each of our new European facilities has now demonstrated our capability to achieve the required technical standards, and we've now moved to the customer qualification stage with our new A350 fiber and A350 prepreg system being one of the first priorities. We aim to have these European plants at least cover their costs in the second half.

We expect our Chinese prepreg plant for wind turbine blades to open on schedule in October, and to cover its incremental costs next year.

As I am sure you are aware, this quarter has seen another 16% year-over-year decline in the value of the dollar versus the Euro. This costs us about 110 basis points of gross margin and 130 basis points of operating income compared to last year despite our hedging program.

So, as usual, I'll comment on each market year-over-year growth trends using constant dollars to better understand the real volumes.

For reference, our reported top line sales of $359.9 million represent apparent sales growth of about $70 million over last year, but was really $54 million in constant dollar terms. Commercial aerospace sales were about $199 million for the quarter, up over 25% in constant dollars from last year, a dramatic rise, but with a big shift to Europe, exacerbating our currency frustration as aerospace sales are mostly in U.S. dollars but manufactured in Europe.

Sales to Airbus and its subcontractors were up over 30% for the second quarter in a row, and we benefited from growth in all platforms.

A380 sales were up year-over-year, but still short of 2005 and 2006 sales levels for the second quarter.

Obviously, the big Airbus news in the quarter was our win to supply prepreg utilizing our carbon fiber for primary structures on the new A350. We're obviously very pleased to have been selected and for signing the largest contract in our 60-year history. I trust you can now better appreciate why we opened three new plants in the three principal countries in which Airbus manufactures. We hope to be selected for a wide range of additional materials in years to come as the A350 detailed design is developed.

Sales to Boeing and their related subcontractors were up about 12% for the quarter, as compared to last year's period, but down sequentially. We saw a significant number of deferrals for materials intended for the 787, frustrating our inventory improvement programs.

Sales to all other aerospace customers were up over 25% for the sixth consecutive quarter, as build rates for business jets, regional jets and turbo props remain strong.

At the macro level, despite the concerns about fuel costs and the global economy, over 300 new orders were booked by Boeing and Airbus at last week's Farnborough Air Show, adding to their combined backlog that was already over 7300 aircraft. Even a 30% cancellation scenario would leave a five-year backlog at current rates, but more importantly, high fuel costs increased demand for newer, larger, composite-rich aircraft. 20% of the aircraft built by Boeing and Airbus year-to-date were wide-body aircraft. But over 30% of the year-to-date orders and the backlog are wide-body.

Sales to space and defense markets were $75 million for the quarter, up over 21% in constant currency. Although sales to this market are typically lumpy by quarter, sales for the year clearly appear to be stronger than expected. For the quarter, strong global demand in rotorcraft and European military aircraft were the main drivers of our growth, including a large A400M transport with its composite wing and propeller, which is beginning to gain some traction.

Overall reported sales for our industrial markets of $85.8 million were basically flat in constant currency versus last year. As usual, wind energy sales were strong and remain on track for mid-teens growth. The historically European market for wind energy has become much more global and so must our manufacturing footprint. Our biggest glass prepreg customers have begun to build turbine blades in China, and we are following with a plant there that we open in October. They are also adding significant capacity in North America, and yesterday we announced the new glass prepreg facility in Colorado to serve them. We will begin construction later this year and expect the plant to begin full production in the second half of 2009.

Now, let me turn it back to Wayne for some additional comments and then I'll come back to you with some guidance remarks.

Thanks, Dave. Gross margin for the quarter decreased to slightly more than $76 million, or 21.2% of sales as compared to 24.3% gross margin for the second quarter of 2007.

In summary, startup costs caused about 200 basis points of the difference, exchange rate issues about 110 basis points, and the higher commodity materials, utility and freight rates about 100 basis points. We expect startup costs' penalty to subside as the year progresses, though until the new facilities are fully utilized their contribution to margin leverage will be less than average. While we have limited the impact of FX with hedging, it still makes for difficult year-over-year comparisons and will continue to be a problem next year if the dollar does not strengthen. As for commodity and energy related costs, we are increasing prices as contracts and market conditions permit, and implementing cost reduction actions.

Selling, general and administrative expenses were up $2.6 million to $30 million for the quarter, with about two-thirds of the increase coming from currency effects. Research and technology expenses were $0.5 million lower than last year, as last year's results were impacted by the development and qualification costs of our HexMC products.

Adjusted operating income increased $3.6 million, a 10% increase. Our adjusted operating margins declined to 10.6% this quarter from 11.9% in 2007. The incremental costs to start up the new facilities cost 170 basis points at the operating income line, and exchange rates cost us about 130 basis points in the quarter.

In the quarter we recorded $7.6 million of additional environmental reserves included in other operating expense to remediate our former Lodi, New Jersey manufacturing facility sold in 1986. This facility was part of a fine chemicals business which we exited completely in 1992. While we have an agreed plan to clean the site, we continue to develop information about site contamination and have recently concluded that the extent and projected length of time to complete the remediation is likely to be greater than we had previously anticipated.

As we've discussed in the recent past, we are undergoing a significant review of our tax strategies for the future. One of the early reviews led us to reinstate $14.7 million of U.S. deferred tax assets that had previously been written off, which also result in a $14.7 million cash savings over the next few years.

As background, in 2003 we had an ownership change as defined by the U.S. Internal Revenue Code. This put a limitation on the use of net operating loss carry-forwards prior to the ownership change. With this last action, we'll now be able to use all the net operating loss carry-forwards that were incurred prior to the ownership change.

This gain was partially offset by the elimination of our pension obligation that terminated the U.S. defined pension plan for which we recorded a $3.6 million tax provision. The offset to this provision was to other comprehensive income and is noncash.

Excluding the benefit of these actions, our effective rate remained at 38.5% for the quarter. We continue to review strategies to improve our tax efficiencies, and our next challenge is to be able to reduce our ongoing overall effective rate.

Our net income from continuing operations was $26.7 million, or $0.27 per diluted share on a GAAP basis. If you adjust for the one-time tax benefits and the environmental reserves just discussed, then our adjusted non-GAAP net income was $0.21 per share, as compared to the $0.18 per share for the second quarter of 2007.

On Friday we sold our joint venture interest in BHA to Boeing. Boeing will now have a majority interest in BHA with China's AVIC 1 holding the remaining minority stake. As part of the agreement, we reaffirmed and fully defined our long-term contractual relationships with BHA and Boeing, which include selling our materials to BHA, as well as providing final assembly of BHA components for Boeing by our Engineered Products segment.

The total sales price was $22.3 million, and we expect to record an after-tax gain of approximately $12 million in the third quarter, or $0.12 per diluted share. The sales price was 1.7 times last year's sales, and the cash was assumed in our full year net debt guidance, but the gain was not part of our EPS guidance for the year.

Net debt did increase by almost $31 million in the quarter to $376 million. Higher capital spending as well as other working capital needs to fund the sales growth drove the increase. We expect the second quarter to be the peak of our net debt for the year.

Capital spending for the quarter was $42.3 million as we are attempting to accelerate our capacity expansion projects in light of surging customer demand.

Now, back to Dave for update on our guidance.

Thanks, Wayne. With the 787 delay, the A350 win, and the extreme movement in exchange rates and energy-related costs, we though we should revisit our 2008 guidance in this midyear release.

First, we do see strong sales continuing despite the 787 delay. And, in fact, expect sales now to be on the high end of our 10% to 15% growth range in total. This plus our A350 win and the new U.S. wind expansion leads us to increase our capital expenditure forecast to $175 million, and our year-end net debt expectations to the $340 million to $360 million range. With our recent revolver tack-on and the proceeds from the BHA sale, we continue to be comfortable with our capital structure.

As for operating margins, the dollar has weakened about 15% against the Euro, as compared to our guidance in December. And if it stays at that level, our 12% to 12.5% operating margin goal would translate to 12.3% to -- I'm sorry, 11.3% to 11.8% for the year despite our hedging program.

Finally, though the oil-related cost surge and continued weakness of the dollar created new challenges, we have reaffirmed our EPS guidance of $0.90 to $0.95 a share, excluding one-time items such as tax gains and environmental charges, thanks mostly to the expected strength of sales going forward.

Beyond 2008, we believe that as the cost of fuel climbs, the case for wind energy and newer, larger, lighter aircraft like the A350, 787 and A380 become even more compelling. In December we indicated our 2010 sales could reach $1.7 billion, assuming the successful ramp-up of the A380 and the B787. While the prospects for full rate of those two programs by then may now be in question, we believe the $1.7 billion rate is still achievable due to wind, USEC's uranium enrichment program, and the A350 and defense programs.

So, we are still very encouraged about the long-term, and we'd be happy now to take your questions.

(Operator Instructions) We'll take our first question from Nigel Coe with Deutsche Bank.

Thanks. Good morning. I just want to clarify on the ramp-up costs for the European plants, do they cover their costs for the whole second half of the year, or do they cover -- do they kind of break even during the second half of the year?

Well, the fourth quarter is better than the third quarter, and we hope to get them to cover for the whole of the half, though it will be phased through the fourth quarter.

Okay. So, a drag in the third quarter, positive contribution in the fourth quarter, but net-net neutral for the second half of the year?

Correct. As far as being negative startup costs. They, of course, won't reach average company-wide gross margins until they really get fully utilized.

Understood. Understood. And then on the Euro drag, are you currently hedging the Euro? I'm just wondering, is there a big difference between your hedge rates and what the current spot rate is?

Yes, Nigel, we currently hedge. We average in sort of roughly a year in advance. So, basically what's hitting us this year is more or less last year's actual rates, and we'll continue to sort of roll in the pain.

Okay, so the drag continues for the rest of the year?

Correct.

Okay.

Just to be clear, Nigel, that was as part of our guidance. I mean, yeah.

And the hedging is for what percent?

And we're hedged for this year we're about 75% hedged, and we're about 50% hedged for next year.

Okay, great. And then just finally, maybe, Dave, could you give us an update on HexMC? That's certainly an exciting product. I'm just wondering how much traction that's gaining so far?

Well, its position on the 787 is pretty well defined now because of qualification timing. We may have gotten a lot more on had the product really been discovered or accepted sooner in the program. So, I think we're real happy with how it's going, how production is going. The tooling, of course, and qualification costs are generally behind us. We'll recover those in price as the 787 gets built.

So, all eyes now are on the A350 and to the extent we can get HexMC products on that. So, of course, we have a whole new customer who is not familiar with the HexMC concept that we've got to convince in the coming months and years, but we're hopeful.

Great. Thanks a lot.

Our next question comes from John McNulty with Credit Suisse.

Hello. This is Elaine [Yipp] on behalf of John. How are you?

Good morning. Good.

Follow-on on the Euro/dollar exchange rate impact. What exchange rate are you -- is embedded in the full year guidance?

Elaine, when we gave guidance for the full year on sales, for example, we did it at constant currency with respect to last year. So, we didn't try to anticipate the sales increase related to current exchange rates. And for operating income, we're hedged far enough along that the rates shouldn't have that big an impact on the earnings per share number for this year.

Okay. And with the recent A350 contract win, how much additional capacity do you think you'll need to bring on line to support the platform? And when should we expect to see the spending?

Well, we will require a lot of additional capacity, as you might imagine, with a contract that's almost -- got the run rate potential of 50% of our current business. But what we really have done is laid most of the foundation of where the capacity will be added. It's possible that there might be enough volume at some other tier one player to have another satellite plant. But generally the concept is to expand carbon fiber lines in our Spanish plant and in our Salt Lake plant, and then build out more prepreg lines in these new European prepreg plants.

So, there will be a significant amount, but it will be a little bit easier to digest, I think, as we go forward. We hope that what we are putting in place now and in the first half of next year will be sufficient for the ongoing development program, and we'll be able to add in steps over the next three years, the big capacity, as we can watch the market develop and balance out the cap spending over three years.

Great. Thank you.

We'll take our next question from Steve Levenson with Stifel Nicolaus.

Thank you. Good morning. Are you seeing other opportunities in existing aircraft designs where manufacturers plan to save weight, and how does that new resin you introduced, the autoclave resin, play into that?

How does -- oh, I think those are interesting development projects, but I think existing programs generally don't get re-engineered, even though it might be nice to take weight out because of the certification cost. To me, it seems most of the efforts in the industry to deal with fuel costs are trying to accelerate the new lighter aircraft at winglets. Winglets do have additional materials for us. But I look to the move towards newer aircraft as the big, big driver for Hexcel, hardly enough to register on any of the older aircraft.

Okay. And then beyond the actual airframe, what do you see going on with your engine customers, like GE? Do you think use of composites in the fan case and the cold section blades is something that will expand, too? I don't know if you're talking to anybody about open rotor designs?

I think there is real good momentum in engines and the cells by all of the players. GE, of course, is kind of the leader in it, having introduced the composite fan blade for the 777 a number of years ago. That obviously has been very successful, because they're incorporating it on the GEnx engine.

Others are developing and talking about, and you saw this at the show last week, talking about trying to make fan blades through infusion processes, which would mean fiber sales and resin sales, if we were successful, rather than prepreg. But everybody is sort of after the same thing. The big, big gains in fuel economy of the 787 are in part weight reduction and in part engine, maybe equal parts, if I read the literature.

So, there's a lot of move towards engine improvement. And, of course, open rotor, if it were to go there, I'd be surprised if composites didn't have a place. The A400M is, you know, the new European transport. I think you've seen it. It's got four turboprop engines, but those engines have very large blades that are composites, and there are eight props per -- there are eight blades per prop. So, it's a significant amount, too. The bigger the rotating part the more likely they need lightweight composites, all the way up to wind turbine blades.

Okay, last question on the aerospace side. Is HexTOOL, do you see that being used in A350 part manufacturing, or I don't know if you're at trials at this point, or where things stand?

Well, HexTOOL we think has got a lot of potential and a very interesting product. It really is, as you know, a HexMC variation. It's used in tooling to make tools lighter weight, reworkable, replace very expensive and hard to get INVAR metals.

It's going to take a while for people to accept them. Lots of trials are going on, lots of tooling shops are working with it, though they never had any experience with it. I think it will find a home in the not too distant future, and I think it will be significant volumes for us. It may not be first-round tooling, it may be spare or second-round tooling.

Okay, thanks. Now, on the wind side, is Colorado going to essentially be a clone of the China plant?

Similar. Right now as we look at our customers' plans, Colorado has the potential to be bigger, faster than China, but the same concept.

And do you want to make an estimate on what the output might be?

Not yet.

Not yet, okay.

Not yet, but it's substantial and could be more than China, and it could be fast. If you follow what our key customers who use prepreg technology are doing in the U.S., you might get a good sense of it, though.

Well, that was going to be the next question. I know that there have been some order cancellations from companies that are not your customers because of cracking blades. What sort of things are you hearing from the wind turbine blade manufacturers on using prepregs instead of making them the old clamshell way?

Well, just to be clear for the ill-informed on the call, the cracking blades are not our material, not prepreg at all. In fact -- and I have no idea what their real problems are, whether or not prepreg would solve them. But we'd like to think that that will create a stampede to prepreg technology. But whether it does or not, some very big players are growing very fast in using massive amounts of prepreg. And if the blades get larger for the next generation turbines, I don't think they'll get really huge except in a couple of rare cases. But as they get larger, the volume of prepregs that they have to take goes up by a cube factor.

So, I've never been so optimistic and positive about wind in my seven years here. Its building capacity, our customers putting capacity in China and the U.S. really breaks the European deadlock that we sort of dreaded in the past. And the commitment to use prepreg as the technology in those new plants seems to diminish the risk that someone might go away from prepreg. So, we're very happy with our positioning.

Great. Thanks very much.

Sure.

And we'll go next to Cristina Fernandez with UBS.

Good morning. This is for Dave. Today you reaffirmed your revenue guidance for 2010 of $1.7 billion. At our Investor Day in December you had also set a target for 15% margin in 2010. Do you think that's still achievable?

Well, I'd answer it with a great deal of confidence if you could tell me what's going to happen to oil and FX. Been a little bit humbled by my inability to control the global currency in the oil economy.

I think if exchange rates stabilize or balance back out to where maybe they should be -- I mean, I don't know where they should be, but it just seems to me this can't continue -- I certainly think it is achievable. It is certainly our target and has been for a long time.

We are discouraged with oil prices like they are. Almost everything we make or do starts with oil. I think we've done a good job in managing through that. We've had lots of contractual relationships that keep us from getting burned by that. But, boy, over the long term that's a painful hill to climb and we need to be able to either pass it on or find other economies. So, it's a stretch, but it's obviously -- I mean, it clearly is what our goal is.

Okay. And then could you give us an update on the USAC contract and if that's still -- is it still on track to start contributing later this year?

Well, the contract hasn't changed at all. Their schedule was to just start late this year. Whether or not they hold with that with the delays they've had is something that's being discussed, but I see no indication that they're backing off their plan or their ability to get the project launched.

All right. And then one last thing. What is the opportunity for Hexcel to gain comp on the C-Series now that the aircraft is officially launched?

Well, as with any new airplane, there are lots of opportunities for lots of different materials. The C-Series, I believe, is advertised now as being 46% composite. Even though most of the fuselage is metal, the fact that the wing will be even more composite than the 787 gives them confidence that they'll be up at that level of composites. So, from the engine to the nacel to the airframe, there is a lot of potential for all of us in the composites business. It's way too early to handicap it, but we're very much on top of it.

And actually one last. You mentioned in your comments about the opportunity to take cost out. In what areas are the greater opportunities?

You mean what we're going to do to try to make our number for the year?

Sure, yes.

Well, just sort of every element of the budget we've got a very strong make the numbers kind of commitment in this Company, and we're all discouraged by the headwinds that we face, and we recognize we're going to have to find ways to economize to get where we need to get for this year. So, no specific big project, don't have any big restructuring announcement, or any such thing. It's more blocking, tackling, and making sure that we maximize the efficiency of the plants.

We had some difficulties in the second quarter that with a sudden violent ramp-up in Europe compared to the U.S., where in the last six quarters the U.S. -- the four quarters of last year, at least, the U.S. was growing at a frantic pace and Europe was somewhat idling. And now we had a complete reversal with the 787 delay and Airbus coming on strong again. So, it wasn't the most graceful flip-flop in growth rates for us, and we expect to get that stabilized and get more efficiency out of our plants. Most importantly, we've got to get those new plants contributing.

It all comes down to gross margin this quarter. I think we've done a good job on operating and net income leverage. And if you look at the first six months of the year, our gross margin is down 260 basis points, yet adjusted operating income is only down 30. Net income is up 40.

So, SG&A is in good shape or being well controlled, and the other elements we've just got to get the plants caught up to the capacity increase. We would have loved to have phased these new plants in a more gradual fashion, but of course the market's growth was not exactly timid, and it's what we need to do to keep pace.

Thanks.

Sure.

(Operator Instructions) We'll go next to Al Kaschalk with Wedbush Morgan.

Morning, guys. Dave, I was wondering if you could comment based on the previous questions in the wind business, has your confidence or optimism about wind changed the order pattern that you're seeing from your customers? In other words, you had previously commented about a three-month visibility or short duration on that visibility. Has that extended out? Can we read that into that based on the acceleration in facilities?

Well, we ship as they require materials, not to some order commitment. I mean, the same in aerospace. We don't ship to an advance order whether they need it or not. We're very much JIT in almost all of our businesses. So, our visibility is really about how many molds our customers have and are they successfully using them? Secondarily, as you recall, two years ago, if they've got bearings and other components that they need to use the blades that they're making. So, we try to monitor all of those things.

So, our view of the future is stronger or better now because we know new molds are being put in place in China and in Colorado, and if we're able to be the supplier of the materials for that, that's going to be an incremental step-up in capacity for us following our customers. So, that's sort of how we see it.

Now, launching a new plant in Colorado was not done without some understanding of what the pace of growth would be and some agreement with our customers for the demand.

Okay. And have you seen any competition in the marketplace as it relates to existing customers or potential new market opportunities, new customers for yourself?

Are you talking about wind, specifically?

Yes, sorry.

Well, as you know, our competition there is Gurit, a Swiss company. I'm assuming that they're growing at a frantic pace, like we are. These kinds of growth paces are -- I mean, our challenge is about keeping up with the growth that's there. These aren't -- there aren't big share shifts going on. I don't think anyone has the stomach for that, customers or suppliers at this stage. I have not seen anybody new in the prepreg -- glass prepreg business that concerns me at this stage.

And then following on an order pattern in terms of other in the commercial aerospace, that's been a very strong performer for the last six or seven quarters. Anything in the near term horizon that we should think should decelerate that growth or expect more of the same as oil prices remain pretty high?

Well, I've got to tell you that it's so diverse it's hard to give an easy answer. But just some general market dynamics that we keep an eye on. An awful lot of industry hacks report that business jets below 50 passengers are clearly on the way, and we overbought them in the U.S. partly because of the two-tier pilot structure. They're not economical. They need to fly fewer, bigger aircraft now between nodes, part of the upsizing that I talked about earlier. So, the small regional jets are probably going to come under pretty serious pressure pretty soon. They aren't very composite-intensive. So, that doesn't hurt us a lot.

Business jets have been going at a crazy pace. They're still going very strong, mostly because of new wealth in oil rich countries, in Russia and elsewhere. But I've got to think the U.S. is going to slow it down a little bit. Again, not a big participant in our composite sales other than a couple of aircraft which are the lightweight aircraft that tend to sell pretty well in this environment.

On the upside, larger regional jets are still doing well. They have more composites, and surprisingly -- we've mentioned this a couple of quarters in a row -- turboprops that we thought were dead and gone in this industry for a number of years are having a resurgence. So, you're starting to see people talk about doing fewer frequencies to hubs again, and maybe turboprops handling the next leg, because the RJs are just so inefficient from a fuel usage standpoint, and the turboprops are so efficient.

It happens that the ATR series from Italy is a pretty composite-intensive aircraft, even though it's a very old aircraft. It was one of the early adopters of composites in a good portion of their wing, and it happens that Bombardier's turboprop, Q4000, I think it's called now, that we do some significant engineered materials work for that program. So, those two are up and I think they'll stay up, maybe keep going up.

Very helpful. Finally, on the gross margin side, you talked about improving pricing situation but very much environment/market dependent. Could you add a little bit of additional color on what you're doing or how far you're through the book of business in terms of getting price increases through, or what that all entails? (multiple speakers) I realize you're doing something.

I can give you a little general color, I can't give you specifics. But when contracts -- an awful lot of our business is done on longer term contracts, sometimes a year, sometimes five years, sometimes life of program. It's a wide range, but generally it's contracted, it's not a spot buy. Almost everything we do, in fact, now that we've gotten out of the weeding businesses. Those longer term contracts we obviously have seen the environment, seen FX changing, seen oil going up some. Back when it went from 20 to that unsustainable 60 level, we started talking more about price up on new contracts.

So, I would say almost every new contract over the last year has had some price increase in it because of what's been going on. Was it enough to cover this surge to $140 to $150 oil? Maybe not. But again we have most of our -- many of our supply contracts also nailed down.

So, what we're talking about here, really, is around the edges, the transportation surcharges, natural gas boosts, [dicryl] and nitrile increase, which is substantial, that is the basis for carbon fiber. Those things that were not covered, we need to find a way to manage through that. So, where we don't have firm long-term contracts, we're trying to push through price as we can. Where we have long-term contracts that need to be renewed, we obviously have new data to support price increases.

So, over time we hope to match those out, but this quarter put us back a little bit and we need to catch it up as we go forward.

Is there either in the new contracts or as you take existing ones and get discussions underway, is there an existing channel where the price up or down you're sort of left to the market conditions? And then if they're outside that channel, up or down, that you have to come to the table to discuss?

We have a wide range of contracts and contract terms, and we try to factor in the realities of life as we do those and negotiate what we think will be contracts that will be okay through the period. And it's a wide range of solutions to deal with that. Whether it's a higher fixed price to begin with or clauses that compensate for wide changes, I can't really be any more specific than that.

Okay. Thank you.

And, ladies and gentlemen, that does conclude today's conference call. We appreciate your participation, and you may disconnect at this time.