Hexcel Corp (HXL) 2011 Q2 法說會逐字稿

Good day, everyone and welcome to the Hexcel Corporation second quarter 2011 earnings release 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.

Okay, thank you. Good morning everyone. Welcome to Hexcel Corporation's 2011 second quarter earnings conference call on July 26, 2011. Before beginning, let me cover the formalities. First, 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 Form 10-K, our second 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 re-recorded or broadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today is Dave Berges, Hexcel's Chairman and CEO, and Michael Bacal, our Communications and IR Manager. The purpose of the call is to review our 2011 second quarter results detailed in our press release issued yesterday. First, Dave will cover the markets, then I will cover the financial details and we will go back to Dave for comments on our outlook before taking your questions.

Thanks, Wayne. Second quarter sales of $353.7 million were up nearly 16% from the prior year, our fifth straight quarter of double-digit growth. Our adjusted operating income or $49.4 million for the quarter was 22% higher than last year, and adjusted diluted EPS of $0.32 was up 39%. This was first time we achieved a 14% adjusted operating margin, as we got good incremental leverage on increased sales. Commercial aerospace sales were about $208 million for the quarter, up almost 27% in constant currency from last year's second quarter, with growth in all sub-markets. Revenue from the new programs, which include the A380, 787, 747-8, and A350 increased by more than 30% for the quarter versus last year, and again accounted for more than 25% of our commercial aerospace sales. Sales to legacy platforms at Airbus and Boeing were up over 25% compared to the second quarter of 2010, as we were benefiting from the demand for announced higher build rates. Sales to regional and business aircraft were up over 20% compared to last year, at a rate similar to the first quarter.

Revenues to space and defense markets were about $82 million, essentially flat on a constant currency basis, with a strong second quarter of 2010. Sequentially, space and defense FX adjusted sales, were up 2%. In industrial markets, total sales for the second quarter were $64 million, down about 9% in constant currency versus last year, but up 15% from the prior quarter. Wind sales were down 15% to 20% in constant currency but for the same period last year -- from the same period last year, but were up more than 10% sequentially, and remain in line with the average of the last 12 months. For the fourth quarter in a row, all other industrial sales were up double-digits. Wayne?

Thanks, Dave. Our reported diluted earnings per share for the quarter of $0.37 includes a $5.5 million tax benefit, primarily from releasing reserves for uncertain tax positions. As the gain is significant and relates to prior periods, we have excluded it from it our adjusted diluted earnings per share for comparative purposes, and trend analysis. So, our adjusted EPS of $0.32 this quarter compares to $0.23 last year, brining our year-to-date adjusted diluted earnings per share of $0.57 to 50% better than 2010. Gross margin of $87 million for the quarter was 24.6% of sales,. While the quarter benefited from higher sales, we did have a few head winds, such as qualification costs for new line start-ups, higher acrylonitrile costs, and the disruption caused by April's tornado at our Decatur, Alabama facility.

Our adjusted operating income for the quarter was $49.4 million as compared to $40.5 million a year ago. We held SG&A costs flat compared to last year, which translates to a 4% decline in constant currency. Combine this the with higher sales, and the result is an adjusted operating margin of 14%, which is our highest in history. Interest expense for the quarter was not quite $3 million, as compared to $7 million a year ago.

We are benefiting from the lower rates from the July 2010 re-financing, the February 1 bond redemption, and lower borrowings. Our effective tax rate for the quarter was 20%, but excluding the previously mentioned tax benefit, our effective tax rate would have been 31.8%, which is in line with our prior guidance and expectations for the rest of the year. Our year-to-date free cash flow is $9.5 million, as compared to $11.6 million for the first half of 2010. We spent $55 million in capital through the end of June, with the expected upcoming growth, our capacity expansion plans are now well under way. We still expect to spend between $150 million and $175 million in capital expenditures this year; and we still target free cash flow to break even for the year. I will give the call back to Dave for some comments on our outlook.

Thanks, Wayne. When we last spoke, the supply chain ramifications of the triple tragedy in Japan were not yet clear. Then on the day after our first quarter call, a Class EF-4 tornado hit Decatur, Alabama and our carbon fiber precursor plant. Thanks to risk mitigation investments we have made, and a great recovery effort by our employees there, we were able to restart the plant smoothly after the 10-day power outage. As for the Japanese disaster, the resiliency of the aerospace supply chain seems to have compensated for the disruption risks I worried about on the last call. Meanwhile, orders for new aircraft are surging again, and build rates are being increased by our major OEM's.

As a result of the improved outlook, as well as the strong first half of the year, we are raising our sales and earnings guidance, with the top end of our adjusted diluted EPS guidance up by almost 7%, to a range of $1.05 to $1.12. This excludes the $0.05 tax settlement gain that Wayne just talked about in the second quarter. So, we are targeting to beat our 2008 adjusted EPS by 30% on similar sales, and our growth prospects look even better than 2008. Operator, we would like to take any calls now, please.

(Operator Instructions)

We will take the first question from Howard Rubel,

Thank you very much. David, as you look at the commercial ramped rate increases that have happened at both Airbus and Boeing, how do you look at the supply chain situation and how are you -- are you finding you need to play catch up, running the plants as little hotter? Or, is there more than sufficient inventory in the pipeline?

Well, I can't speak for the rest of the supply chain. We are sort of at the front end. They probably can see more than I can. We do have some scrambling going on. The increase of legacy at 25% was a shocker for the quarter. As I look back at 2008, I think there were similar rates on the legacy aircraft. We were at a similar rate. So, I think what happened was we had the big inventory correction in the down years 2009, 2010, and now there is the serious restocking that we thought might occur. So, it has been a little hectic the last 3 or 4 months, but I am sure that will stabilize because the step-ups are not radical and they are spread out over time.

Yes, I can see that. And then related to that, where are you in terms of feeling comfortable about your CapEx,, the spend rates. I mean, it seems as if the number is always large, and then when it comes time to look at the end of the year, it is a little bit smaller. Are you letting the purchase contracts and are you starting to dig holes in the ground, or put additional lines in, as we speak?

We are starting up again hard, Howard. We had a big year, I think it was 2007, right before the banking crash, and then slowed it down as best we could, and so what we had in the pipeline in mid-2008, which we needed desperately at the time, ended up stringing out over a couple of years., So I would say the last couple of years is not really an appropriate characteristic of what the profile should be going forward. We are starting to ramp now as quickly as we can, and I do think we will be inside or over rather than under on the numbers that we have given you.

And then just a follow-up on that and I am done. So, as you sort of think about this, you still have to stay a little bit ahead on qualification relative to supplying your customer. So would we still see a little bit of pressure on margins for a bit as you qualify the additional lines, or can you overcome that as some lines qualify and then as others sort of go through that process so one offsets the other?

We had some qualification cost this is quarter, but it is mostly about the pace of this ramp-up in the last 3 or 4, 5 months. This LTM sales growth for the total company was over 18%. When you are growing that fast, you are required to staff up to meet the projections. You have advanced hiring, training, new employee efficiencies. It can cause a little bit of a lag in the leverage that you would normally expect to get. We don't normally talk about it was the incremental leverage covers a lot of things. It generally would cover qualification costs, but the new qualification cost, plus the tornado, plus the acrylic nitro, plus this serious ramp-up hasn't allowed us to get our over20% year-to-date. We are up 24% incrementally, operating income leverage, over the last 12 months, but we have had a little bit of a struggle this quarter getting to our target. If you do the backwards calculation on our guidance, you can see we are still hoping to meet our target of over 20% leverage for the year.

Thank you very much.

Yes.

And we will move on to our next question from John McNulty, with Credit Suisse.

Great. Thanks a lot and congratulations on a great quarter.

Thanks, John.

A couple of quick questions. First of all, can you quantify what the impact was of the tornado issue on some of the ramp-ups. It does seem like it was a decent headwind, but they don't necessarily seem like they're recurring and something that we should be modeling in going forward.

There is no one item on there that is big enough that we wanted to spell it out in detail. We just lump all that together to express just a little disappointment that we didn't hit our over 20% goal. Not to make excuses for ourselves, but the last time we had this kind of ramp-up was first half of 2008 when we were growing this fast and we had leverage, I think, of 5% or 10% in the first half. So, we did a lot better than we did that time, but we still would like to see it over 20%.

Okay, and then, with regard to raw materials, they never used to be identified as kind of a major headwind for you, and I guess we are in a slightly different inflationary-type environment now. Is there anything that you can do with your customers to maybe better manage through some of these raw material inflation issues, and when might we be able to see that, if you can do something else?

Well, I think there are things we can do and we started to do them in 2008. 2008 was probably a help in some ways, because the outrageous spike in oil and other things allowed us to have different kinds of discussions when it comes to long term contracts. So, I think in general, we still won't talk about raw material pressures a lot. It wasn't big this quarter, but the [polyacrylonitrile] input for carbon fiber, which is a small part of our business, is a public number and we've had some questions on it. So we just wanted to acknowledge that it was a hurt. Obviously, those things that aren't on long-term contract, we can push price through over time. Some of our contracts have provisions to deal with these things. So I wouldn't call it is big worry for our business model.

Okay, and then just the last question. On the space and defense area, I know it is a lumpy business and I guess I am aware that the F-22 seems to be winding down as well, and that may be part of the impact. But you are definitely running kind of below the kind of high single digit range that you kind of targeted as a long term goal, and I guess I am wondering when you think you might be getting back to that range, if it can be later on this year, if it's 2012, or do we have to look out a little further than even that?

I will let Wayne correct me, but I think we move off the high single digit to, say, single digit, as in positive single digit, that we would think that generally Rotorcraft, in the near term, Rotorcraft would offset the things like F-22, and maybe slowdown of C-17 and those other risks, but that Rotorcraft would keep us in positive numbers. And I think we've moved it to single digits, just until we see better what's going to happen with spending. Longer term, with A400 and Joint Strike Fighter and so forth, we do expect that we would move north of there, but right now we are just saying single digits. Is that right, Wayne?

Correct, and John, it was our second highest space and defense quarter in our history.

Sure, absolutely. Fair enough.

This is probably more just the lumpiest point that you made earlier, explain it.

Okay, great. Thanks for the color.

We'll now take our next question from Amit Mehrotra with Deutsche Bank.

Hello, good morning. Can you just give us the foreign exchange impact on the EBIT line in the quarter? If we assume that your hedges were 100% effective, the incremental margins, excluding FX, look to be in the 25% range. Is that correct or was there some FX impact on the EBIT line?

Yes, Amit. There was a little bit of FX effect on the quarter, because we are not 100% hedged, but if you look at overall, the FX impact on the operating percentage was basically zero, so, we didn't call it out. If you look for the second half of the year, if you look at what we are exposed to, about every 5% movement in exchange rates is about $250,000 per quarter. So don't expect too big of an impact going forward for the second half, but just to give you an order of magnitude of it would be.

Okay, and maybe this one is for Dave. Alcoa has been issuing press releases and has been pretty vocal about their potential for lithium ion, aluminums, and their potential for lithium alloy, and their potential to compete in the commercial aerospace application space. We haven't really heard a lot from you guys in terms of how you view the technology versus commercial composites, and how has that been impacting maybe some of your commercial discussions with Boeing, specifically related to the narrow body?

Well, we don't know a whole lot about the material. It has so far been mostly presentations that I think everybody has seen. The real competition with respect to aluminum versus carbon composites, I think we all recognize, would most likely come on the narrow body, because the narrow body economics are a little bit different compared to a long haul aircraft where weight is absolutely paramount. If you think about it, the Airbus decision to re-engine the A-320 and now the Boeing decision, if it is one, to re-engine the 737, in effect, gives aluminum a win or a stay, I guess, would be another way to put it for the near-term, because that would have been the big battleground.

I am happy to read that the new aluminums are at a much higher price point. We love competing with higher cost materials. It is supposedly slightly better than prior aluminums on density, corrosion, and fatigue, but I don't think it is a match for carbon fiber, certainly not carbon fiber's potential in the long term, where we are coming down a learning curve and everyone is getting familiar with manufacturing and ways to optimize and develop aircraft that are specifically focused on composite utilization, and the absolute need for lightweight on long haul aircraft likely now will be the next aircraft launch. So, I have great respect for all my competitors, but I am happy with our odds compared to metal.

Okay. Thanks for that color. Just lastly, Dave, I know wind is relatively a small part of your business. Certainly seems to get a lot of attention. So I thought I would just bring a little more attention to it by asking a wind-related question. I guess in many ways 2Q was more -- one of the quarters that had purest comps in terms of your viewer change relative to what we saw since the downturn, and it was still down year-over-year. I guess with all the growth you are expecting in the commercial aerospace side of the house, how does wind fit into your 5-year business plan, and would you consider doing something strategic with it, whether it is an outright sale or a joint venture, and maybe re-investing some time and money into the commercial aerospace side of the house?

Well, we look at our strategy and our portfolio every year in a pretty rigorous process, as you have seen if you look over the last 10 years. We make moves when we think it is appropriate. So the big answer to any kind of strategic discussion is, we always look at everything every year. The second quarter last year was actuality the strongest wind in 2 years, so it was a tough comp, and sequentially we are in good shape and we are about where we thought we would be. We are really just happy to see it stabilize so we can utilize our assets.

The shift from Europe to manufacturing in China and the US is a big part of what we are doing these days, and to be able to get that done and still deliver the margins that we are targeting has been a great accomplishment. I am still very confident over the long term that wind is a good, steady grower. It is a very attractive business from that perspective. What we really try to focus on when we did the portfolio adjustments, 4 or 5 years ago, was things that had sustainable competitive advantage and long-term good growth prospects. Wind and a number of other of our sub-markets in industrial fit that very well, and we have good synergies for the rest of the business. So we are very happy with the wind business.

And then just, really quickly, excluding the wind business and the industrial, it looks like the non-wind portion was down a little bit on a constant currency basis. Could you give us a little more color on what the drivers were for that decline?

Non-wind actually, I'm not sure how you're looking at that, non-wind industrial is up double digits 4 quarters in a row on a real currency basis. I don't know that we have calculated the constant currency.

4%.

4%. If you look back at the other industrial back 3 or 4 years, you will see we had a long decline of other industrial, and that was when we were really focusing after the 2008 crash -- really narrowing, focusing, trying to go after those that had the good long-term potential rather than high cost to serve. We moved a lot of those businesses out to a new set of distributors. We let competition, small competition, take some of that business and support them with carbon fiber or with weaving. That cycle, or that portfolio fix, is pretty much behind us about a year, and that is why we are seeing industrial growth. It is growth with distributors, growth with third party prepreggers, and some success with our new HexTOOL product, which is to -- a method to make a composite lightweight tooling for a number of industries, primarily aerospace.

Great. Well, thank you very much.

Next up we have Ron Epstein with Merrill Lynch.

Good morning.

Hi, Ron.

Everything seems to be going very well right now. Just, if you step back and you think about what risks you have in front of you right now, what worries you, what would they be?

Well, I could be facetious and say I was disappointed last night to hear that our $14 trillion national debt was the fault of the business jet industry, but I would say near-term our concern is execution, not just Hexcel's execution, being able to handle this ramp-up, but all of our peers and customers -- the entire supply chain. The prospects looks great and I think the slope of that curve will be dependent on how well we all do in this industry. So the fundamentals are great, and I think the only risk, outside of exogenous kinds of events, would be performance by anybody in the supply chain.

Okay, and then -- and maybe another follow-on. On the 737 next gen squared, that is what I call it now, is there any opportunity for you guys to pick up any composite content more so than what is already on the airplane? Do you know yet, is it too soon? And before you answer that, the way you phrased, if it was a decision regarding the re-engining, I am curious why you said that, too?

Oh, I shouldn't have said that. I don't know. It was a surprising decision to a lot of people, and who knows? Maybe there is something else under the covers, but I don't know. I'm just reading blogs. I have no inside information on this. But to your first point, we always prefer a new airplane, but we do always gain on new engines and new nacelles. It's just the nature of the composite story. I don't just mean Hexcel.

I think everybody in the composites business would say any change to an aircraft; they are going to have more on it than what they had with what is replaced. 747-8 is an extreme case in point. It is a 1965 vintage aluminum airplane that they re-engined. While they made changes to the wing, they didn't change it to composites, and yet we ended up with $1.5 million on the airplane. Now, it happens to have 4 engines, but it is just the nature of this secular story in composites. So, to the extent they launch a 737 and an A-320 with new engines that have more composite-intensive nacelles and engines, I am sure we will get more per aircraft. You might also think that they will be able to launch it sooner than an all new airplane, though it actually might pull in some incremental sales. The history is that delays have always allowed us to smooth the ramp up and to get more material on the final designs, but, we don't have any numbers for you yet.

Okay., and then maybe just one last one, if I can. Is there any residual Japan risk, or would you say the risk from what happened in Japan, in terms of the natural disaster and everything, is that behind the industry now?

Well, I don't know. I was worried about it on the first quarter call, though I told you I had no information. So far as I know, the only -- there was only 1 other aerospace firm that mentioned it as a risk, and it only takes 1 to bring production lines to a halt. That company seemed to put it behind them in the call this quarter. So, I am only -- I only was being a little hesitant in the first quarter because it just seemed hard to imagine that it wouldn't have an impact. I haven't heard anybody talking about it in the industry. If you have, feel free to speak up, but from what I know, we are looking pretty good.

Okay, great. Thank you.

Now we will go to our next question with Noah Poponak with Goldman Sachs.

Hi, good morning.

Hi.

In the press release, you mention that you are encouraged with the modest recovery in the regional and business jet sub-segment. Can you just elaborate on that and talk about how much of it is regional, how much of it is business, and even, if you are willing, to discuss specific aircraft segments that would be helpful, as well?

We don't break it out, but I did look, and it can also be pretty lumpy because there is some small volumes, small players, and a long list of customers. But I did look at it in detail this quarter to see where the movement was, and it was across the board. In general, I would say bigger is better in our business. So if you go to the big regional jets, like the Embraer 190; if you go to the big business jets, like Embraer and Bombardier business jets, Dassault, Gulf Stream, they tend to be more composite-intensive, They seem to have survived this downturn a little bit better, or are coming back a little bit stronger. That is just a sense I have, and I don't know if it will get back any time soon to what it was. I think we used to say that that whole sub-segment was about a $200 million a year run rate. It went down to about $100 million. Now we're sort of in the -- LTM is in the $130 million range. So, we are kind of happy that it is stable and hope that there will be good gradual growth to contribute to the rest of the commercial aerospace segment.

Okay. As a second question, your revenue guidance range implies your second half 2011 revenue will be lower than your first half revenue. If I think about the 3 major end markets, it seemed like aerospace would keep ramping with new programs and legacy line rates about to go higher. Industrial, I think you've said, would get better modestly sequentially every quarter through the year. Maybe that is wrong. Maybe space and defense is down. Can you help us with which of the 3 major end markets is up and which is down in the back half versus the first?

I would just call it seasonality. We rarely have a second half that is bigger than the first half. We always have a step-down in margins of 1% to 2% just from European holidays. Almost half our business is outside of the US. So we have historically had offsets in the third quarter. Wind tends to be strong at the end of the year. Aerospace and other industrials tend to reduce inventories going into December and then have a strong first quarter. I don't have all the explanations. I just have 10 years of history. So if we show the second half about the same as the first half, that actually is a pretty strong second half.

Right. Okay. Fair enough, and then, just one clarification just to make sure I have this right. The new EPS range, $1.05 to $1.12, does not include the $0.05 tax benefit, is that correct?

That is correct.

Okay. Thank you.

And we don't apologize for that tax benefit. We will earn what we have in prior period, it is thin, what is it, 46?

8.

48.

So it looks, the EPS is even better if we put that back in, so I wanted to make sure that is right.

Right.

Thank you.

Stephen Levenson with of Stifel Nicolaus has the next question.

Thank you. Good morning, everybody.

Hi, Steve.

You were talking about the single aisles before and your difference between 747, 400 and Dash 8. It looks like the LEAP-X is going to be the big winner on the single aisle planes. Would you want to hazard a guess of what the incremental benefit per aircraft is?

I don't, but I don't ever want to root for a customer publicly, but the LEAP-X is,, as you note, is not a disappointment to us.

Okay, and you do have content on the geared to rough end as well, if I am correct?

We have content on everything in the air.

Okay. Airbus has come out and said that if things go right, which I don't think anybody is betting on, that they will start up the A-350 final assembly line at the end of this year. What are the sort of lead times you have, if they were going start at the end of the year, when do you think you would start getting pull-through?

2005.

Okay.

I mean, really. New airplanes start to hit sales in a significant fashion way before launch. I actually looked back the A-380, which everyone's forgotten about and that one is really starting to get fun for us. The A-380 first central wing box started to be assembled in January of 2002, 6 months after I got here. It is now about halfway up the ramp that we expected a number of years ago, But we had a lot of very strong years on the A-380. So, the same has been true on the A-350. I mean, it doesn't stack up yet with the A-380 or the 787, obviously, but with these new programs, you have the A-380 ramping up hard now, and it is the biggest growth driver near term. The 787 is going to be almost twice as big at rate, and it is going to follow behind the A-380, and the A-350 is going to be twice as big again, and it will follow those 2. So we see a steady, long term growth pattern from this layering effect with no real radical steps, and the A-350 is just one piece of the long-term puzzle.

Got it. Thanks. 2 more quick ones. At the air show there was a lot of discussion and some people displaying parts that can be cured out of the autoclave. What is Hexcel doing on out-of-autoclave materials?

I think most of us in the business have been working on out-of-autoclave materials for a long time. We have got materials that are interesting for it and a lot of developmental work has been going on. There are a lot of customers who are sampling it. Tends to be first on less critical aircraft like UAV's and so forth. You might have seen in the quarter NCAMP, which is the National Center for Advanced Materials Performance, who does generic composite allowables programs so that anybody can use the materials without having to do individual certification and qualification, particularly used on smaller aircraft, and you can see we got qualified, our 8552 System, which is both a regular prepreg, but also a very interesting from an out-of-autoclave standpoint. I think on the big aircraft, everybody would love to be out of the autoclave, but I think the performance improvement is worth the money for the autoclave, to date at least. So, I think out-of-autoclave and direct processes and fusion will all have a place in the future, all have a part to play. We are involved in all of them, but for the near term, prepreg is still is the dominant focus.

Got it. Last one is something I get from people that I deal with all the time, and maybe some clarification would help. A lot of people are curious why other competitors don't just come into this market. There's obviously a long qualification time, but if you were going to guess if somebody else was going to show up, how long would it take before they could sell their first pound of aerospace fiber?

How long is a string? It is just -- it is not impossible. It is just incredibly difficult. It is as good as any industrial product I can think of with respect to the security of our position. Those of us who are in the Intermediate Modulus fiber, assuming that that is what you are referring to. First, you have to know how to do it, second you have to build a factory that maybe would cost you $50 million, and 3 years later then you would get your first pound, and then you would have to find a customer willing to try some brand new fiber that he has never seen before. So it is just not real practical. I think those who are in the industrial arena are very anxious to see industrial take-off in automotive and are very focused on that, but those assets, I am sure they aspire to entry into aerospace some day, and someday maybe they will, but you need a new airplane, you need a fiber their performs like ours and you need some database of usage and history, so it is not something, at my age, that I lose a lot of sleep over.

Got it. Thanks a lot.

Yes.

Moving on, we'll take our next question from Rich Safran with Buckingham Research Group.

Good morning, David. Good morning, Wayne.

Hi, Rich.

Just a real quick accounting-type question. Your corporate and other was a little lower than I expected. I kind of believe that has to do with stock comp expense. Just want to know if you could give us that and what that was in 1 -- I think it would be down from Q1 then, right?

Yes, correct. From the first quarter, it would be lower, just the nature of how we do our stock compensation charge, most of it hits in the first quarter. Then it is a lower run rate in the second, third and fourth quarter, and that's probably the single biggest difference if you are comparing Q1 to Q2.

And what do you think the run rate is going to be for the rest of the year?

It will be comparable to what it is in the second quarter, which, I think, is $2.5 million a quarter.

Okay. $2.5 million a quarter. Thank you very much.

Yes. Thanks, Rich.

Moving on, we will take Ken Herbert with Wedbush.

Yes, hi. Good morning.

Good morning.

Just wanted to ask one further question. On the second quarter on the margin, I mean, great quarter, by the way. It is possible, I know you mentioned some of the 3 head-winds in terms of material costs, start-up costs for the facilities, and the tornado. Is it possible to even, as we think about these, understand sort of the relative impact of each one? I mean, I can appreciate the -- clearly the guidance reflects that you expect margins to get back to where you want them to be moving forward, but as you think about the quarter, can you at least rank for us the relative impact, or help us put this in context a little better?

Again, we really only see it as about 100 or 200 basis point swing in total on the 3. There is no one thing that is big enough that we want to point it out and put a big number on it. We think that the growth that we will get in the second half, the comparisons that we have to meet, we will be able to get back on track with what we did, and it is not something we want to spend a long time on.

Okay. I can appreciate that. When you look at the wind markets, can appreciate long-term. It will be very likely, and a very attractive business. Can you just talk us through your expectations for the next 2 to 3 quarters? I know the wind came off, obviously, very tough first quarter last year and it seems to have sort of stabilized at these levels, but when do you expect to see, or hope to see, some incremental step-ups in terms of volumes for that business, and, obviously, with your primary customer, in terms of the build rates moving forward?

We don't have a projection of any big step change. We are happy to see the stabilization that we have. We think there will be some gradual growth. Most of what we described is just based on the backlog that Vestas was able to accumulate last year. So we are anxiously awaiting their next quarter release to see more orders. I think they had 8 gigawatts last year, which gave a good steady backlog that I hope they will be able to feather out in a stable fashion. I think they had 8 gigawatts last year, which gave a good, steady backlog that I hope they will be able to feather out in a stable fashion. I think 2 gigawatts is all I've seen announced to date. So it is a little off the pace from last year. I think their production schedule is in the 6 to 7 gigawatt range.

So I don't have any quarter-by-quarter color to give you, other than it seems like it has stabilized, and to the extent we can get recovery of the economies and the electric usage, we are happy about the heat wave in the US, pushing demand up for electricity, [fine] in the US, despite the economy, and offshore, it seem to be doing very well in Europe, particularly in England. That requires much bigger blades and thus more materials, So, there are some signs of progress, but we really need a global economy to get moving and Vestas to win a bunch of orders to give much with respect to future growth trends.

Great. And inventory, in the wind channel still seems to be under control from everything I have heard. Are you hearing anything different?

If you mean our inventory, It is always a pretty tight supply chain. If you mean their inventory of blades and turbines, I really don't have visibility into that.

Great. Great quarter and thank you very much.

Thank you.

We will move next to Avinash Kant, with D.A. Davidson & Co.

Good morning, Dave and Wayne.

Hi.

A few questions. In the past you have talked about reaching operating margins of roughly 15%. As you appear very close to that, do you think there could be some upside to that, and maybe any idea of what kind of revenue would it would take to get to those kind of margins?

I don't have any stock point. Everybody picked up on 15.I think I have always said we belong in the high double-digit range. I think the previous CFO, Steven, sort of backed it down to 15. As long as we are growing, I expect margins to expand. That is the nature of incremental leverage. So if we were to stay at a 20% incremental leverage pace, you can do the math. A 20% growth rate would translate to 170 basis points. A 10% growth rate would translate to 80 or 90 basis points. So I don't see any reason to stop that, as long as you can find 10% to 20% growth for me, I think margins should keep moving up.

Okay, and also maybe this was asked, but did you try to kind of give us some color on the relative content that you have in an Airbus 320 versus the 320neo?

No. We haven't given anything out on that yet. It is a little too early to judge.

But qualitatively would it be higher or lower?

Higher.

Higher, okay. And also, when you talk about the ACN pricing, how big an impact is it right now? And could you give us some idea about what percentage increase in ACN pricing would impact your cost by how much?

Well, it depends on how we do with respect to pricing. So it is not that big a part of the business that we want to start tracking those kinds of numbers, but for the quarter, I am sure it was less than 150 basis points.

Okay, and final question. You talked a little about the CapEx, you have been giving the guidance for CapEx for 2011. Any idea how 2012 CapEx could be panning out?

We have been saying $150 to $200 for the next number of years, as long as programs down schedule and growth projections stay as they are now, we haven't changed that.

If I may ask, I know you have been building capacity for the Airbus 350. How much of the Airbus 350 capacity has already been billed out? What percentage of that?

We don't isolate it on the A-350. If you think of the kind of growth that is going on right now, if you look at all the data we have given you, you could see last year's commercial aerospace was, I don't know, $650 million roughly, and about 60% of it was legacy, big aircraft, and roughly a little less than 20% was business and regional and about 20% is new aircraft. The announced legacy build rates, if I just look at the build rates announced by Boeing and Airbus, they have about a 5% CAGR outlook over the next 3 years. So the big part of our business, the 60% legacy, is now likely to grow at something around that, depending on mix. Business and regional is recovering. New programs sales have doubled in the last 2 or 3 years. So CapEx is not just about the A-350. It is supporting the ramp-up in the A-380 first, 787 second, ultimately the A-350, as well as these build rate increases on the legacy big aircraft.

My understanding was that for the 787 you already had built out the capacity, so the incremental 1 will be for the Airbus A-350. Am I off on that?

We look at all of our requirements, many of our processes and materials and capital, make multiple products, the materials that come off are fungible. So we don't have a 787 sticker on any equipment, nor USEC, nor A-350.

Okay, Perfect. Thank you.

Yes.

Michael Lew with ThinkEquity has our next question.

Good morning. Nice quarter.

Thanks.

Which your current carbon fiber capacity? Is the plan still for 16 million pounds by year-end?

Correct, Michael. It probably slips as little in the first quarter of next year, but that is a nameplate that is correct.

Okay. Also wanted --

That's the amount so far.

Yes. Just wanted to follow-up on Avinash's question. How much incremental carbon fiber capacity do you anticipate you will need to support the narrow body build, the new program such as the A-350 coming on. Is 16 million pounds enough?

Certainly not. That is why we are spending $150 to $200 (sic -- see press release) over the next number of years.

Over the next number of years. Okay. I missed that then.

I mean, each year we expect the range will be in that neighborhood, because we do the capacity expansions in tranches, and we have a model that allows us to add blocks of precursor, fiber, prepreg to meet the demand, and that is just sort of what our long-term growth trajectory seems to suggest from a capital standpoint

Okay, and with regard to the A-350 program, which seem to be moving along, do you have a sense with regards to the time frame as to when the secondary structure contracts might start to be awarded?

I would say they are being awarded. We just probably won't be tracking part by part, or material by material. We will give you some guidance of what we think the total airplane content will be when it get as little closer to launch.

Okay. All right, and also a final question. What is the static on USEC? Can you refresh on how much that was worth, or is there anything going on there?

The original announcement we had was a $100 million program over 3 years. We shipped about --

$16 million so far.

-- $16 million of that, assuming that when the program gets restarted, it has a similar production build. You maybe me think of a third of that per year at rate, but what is in the pipeline with the inventory is, what the plan will be when they get funded, isn't clear to us. So I am only talking about history. We don't really have a projection, not yet. Last I read, they are still working on getting a DOD loan guarantee. There was a deadline with some of their partners, the end of June that got a 45-day extension.

Right.

That is all I know.

Okay. Great. Well, thank you very much.

Yes.

We will now move to Peter Cazone with KeyBanc Capital Markets.

Good morning, guys. Great quarter.

Thanks. Hi.

In the business and regional jet market, can you just remind us, or quantify where we are relative to maybe pre-downturn run rate here?

I'm sorry?

The pre-downturn run rates.

Pre-downturn run rates. So as I said earlier, we were running at about $200 million a year, we dropped to about $100 million a year. We are up in the neighborhood of $130 million on a first-half basis, I think.

Okay, and then on the SG&A front, costs declined both on absolute and percentage of sales basis versus 1Q. How do we think about the run rate kind of going forward here? Is there a need to add to the commercial force, or have you already been doing that?

Well, we always try to hold SG&A, as well as factory [overhead] to get the leverage we talked about earlier. Of course, there is inflation and such. I don't think we are down dramatically from last year, other than if you adjust out incentive comp adjustment last year, If you think back to the beginning of last year, there was a lot of negative thoughts about what was going happen, build rates were going to go down per almost every analyst, and then when things started to get stronger faster than we expected, and we took up our guidance, we adjusted our accrual rate on incentive compensation in the second quarter. If you took that out, we are probably pretty flat with last year. So, we would like productivity to offset inflation as a goal, and don't have any specific big additions to talk about today. We certainly are adding in all of the factories for the kind of ramp-up that we are doing, up 18%. Our head count is probably up 15 or 16, but most of it is in factory-related areas.

Okay. Great. Thank you.

Yes.

At this point we have no further questions. This will conclude today's conference call. Thank you for attending.