Hexcel Corp (HXL) 2011 Q1 法說會逐字稿

Good day everyone, and welcome to this Hexcel Corporation first quarter 2011 earnings release conference call. Please note that today's conference is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone. Welcome to Hexcel Corporation's 2011 first quarter earnings conference call on April 26, 2011. 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 2010 10-K, our first quarter 10-Q and last night's press release. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. With me today are Dave Berges, Hexcel's Chairman and CEO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of our call is to review our 2011 first quarter results, detailed in our press release issued yesterday. First, Dave will cover the markets, then I will cover some of the financial details before taking your questions.

Think Wayne. First quarter sales of $331.6 million were up over 26% from 2010's first quarter, our fourth straight quarter of double-digit growth. Our adjusted operating income of $41.5 million for the quarter was 52% higher than last year and adjusted net income of $25.3 million was up 74%. Both were Hexcel records. But sales are still 8% percent below Q2 2008 peaks, confirming that the actions taken during the recession are providing us an improved platform for earnings growth.

To date, the tragedy in Japan has not impacted either our core markets or supply chain, and we are not aware of any significant problems going forward. However, we remain cautious until customers confirm that there will not be any transitory negative impacts in future periods. Nevertheless, in light of this strong start, we are increasing the top end of our adjusted diluted EPS guidance by 7% to $1.05 for the year and updating our sales range by $50 million to the top end of $1.35 billion.

Now let me cover the markets using constant dollars to describe sales trends, though there is very little year-over-year currency impact this period. Commercial aerospace were $198 million for the quarter, up 30% in constant currency from last year's first quarter with the continued surge in new programs. Total revenues from these new programs, which include the A380, 787, 747-8 and the A350, more than doubled for the quarter as compared to Q1 2010 and accounted for more than 25% of our commercial aerospace sales.

Sales to legacy platforms at Airbus and Boeing were up about 5% compared to the first quarter of last year as we are beginning to see the demand for the announced higher build rates. Sales to other commercial aerospace, which includes regional and business aircraft, were at their highest since the first quarter of 2009 and about 40% higher than last year's first quarter, the low point in the trough.

Sales to space and defense markets were $80 million, up about 10% on a constant currency basis versus Q1 2010. Sales to this segment continue to benefit from rotorcraft related revenue as new programs and blade retrofit programs are increasingly composites based. In fact, rotorcraft sales, which are more than 50% of this segment, were up 15% year-on-year. In industrial markets, sales for the first quarter were $54 million, up about 42% in constant currency versus last year's period. As expected, sales and materials for wind turbine blades were up dramatically due to the customer inventory correction activities of last year, but remained in line with the 2010 full year run rates.

We expect steady improvement in wind energy sales throughout the year, thanks to the 2010 record orders previously announced by Vestas. First quarter industrial sales other than wind were also up, up over10% year-over-year on a constant currency basis and consistent with levels we saw in the second half of 2010. Now let me turn the call back to Wayne for some additional financial comments.

Thanks, Dave. Our reported diluted earnings per share for the quarter of $0.26 included the previously disclosed $0.04 per share benefit from the curtailment of the pension plan, which was partially offset by a $0.03 per share charge from the accelerated amortization of deferred financing costs and expensing of the call premium from redeeming $150 million of our 6.75% senior subordinated notes. So the net adjusted diluted earnings per share was $0.25 this quarter as compared to last year's $0.15.

Gross margin of $83 million for the quarter was 25% of sales, and included nearly $2 million more of depreciation than last year. The step up in depreciation started in the second quarter of 2010 as a result of capacity additions. While the quarter benefited from higher sales and slightly favorable exchange rates, it was offset by increases from certain rising raw material costs and last year's favorable product mix.

Our adjusted operating income for the quarter was $41.5 million, or 12.5% of sales, as compared to adjusted operating income of $27.3 million or 10.4% of sales. So for the quarter, our adjusted operating income increased $14.2 million over last year; a nearly $69 million of sales, or an incremental leverage ratio of 21%, in line with our prior guidance. Our interest expense for the quarter was $4.2 million, as compared to $6.6 million a year a go. We are benefiting from the lower rates from the July 2010 refinancing, the February 1 bond redemption and lower borrowings. Our effective tax rate for the quarter was 32%, which is in line with both our prior guidance and our expectations for the rest of the year.

Our free cash flow for the quarter was a use of $19 million as compared to our use of $10 million in the first quarter of 2010. The increased use was driven by higher capital spending that was partially offset by higher earnings. Our accrual based capital expenditures was $25 million versus $7 million last year, but we continue to expect to spend between $150 million and $175 million in capital expenditures this year. Our total debt net of cash now stands at $229 million, which is up just $14 million from our 14-year low achieved at the end of 2010. We have targeted free cash flow to be breakeven for the year, though we do expect to be negative in the first half of the year.

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

Thank you. The question and answer session will be conducted electronically. (Operator Instructions) We will pause for a moment to assemble the queue.

Howard Rubel, Jefferies.

Thank you very much. David, your engineer products business appears to be growing a little faster than the market. What are you doing there to go out and win new business?

Well, Howard, I think you are aware, most of that business is driven by our Kent, Washington operation that does sub-assemblies for Boeing on a long-term contract, generally coming out of our joint venture in Malaysia. But in recent years, we have started to team with a couple of our other plants that had expertise in large long parts, like helicopter blades, and take on additional work. As many of our helicopter customers are moving to more composite-intensive blades and not all have the capacity or capability to do the manufacturing. So, we've got a little bit of a vertical integration move there, and as we pointed out before, helicopters seem to be going pretty strong right now.

Oh, clearly. And just one other question. Where do you stand-- in terms of all your capital spending, can you give us a sense of either startup costs or how you're thinking about factoring in the incremental costs of qualifying as you spend this additional capital?

I think the -- we have two kinds of costs that we occasionally point to. In the case of fiber lines, the qualification cost is pretty extensive and time-consuming, so we end up with a lot of capital deployed. That takes about a year to get through all the certifications and qualifications. In that period of time, we attempt to sell the fiber we can produce into industrial markets that don't have those qualifications. So, we are starting up line E, which we had put on hold a year and ago. And that's creating some cost pressures for us.

We had some in the third quarter of last year. We'll have some in this period. The other costs that we have pointed to in the past with the start up and training costs of the new satellite facilities that we have. So we built five-- six new factories including the fiber line in Spain in new locations and the staffing and training of all those is something we went through in 2008 and partially 2009. We've had a little residual costs and then start up in this last quarter, but compared to where we were two years ago, we're in a much better position. The additions of capacity in those plants going forward will be minor incremental costs.

And just to conclude on that, then, this improvement in the industrial market is helping you sell the-- I'll call it the startup fiber or the qualifying fiber-- that otherwise would have been a little more struggle.

The general improvement in fiber demand, if that's what you mean, yes, that's true.

Yes. Sorry, thank you. I'm great. Thanks.

Steve Levenson, Stifel Nicolaus.

Thanks. Good morning, everybody.

Hi, Steve.

Yesterday one of your -- I don't know if I should call them piers or competitors, announced a contract related to the F35 for $1.1 billion of materials. Am I correct that you supply all the fiber for the F35 and that it's somebody else who does the prepreg?

They noted quite a number of materials, most of which, though, I think are carbon fiber prepreg and that is our fiber. So we're happy to see that contract nailed down.

Sounds good. Now, is that amount inclusive of the material that you'll deliver to them, or is that just their value added part?

We sell to them, and they sell to their customer.

Okay. Got it. Thank you very much. There's been some news from Sikorsky that they're going to begin assembling what sounds like a fairly large number of H-60 or I guess I'm going to call them to T-70 helicopters, Blackhawks, overseas. Do you anticipate that you all will be supplying blades for those, or is that something where a competitor could show up?

I would expect that what business they've won is good news for us. It might also be good for other people in the composites world in general. Just the more helicopter activity we can see, the less we worry about US defense spending.

Got it. Thank you. And last, on the wind turbines, there's a fair number of new larger offshore turbines that I believe Vestas took orders for that it plans to deliver this year. What's the differential between the amount of material that goes into the blades per se, you know, when the onshore turbines compared to the offshore?

I can get specific on that, Steve, but I can tell you just some the simple physics is that for every increment in length of a blade, the weight goes up by a cube factor. We happily are the weight in this case. So, bigger blades have a pretty large increase in material requirements. On the other hand, I caution you that the offshore, while it's a fast growing market and real important for the future, it's still a small percentage of the total wind blade business in the world.

Okay. So you're going to leave me to do the arithmetic, I guess.

(laughter) I am.

Thanks very much.

John McNulty, Credit Suisse.

Hi. This is Javier [Jandring] calling in for John McNulty. Good morning.

Good morning.

I had two quick questions. One of your competitors yesterday talked about raw material pressures in the carbon fiber market impacting their composite business. Are you seeing any such impact or is the industry as a whole seeing any effects from events tied to Japan or any other factors?

I would say in general I imagine everybody in the industry is seeing pressures on raw materials. Actually, in my 33 years, I think suppliers of always tried to increase prices and customers have always tried to lower them. So, nothing real unique. We try to provide long-term stability and visibility to aircraft designers to encourage the composite business case versus the wild swings on say, titanium. So, to that extent possible, we always try to have long-term contracts with both customers and suppliers that line up as best we can to minimize the volatility. So, we've got exposures and pressures, but to date, we've offset with productivity and pricing pretty much.

Great. And one quick follow-up question, on wind, what are your sort of expert expectations for order flow development activity in the global wind market, based on what you're seeing at your customers with their backlog?

Well, if you mean the turbine makers in the global market, I think China is going to continue to grow really rapidly. I think the US is in a bit of a lull with respect to energy demand and low cost of natural gas. Europe seems to be picking up again, particularly offshore. And the rest of the world outside of China, Europe, and US is adding up to quite a bit, too. Brazil, Australia, New Zealand, and other regions. So, I think there is good steady growth, not like maybe in prior years, with a question mark a little bit around the US.

Okay. Thanks very much.

David Strauss, UBS.

Good morning.

Hi, Dave.

You talked about the new programs are on year-over-year about doubled in size in total. Can you talk about how much of that increase is specifically being driven by A350? Because if I look at the other programs, 87 and 47-8 and 380, rates haven't moved a lot as far as I know on those programs over the last year. So, just trying to get a sense of how much this is being driven by work on 350.

Well, I'm not going to give you a specific, but I will give you a little bit of color. The A380 rates have gone up. They're talking about shipping 25 this year. And I think they did 18 or less last year. More importantly, though, for Hexcel, we shipped materials in the early years for that program before all the delays, in large volumes. And then after the second large delay, things went quiet. And we had very little A380 activity despite the build rates, because all the materials were already in the system and parts were already made.

What's happened now is in the last two quarters or three quarters, the A380 demand has picked up dramatically to the sort of level that we had expected four or five years ago. So, I won't give you a specific number, but they're talking about making 25 this year, and we have $3.3 million per plane. And the timing and sequencing of that is pretty variable, but it's a big number, and it's definitely on the radar screen where two or three years ago, it was de minimis. 787 is on a steep ramp. When you say the rates haven't really gone up, they were zero last year and they're talking about 25 this year. We like that kind of a step. And presumably, we go up further next year. We've got a range on that, the average is about $1.5 million.

So those are big numbers. The 747-8, they're trying to build 1.5 per month, moving up to two per month next year. So, that goes from zero of last year. So, there all up double a year ago. A couple of the more than that.

That's great color. To follow up on 380, are you pretty close to in line with the kind of production rates that Airbus is targeting at this point for this year?

I don't want to get that specific, but we're definitely headed in that direction.

Okay. A follow-up to that. You talked about in your release, you know, business jet and regional jet being up 40% year-over-year. That looks like sequentially it was up, you know, versus the fourth quarter was up as well. Can you give us some color there? Is it increased penetration for you guys, or is this some statement that business share of rates could potentially be moving up? Just some sort of color there.

Actually, our other aerospace business, if you followed us for a while, is down quite a bit over its peak in 2008. We were running $200 million a year and we dropped to about $100 million a year. It's gradually been working its way back. Recent quarters seem much stronger. I'm not convinced that regional jets are out of the woods, but business jet customers are all up, and all seem to be more optimistic of late. Used business jet inventories are declining. Departures are up. Passengers aren't even wearing bags over their heads anymore. I think that there's a general, gradual improvement in that market that was really in terrible, terrible shape last year. I don't think it will be back to the 2008 rate, but I think we still have some upside.

Great. Thanks a lot.

Ken Herbert, Wedbush.

Hi, good morning. Thank you. First, on the space and defense side, specifically the helicopter side, I can appreciate the growth there on the original equipment side, but can you comment on the demand? Are you seeing it more from blade replacement in terms of aftermarket demand or is it more new helicopter construction?

I can say that we are sophisticated enough to be able to differentiate it. Oftentimes, the same materials go to our customers for both products. And if they're making a blade, we don't know if it's going on a civil helicopter, a military helicopter, or a retrofit or a field replacement. So, I can't really say. I would point out, though, that we have a good deal of business with all of the major helicopter operators around the world. So, it's not even entirely conflict driven.

Okay. So obviously cost some good commercial business as well as those volumes start to increase.

Right.

Just switching gears, I know seasonally, working capital historically has jumped up sequentially from the fourth quarter to the first quarter. Can you comment specifically this year and weigh maybe more for you, how you see that working through the year? Do you see the kind of improvement over the course of the year like you've seen in prior years?

Yes, Ken, if you look at both days for both receivables and inventories, particularly for receivable days, it really holds steady and it just fluctuates with sales. We really don't have any bad debt collection problems. With respect to inventories, our days on hand at the end of March is about the same as it was as March a year ago. It does drop at year-end, but it's something we'll continue to try to always improve, but right now the days are about the same as a year ago.

Okay. And just finally, specifically to the A350 and investment to support that group, any change from what you've talked about previously in terms of the schedule for some of the CapEx and your ability to manage the timing of that capacity?

No. Were still on the same schedule we gave last time.

Okay. Excellent. Thank you very much. Great quarter.

Thanks.

Ron Epstein, Bank of America Merrill Lynch.

Good morning. Just a quick detail. In the engineered materials year-over-year, it looked like your margins came down a bit. Just curious about what's going on there.

We ship pretty large assemblies, so you can have some quarterly mix swings because it's pretty low sales basis. There's nothing wrong there. Were pretty happy with the 16.5% run rate we've had for the last year or so. It's very low capital intensive business. It's in a good place.

And in your prepared remarks, you mentioned that you haven't seen any issues around what happened in Japan. How confident are you around that? It seems to me that somehow or other all carbon fiber somehow traces its roots back to Japan.

I don't see a problem in carbon fiber at this stage. We make the statement that we know nothing that is negative. I'm concerned enough that I think everybody ought to keep an eye on the risks of the extended supply chain in any industry, but in particular, aerospace. When you go down to the electronic component level, in Japan, it just takes one missing chip to have a delay on a program. To the extent that there are any such impacts, hopefully there is some time to recover or come up with workarounds.

But the devastation of Japan and all of the infrastructure and manufacturers that were in there, to think that none of them have an impact on our industry is maybe naive. And I just want to keep that on the front burner for another two or three months until we hear that Boeing and Airbus and others say they're in the clear. I think Rockwell Collins had this discussion yesterday, or Friday, whenever they had their earnings. So, it's just a watch item for us.

Okay, great. Thank you very much.

Noah Poponak, Goldman Sachs.

Hello. Good morning, guys.

Hello.

When I look at the end market growth rate, I was just wondering if you could potentially provide us an update on where you see each end market growth rate coming in for the full year. Just because, you know, all three of them are quite well ahead of what you'd last discussed and you gave us some comments on industrials sequentially for the year. I look at aerospace and space and defense, it doesn't look like the comps really actually get that much tougher. Last year, it was kind of fairly level loaded, and you did 30 and 10 here. So, I'm just kind of wondering where you see those coming out for the full year?

I actually haven't done it by market, Noah. We did the top line guidance. So, I haven't done the math, but I'll just give you my view on a couple of the items. I'm happy to see that legacy aircraft build shipments to those is finally up a notch. It was inexplicably down two years ago. As you recall, I think it was down 15% or 16% from where it should have been. Line rates stayed the same. We all in the industry called that an inventory correction.

Last year it came back part way, but not as far as it should have. Now I think we finally are back to what seems to be the right sort of run rate for the quarter for the current build rate. And as you know, we've got build rate increases coming this summer on the A320 and 777. And again, January of next year, the A330 and 737. So I think the legacy part of our business, which this quarter was less than 75% of commercial aerospace. It's at least got some upward momentum and not having an inventory correction anymore. More importantly, though, the new programs, which are a little hard to predict, they are certainly allowing us to outgrow the market. Not sure everyone gets the magnitude of this, but if everything else was flat for the quarter compared to a year ago, we still would have had double-digit Company growth. So, it's hard to put a finger on how much it is, but it's a big driver of growth.

Space and defense, we've only talked for years about single-digit growth. I think it's still stays there. Helicopters, if they can keep on a teen's pace, they can offset any kind of softness in the defense markets. So, I'd be happy with single-digit growth on that. And wind, I think we're going to get sequential growth, but it's not going to be explosive like in the past. I think this year and halfway into next year should be pretty good based on the Vestas backlog, and we have to see how the orders come in beyond that. The all other commercial aerospace as we said, is starting to show some signs of life. And all other industrial is stabilized from years of portfolio printing and has actually grown slightly the last few periods, 10% this quarter.

Okay. That's helpful. And then I'll ask one more. Unless I'm looking at the model incorrectly, I think you put up your best operating margin percentage ever. And we've had five or six quarters of an incremental between 30 and 40; the target you always talk about is better than 20. It's early in the cycle, which is when they tend to be stronger, but you guys clearly changed the cost structure of the company during the downturn. Can you maybe just talk about the progression of the margin you see through '11 and then also what you can get it to on an annual basis longer term?

Well, thanks for those kind words. Walking into this meeting, Wayne reminded me that last year's second quarter was a record 25.7 gross margin and a record 13.3 operating income margin, highest in history or at least in my 10 years here. We still do target 20% plus EBIT leverage. But on double-digit growth, my acrophobia won't let me do the math for what the second quarter would have to look like. And as always I'd caution you about second-half seasonality and we do have an FX hill to climb, something to be factored into the margin percentage calculations if exchange rates stay like they are today. And there is raw material pressure, but, you know, 20% or greater EBIT leverage is what I've been saying for nine years. I'm not going to stop saying it. We do tend to get 30% incremental gross margin leverage. That's gotten a little tougher with the increase in depreciation. But we should just see continued expansion of margins if I'm doing my job.

Okay. Thanks a lot.

Richard Safran, Buckingham.

Good morning. You may have mentioned this and talk about if you did, I apologize. I think towards the end of last year, you are at the 10 million pounds capacity for carbon fiber. I think you're targeting 16 million pounds by the end of this year. I just want to know if you could comment on where you are at now and what you're thinking about for the end of the year, if you're still at 16 million.

Yes, Richard. The 16 million pounds was the last expansion we announced a few years ago. We put out a little bit of hiatus during the downturn. And we are in the little over 10 million pound range now and expect to get to 16 pounds either by end of this year, probably no later than the first quarter of next year.

Okay. Thank you.

Avinash Kant, D.A. Davidson & Co.

Good morning. A few questions. On the guidance front, maybe Wayne, could you give us some idea in terms of the range that you are doing in terms of revenues, like roughly $50 million. Where is the upside coming from?

Yes. I'm sorry, with respect to revenue, mostly, we had a stronger first quarter and really it's just a carryover of that.

But in terms of the segment, I'm saying mostly it's the commercial aerospace side, that is what is the upside or is it also coming from a different side?

I think commercial aerospace is the strongest. Wind was big in the first quarter, but we'll stabilize a bit more as we go forward. Right now, we're just sort of looking at the rest of the year looking pretty similar until we see more about the Japanese impact.

Right. And on a sequential basis, you talked about on a year-over-year basis regarding the industrial and the wind basis. Could you talk sequentially, how is the mix between wind and the rest of the industrials? Did it change much?

No, there wasn't much difference.

So basically flattish compared to the last quarter?

I don't know about the quarter specifically, but wind was pretty much at our last three quarter run rate.

Okay. But you expect improvements going forward from here on, right?

Sequentially, yes. Not big numbers, but yes, I think with the backlog that Vestas has, we should start to see some pick up.

Right. And you did give us some idea for the CapEx for the year? Where do you plan right now to be?

Were still at $150 million to $175 million for the year.

$150 million to $175 million. Okay, and a little bit more on the margin side. In the guidance that you have given, what kind of progression and margin in the gross and operating side you have assumed? I'm talking about the quarter sequentially. When do you see things improving, all through the year or staying at these levels? How do you see that?

We always have our strongest margins in the first half versus the second half for seasonal reasons. But basically, we just talk about getting good incremental operating leverage when we get those. But year-over-year you have a step down in the second half of about two points of operating margin over the last five or six years, if you average it, for seasonal reasons.

Right. And you may have given this already, but did you break out for us what was the equity compensation expense in the quarter? Because, that typically happens in the first-quarter, I believe.

Yes, that's correct. Avinash, if you look in the press release, I believe it's in table C. For the first quarter, it was $6.4 million, which is usually $3 million or $4 million higher than the rest of the quarters.

And on the 787 front, it looks like their running at like 3 planes a month right now. When do you see a ramp happening and what you see the inventory at this point? Is the inventory situation pretty much under control?

Well, we don't see our customers' inventory. Ours is certainly under control. And on the new program, the ramp can be stretched out over quite a few years. So, we've been seeing a ramp for a number of quarters and expect that to continue until they reach a stable build rate.

So lately, it has been steady, you mean to say, or it's been going up still?

It's going up.

Okay, perfect. Thank you so much.

Mike Sison, KeyBanc.

Hi, guys. Nice start to the year. In terms of the sales to the new aerospace programs, wouldn't that accelerate as the year unfolds?

Love to hear that.

Embedded in your guidance, are you suspecting it to accelerate or sort of stay at the pace that you saw in the first quarter?

I don't know that we've got it finessed to quite that much actually. The A380 is up and maybe at a stable ate. It's a big piece of the new builds. The 787 depends a little bit on how well everyone goes up the ramp throughout the Japan caution one more time. A350 can be pretty erratic as people are doing development hardware and manufacturing. You know, early parts doing demonstrators. And 747-8 has been running pretty strong for a couple of quarters now.

So within your outlook, you expect that 30% year-over-year growth in the commercial airspace to sort of moderate into maybe lower double digits in the second, third, and fourth quarters?

I don't know that we're going to get that specific about it, but I do not expect to see 30%. I think last year we had 16%, first quarter to second quarter growth. So that's a pretty big step, when you start doing year-over-year comps.

And in terms of your outlook for raw materials, do you expect your cost to be higher and do you expected to squeeze or will you be able to get your pricing through and that's certainly not too much of a worry for the full year?

I always expect to squeeze and I always-- I worry about it, but I do not expect it to have a big impact on our performance this y ear.

Okay. Great. Thank you.

Amit Mehrotra, Deutsche Bank.

Thanks. Good morning.

Good morning.

Dave, could you just comment on what opportunities you see over the next few years on the potential replacement of the narrow body fleet? One, with the A320neo, the incremental business potential revenue opportunity there on the new cells and also a potential replacement of the Boeing 737?

It's a little early to call to hat. There's always new business when there's an upgrade, but not as much as when there's a new plane. So there is opportunity in the cells, on the engines, on the winglets, or the sharklets as Airbus calls them. And as for what Boeing does next, it's hard to tell. It's not even certain that it would be all composite, much less Hexcel composite. But we spend everyday trying to get on any new airplane anywhere in the world and we root for all of them. There are always better than the old ones they're replacing.

Okay. And then you gave a little bit of color on the year-on-year growth in the newer aerospace programs. But just looking at sequentially, it seems like, if my map is right, that the sequential growth on new programs was about 40%. Did you see that kind of sequential ramp on the A380 and the 87, or was there something there in the fourth quarter that made the comp a little more difficult, not as pure?

Sorry. We group them all together just because there's quite a bit of lumpiness and I would rather not break it apart, but it's been a steady sequential growth. There always are some quarters that are stronger than others, but the trend is inexplicably-- inescapably up, not inexplicably.

Okay. Just two quick ones. You showed some good SG&A leverage in the quarter. I think it's just below 10% now of sales. How should we think about SG&A on an absolute basis as revenue ramps up?

I always like to see it stay flat. I'm not impressed when the percentage goes down and sales goes up 26%. We've had some expansion in that as we've needed to, adding these new plants. But I'm hopeful that is going to creep up, not climb up, and we'll be able to get great leverage going forward.

OKay, thanks. Just last question, maybe this one is for Wayne. In your 2011 guidance, can you just give us what you're assuming for FX rates, tax rate, and also what the net commodity headwind is relative to what you guys had in the first quarter? Thank you.

I'll take the easy one, which is tax rate is 32%, with respect to exchange rates, when we give out sales numbers. We're really assuming based on constant currency. And with respect to the remaining impact on net income from exchange rates for the rest of the year, it's probably not going to be too big, given how much we have hedged for the year, so not to worried about the FX impact on that income.

It will affect margin percentage, just not significantly.

Yes, just as a simple example. If the euro stays at $1.46, when you compare second quarter of '11 versus second order of 2010, we'll lose 60 basis points on the margin percentage.

And then the commodity headwind?

Yes, the commodity headwind, we're not going to comment specifically on that. We tend to go back to 2008 when oil spiked at the highest point. And when we looked at the impact of utilities and freight, and commodity costs, you know we, at that time, said it was about 100 basis points on us. Certainly, our goal would be to clearly be under that level of number.

Thanks very much. Great quarter.

Thanks.

Thank you, and that was our last question for today. This does conclude our conference. We think you for your participation. You may now disconnect.

Thanks.

You're welcome.