Hexcel Corp (HXL) 2011 Q3 法說會逐字稿

Good day everyone and welcome to the Hexcel Corporation third 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 Mr Wayne Pensky, Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2011 third quarter earnings conference call on October 25, 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 third quarter 10-Q, and last night's press release.

Lastly, this call can being recorded by Hexcel Corporation and is copyrighted material. It cannot be rerecorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

We me today are Dave Berges, Hexcel's Chairman and CEO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2011 third quarter results detailed in our press release issued yesterday. First Dave will cover the markets and then I will cover some of the financial details before taking your questions.

Thanks, Wayne. Great quarter. Good morning everyone. Hexcel's third quarter sales of $352 million were up nearly 20% from the same period last year, our sixth straight quarter of double digit growth. Considering the typical seasonal slow down of the third quarter, revenues were surprisingly strong and good leverage on incremental sales allowed us to deliver adjusted operating income of $48.7 million for the quarter, a 41% improvement over last year. Adjusted diluted EPS of $0.34 was a 70% gain. With year-to-date adjusted EPS of $0.91 and the strength we see in most of our markets, we are increasing our 2011 guidance for the year. Now expect sales as high as $1.4 billion, and adjusted diluted EPS in the range of $1.18 to $1.23 for the year, up about 10% from our prior guidance.

Now let me cover markets using constant dollars to describe the sales trends. Commercial aerospace sales were $207 million for the quarter, up 31% in constant currency from last year's third quarter, with growth in all areas of the market. Total revenues for new aircraft programs, which include the A380, 787, 747-8 and the A350, increased by more than 35% for the quarter compared to last year and, again, accounted for more than 25% of our total aerospace sales. Sales to legacy platforms at Airbus and Boeing were up again, 25% compared to the third quarter of 2010. As we were benefiting from the demand of the announced higher build rates. Sales to other commercial aerospace, which includes regional and business aircraft, remained essentially similar to the first half, but were up over 30% compared to last year's easy comparisons.

Sales to space and defense markets were $81 million, up over 7% on a constant currency basis versus Q3 2010. As has been the case for the last few years, sales were driven by rotorcraft, where we continue to benefit from growth in new programs, as well as blade retrofits. As expected year-to-date space and defense sales were up almost 6% on a constant currency basis. In industrial markets, sales for the third quarter were $63.5 million, down about 5% in constant currency versus last year's period. Wind sales were down modestly from the same period last year, but up more than 10% sequentially. This is the third straight quarter of sequential growth for wind sales, a trend we expect to continue. Let me turn the call back over to Wayne for some additional comments on the financials.

Thanks, Dave. Our reported diluted earnings per share for the quarter of $0.32 includes a $2.7 million charge for additional environmental reserves, primarily to deal with the remediation with site Lodi, New Jersey that was sold in 1986. Flooding from Hurricane Irene damaged our efforts there, and we are now back on track and we expect to complete the multi-year effort next year. Excluding this charge, our adjusted diluted earnings per share was $0.34 this quarter versus last year's $0.20.

Gross margin of $86.5 million for the quarter was 24.6% of sales, as compared to 23.9% in the third quarter of 2010, due to good leverage in the strong sales volume. Our adjusted operating income for the quarter was $48.7 million, or 13.8% of sales as compared to adjusted operating income of $34.5 million, or 11.7% of sales a year ago. Selling, general and administrative costs increased by about 2% constant currency, while R&D expenses increased about 5% from last year's levels. These higher costs were more than offset by the gains from the 19% increase in sales, which led to our strong operating margins. As we have been saying, increasing sales volume, coupled with good cost control, will translate into a growing operating margin percentage. Our year-to-date adjusted operating margin is now 13.5%.

Our interest expense for the quarter was $2.2 million as compared to $5.3 million a year ago. We are benefiting from the lower rates from the July 2010 refinancing, the February 1 bond redemption, and lower borrowings. We also had some one time benefits in interest expense this quarter and we estimate that our interest expense run rate is just over $3 million per quarter. Our effective tax rate for the quarter was 27.4% as we benefited from both the reduction of our estimated tax rate for the year from 31.8% to 31%, and the release of $1 million of reserves for uncertain tax positions. For the remainder of the year we expect a 31% effective tax rate.

Year-to-date free cash flow is $11.5 million as compared to $38 million at this point last year. Higher earnings were more than offset by higher levels of capital spending. Our accrued capital expenditures through the end of September were $104 million, and we now expect to spend close to the $175 million for the year, which is the high-end of our guidance range. We expect free cash flow to be slightly positive for the year. Now let me turn the call over to the operator to take your questions.

(Operator Instructions) We'll go first to Howard Rubel with Jefferies.

Good morning. It was a heck of a quarter, David. But I have a couple of cash flow questions for Wayne, if you wouldn't mind. You are starting to use working capital again, at a decent clip. How should we think about what you are going to do going forward? I would suspect it won't be quite as high next year as you have used it this year because the sales ramp might not be quite as aggressive. And the second part of this is to talk to maybe deferred taxes and also CapEx. Because the Q clearly talked about 50% higher spending next year than this year.

Okay, Howard. Let me break it into -- first let's talk about fourth quarter as opposed to 2012. With respect to fourth quarter, generally speaking, we tend to not use working capital in the quarter. Whether we'll generate working capital in the quarter is yet to be seen, but we don't expect it to go up. When you throw in the CapEx that we have expected for the fourth quarter, we do expect to be near neutral for the quarter which puts us up a little bit for the year. With respect to 2012, we'll probably give more guidance about that in the upcoming months, but I would just view receivables generally moves with sales and inventories, try to do a little bit better holding the line this year.

Howard, let me chip in on CapEx, because as you noticed in the Q, we indicated we are now targeting a higher rate of capital spending next year than what we had previously talked about. In the second half of last year, we had 25% year-over-year growth in commercial aerospace. So, we outlined a spending profile that we thought we'd need going forward being in the range of $150 million to $200 million a year for a few years.

This year the growth has been 30% for three quarters. And Boeing and Airbus announced legacy build rate increases we weren't expecting. And the new A380, A320 reengine program was launched and we'll have a lot more composites on both the engines and the cells. And the 737 max program was launched that will have, in addition to engine and cell content, the carbon fiber fan blades of LEAP-X engine. All this is on top of the build of the A380, 787, 747-8. A lot of these new programs call for our intermediate modules carbon fiber, our most capital intensive product. Remember it takes us two or three years to build and qualify carbon capacity. So, now is the time to crank up the spending and you'll see that in our guidance in December as we zero in on a number for next year.

All right. Just one follow-up here, Dave. Then it would seem to indicate that you're staying ahead of capacity constraints so that you can be flexible and grow, take advantage of some other opportunities. Is that sort of the way you are thinking about the capital requirements?

Actually, I always like to stay a little ahead. But no, that is not the purpose. We see, we see this increased demand over this two or three-year period that we need to get this capacity online. The demand is there, even if you make some judgments on program timing or on USEC, or some of these other items. We are now running at a rate that is equal to or above our 2008 peak. In 2008 we spent $177 million and then we throttled it back after the credit crisis. We delayed a number of big investment programs midstream, and it is time to crank back up.

Okay. Thank you very much.

We'll take our next question from John McNulty with Credit Suisse.

Hi, this Abhi Rajendran calling in for John McNulty. Just another quick CapEx question. With all the program ramps and the reengine announcements, could you talk a little bit about how much additional carbon fiber capacity you are bringing up either on a pounds or a percentage basis?

I know a lot of people in the chemical world report their capacity in pounds and historically we did, too. But we have come off that in recent years and would rather not disclose specific pounds. An awful lot of our capacity is used to serve ourselves, it's internal capacity. And we'd just soon not be disclosing what our increases are.

Fair enough. Moving over to space and defense, you had a pretty strong quarter there. Could you talk a little bit about some of the drivers of the strength there and what your expectations are for growth in that business looking ahead to 4Q and maybe longer term as well?

Well they really haven't changed much. I know some of you think I'm in some reality distortion field here. But I'm no Steven Jobs. We just expect space and defense to hold up, albeit at a single digit rate. Because of the things we have talked about before.

Rotorcraft is more than half of our business and accounts for almost all of our growth year-to-date. V-22 Osprey and the Blackhawk are running strong. Export sales to Saudi Arabia, Turkey, Australia, and Taiwan are boosting up prospects. We also sell materials not just to the US and European manufacturers in the helicopter space, but also India, China, Korea and Turkey. But most important, probably is that numerous legacy programs are getting new composite rotor blades, some, like the Blackhawk have been funded for retrofit programs. Beyond these, we see ultimately JSF and A400M will help offset deterioration of other programs.

Okay great. Last quick one if I may. In your wind business, while things are still slightly down year-over-year, it looks like things are improving sequentially. Could you talk maybe a little bit about the visibility that you are seeing in the industry near term, as well as maybe your longer term outlook given rising utility CapEx levels and some of the advances in turbine technology?

We certainly don't get the visibility in this market that we do in commercial aerospace with build rates identified and locked for six or seven years in advance. Mostly what we look to is our customers and how many blade making molds they have, and what their build schedules are for the next quarter or two. We also like to look at what the backlog situation is. As we have said before, Vestas had a very, very good order last year and have built-up quite a backlog of turbines. They have had not as good a year this year, but more than what they have shipped so far. So, we believe the book to build has expanded, which we see as good news. So, I expect that we will have continued sequential growth thanks to the Vestas backlog.

Thanks very much.

We'll go next to Richard Safran with Buckingham.

David, I wanted to follow-up on your comments about wind, et cetera. If I take a look at Vestas 3Q orders, where they are now, they look like they are tracking a little bit below or some what below 2011 guidance. I think year-to-date they have about 4,200 megawatts worth of orders. Guidance seems to be about 7,000 to 8,000 megawatts. So, could you put this in context into your previous comments? I was wondering if this is causing you any bit of concern here or if you think this is something that is going to level out towards the end of the year?

Well I don't have visibility into their negotiations on their order patterns. They do seem to be off the pace. They have been in the past, and beat it, and they have been in the past and not beat it. I'm more looking, Richard, at the, I think it was 8 gigawatts of orders last year, which is far more than they produced last year and more than they have produced year-to-date this year. Plus the four gigawatts year-to-date. I would always love to see more orders, but we have not been shipping at a pace that would lineup with that 12 gigawatt of orders for the last six quarters. So, I think that we've got a little more stability than what we had three years ago with that pent-up demand.

Okay. And then just one follow-up with Wayne on debt repayment. You repaid debt in 1Q and 2Q. I think you are down about $14.5 million for the year. Didn't do anything this quarter and I gather from your commentary, to expect nothing in 4Q either. Just wondering I know you are not giving anything out on 2012, but can you talk a little bit if there is any intent to do any debt reduction, further debt reduction next year?

Excuse me. The 2012 number we are really depending on how large the CapEx is. At this point when we are talking about the CapEx levels, we are thinking about -- we expect we will be a borrower next year as opposed to paying down.

I would expect, though, with the expanded EBITDA, we will be able to manage cash well enough even with that funding that we'd stay well within our existing credit facility and maintain a debt to EBITDA level well below 1.5 times.

Thanks a lot.

Sure.

We'll go next to Amit Mehrotra with Deutsche Bank.

Talk about the cadence in the commercial aero shipments during the quarter, did you see a pick up in the quarter as the quarter went on? Or was it consistent throughout, or was there weakness in the end strength in the beginning? Can you just talk about that?

Normally third quarter is weak in July and August because of holiday schedules. And strong in September. I would say this quarter fit that pattern.

It looked like engineered products had at least one of the strongest quarters in recent history. Any specifics that drove the engineered products division?

I wouldn't focus on one quarters business have some quarter to quarter lumpiness due for tooling, billing, assertions and the like. But as you point out, they are running 20% higher than the 2008 peak. 20% higher than last year. So, we feel real good about their progress.

Okay. And then just looking at the new guidance. The 4Q -- the implied 4Q EPS, it's implied down sequentially from 3Q. While sales -- the implied sales level is about flat. Is there anything impacting the margins as we move from 3Q to 4Q or is it just conservatism given some of the macro uncertainty?

Well it is not macro uncertainty because I don't see that affecting build rates and the increases that Boeing and Airbus are going through. I do always expect lower operating margins in the fourth quarter for seasonal reasons, quite frankly I expected a drop in the third quarter. But the organization surprised me.

Really if you go back the last five years, the second half has always been 1.8% lower than the first half, on average. And as with the third quarter, depends a lot on what the volumes are. Third quarter volumes, despite the summer holiday season, especially in Europe, we managed to maintain the pace of the second quarter, which would suggest a much higher run rate than what we'd anticipated and we got good leverage. So, fourth quarter some funny things can happen with inventories and how they handle inventory year end management. So, you can call it conservatism, but there is a lot of history on a seasonal step down on margin rates in the fourth quarter.

Last question on the CapEx exceeding $200 million for next year. I know you guys were a little bit free cash flow positive, expected to be this year. Can you talk about what you are targeting on a free cash flow basis next year, given the rise in the CapEx?

Well, for those of you who have followed us for awhile, I have always targeted both high teens operating income margin and funding CapEx from operation. I always have targeted that and always will. Until they drag me from the trench and put a bullet in my head. But, no, I don't expect we are going to be able to handle these kinds of CapEx numbers next year. We don't have a specific target range. We just gave you an indication that we are going up next year. We are going to try to do that in December after we finish the planning cycle and we'll do the same with our cash prospects at that time.

Thanks very much.

We'll go next to Ken Herbert with Wedbush Securities.

Good morning. Just first wanted to dig a little deeper into the commercial aerospace. Sounds like, obviously, you have great visibility here but the quarter was probably -- or the latter part of this year shaping up a little stronger maybe than you expected earlier in the year. With the new programs, can you specifically highlight -- it sounds like A380 is having a better year than you expected. But with the increase, would you say this is more 787 step ups? Or is it really A380 starting to perhaps really step up in terms of volumes?

It's all four programs. They've been very strong the entire year, as we expected. A380 is maybe the strongest, just because they are up at a pretty high build rate and we have had a number of years of inventory burn down. So, we have some easy comparisons. So, the A380 is probably strongest and probably the most that the airplanes closest to delivery are the next strongest. But each of them is up year-over-year, and year-to-date over year-to-date. Each contributing to it.

I think the other strength though, not to be ignored, and maybe even questioned, is the legacy build rates. So, we have had a couple of quarters of 25% year-over-year legacy growth rates, and that's more than what build rates would suggest. But I would remind you that in 2009, when everybody was worried about cash, our sales and everyone else's sales and the supply chain to Boeing and Airbus aircraft declined pretty significantly. Ours was 15% as I recall, even though line rates were pretty stable. And at the time everybody called it destocking. As people were working down inventories in anticipation of a decline. So, I think there's got to be some of the reverse going on, some restocking in anticipation of sustainable build rates. And then topped up with legacy increases.

And if we are in a situation maybe where there is some restocking or over buying going on, what kind of time frame do you think that has to run its course before you are in a situation where we are at sort of a one-to-one book to build situation?

I don't know that I would call it overstocking. I think it is just getting it to where it should be. It was hard for me to imagine that we could have a full year of 15% decline when build rates did not go down in 2009. So, I think the supply chain sees that we've got a steady growth path in front of us. I think some people are worried about the supply chain's ability to keep up, and I think we are all doing our part to make sure that doesn't happen. I don't think we are way ahead of it. But I don't expect legacy aircraft sales for Hexcel to out perform build rate increases by 15%.

Okay great. If I could just one follow-up. You mentioned, Dave, early in the call that the business and regional sales up over 30% on the other aerospace, not surprising considering the trough last year. Can you just provide any commentary on what you are seeing there in terms of business jets specifically and any trends here in the fourth quarter and next year in terms of build rates within that sector?

We have quite a few customers and quite a few programs, so it's not a precise science. It certainly isn't as easy as to predict as what we have in the large aircraft. I would say that in the recent two quarters, business jets have been the stronger of the two if I were to separate between business and regional. I think that the pace that we are at, which is about 130 million to 150 million per year, feels about right with the build rates and what we all heard at the NBAA business show last month.

So, I think we've probably stabilized this 30% growth that we are referring to as you point out as really just over easy comps. I look to see this 130 to 150 pace sort of maintained, would be my gut feel. Assuming we don't have some global credit crisis. If we have a global credit crisis, the industrial markets and the business and regional are the ones that would probably be most susceptible, so those two combined now only represent 25% to 30% of our total sales.

Great. Thank you very much.

Sure.

We'll move next to Noah Poponak with Goldman Sachs.

Dave, just to follow-up on that discussion around the legacy aerospace business. Just to make sure I understand you correctly, it sounds like you are saying there was some destocking by the OEs and the tier ones when everyone thought rates needed to come down and that your sense as to why you are growing ahead of the implied rate increase next year now, is because they are catching up from that to get back to square one, as opposed to they are buying ahead to have inventory on hand for the rate increases that are coming. Is that correct?

I would say it is a combination of those two. I also -- we also have all seen, I think, some reports of Boeing saying that they are now running at the 35 airplane per month rate on the 737. That was supposed to be in the first quarter of 2012. So, they maybe pulled in the step up. So, you have some surge required to support that. I think it's a combination though, and I think we are going to see continued growth in legacy. But our big driver, as always, will be the new wide bodies with the heavy composite content.

Okay. You guys have talked about 12 to 16 as a sustainable long-term growth rate in aerospace. Is there any reason you would not be able to achieve that in '12 just due to the difficult comparison you have set up? Or you think you still are in that range in '12?

You are getting a little ahead of me on the guidance here. I also don't know we've done 12 to 16. I think we said double digits. We'll let you know a number. We've got a strong pattern of growth going on, and does a full year of 30% growth mean that we might not quite get to double digits? I don't know. But we still are holding at this stage with the double digit kind of pattern. Not 9-9-9.

Yes. Got you. One other follow-up that you may not answer because it touches on 2012 as well, but I'll try anyway. I would love to just get a sense for the magnitude that you are thinking of in terms of the high-end of the range for this CapEx number in 2012. You are right that historically, your cash from operations versus your net income is a very consistent number. If I apply that to my 2012 number, if your CapEx isn't terribly far above 200 you are in that kind of break even free cash range. Just so I understand how you are thinking about it, is something meaningfully above 200 in, on the table of possible scenarios? Or is it kind of mildly over 200 as the more likely outcome?

I'm not sure what your definition of mild and meaningful is. But we actually put in the Q, that just to get some bounds on it that it could be as much as 50% above our current guidance. And that is just to get you in the neighborhood.

Got it.

That would suggest 225 to 300.

Got it.

Meaningful to me, certainly.

Okay. Thanks a lot.

Sure.

We'll go next to Ronald Epstein with Merrill Lynch.

Just a quick discussion around if we were to see some delays in the A350, how do you guys think about it? How do we, as kind of analysts following the Company, put our heads around that? There is some discussion that the airplane might be six months behind.

I suppose there always has been discussion of every airplane since the A380 that everybody is behind. I can't comment on that. But our current sales and near term growth is driven by everything else not the A350. The A350 is a very important part of our future and very important part of our capital spending. So, we have to monitor the Airbus position on it, mostly about what we do with our capital spending.

So, we take two or three years to add the capacity and if there were to be a delay announced, that's not enough of an answer for us. What we would have to know is, is the entire program and its ramp rate delayed? If so, we'd delay capital spending. If they are late with first flight or late with first assembly, but maintain the schedule and the ramp rate, we have to have capacity in place. We don't want to be one that holds back the program.

Okay. And then in the past you have mentioned there might be an opportunity on the 737 max or A320 neo, for more carbon fiber. In particular, is there opportunity to increase your carbon fiber on those programs? And how should we think about that, and when would we learn about that if that is the case?

We have a number of products that are used to make engines and cells, both lighter weight and better acoustically. So, noise is a very important factor. Weight is a very important factor. So, I think they want to try to take 15% of the weight out of the engine and cell combination on these programs and that points to Honeycomb core, to our acoustic core, to carbon fiber and to prepregs and to resin systems. So, it is an opportunity that, I'm sure, everyone in the composite business is addressing and trying to attack. I'm certain the composite content on those programs will be greater than the existing programs. It is just a question of how much of it we win.

One last one if I may. When we think about the potential competition between carbon fiber and aluminum lithium, particularly around fuselages, how do you guys think about that? Is aluminum lithium really a viable competitor to a carbon fiber fuselage?

I treat every competitor as viable.

Okay.

I think it depends on the aircraft type and design philosophy. Certainly aluminum can work on the fuselage, has for 75 years. Aluminum lithium has some benefits over prior generations of aluminum, but carbon fiber prepregs are getting better as well. There are advantages to carbon fiber that aluminum will not be able to compete with. But there is legacy and history and familiarity with existing technology and manufacturing techniques. So, I think designer by designer, aircraft by aircraft that decision will be made. I think aluminum, titanium, carbon will always be competitors in this market.

Great, thank you very much.

We'll go next to Michael Lew with Needham and Company.

Thanks and good morning. With regard to wind, how many companies are you currently engaged with that could shift to prepreg in the near term? Or is this something still a couple years away?

I think the history suggests that on existing turbines, the way they are manufactured now is the way they'll stay. That's not absolute. But most customers, most turbine makers make that decision very early on in their design and that is the one they become familiar with, just like the aluminum composite discussion that we had with prior call. I think as you start getting to bigger blades, offshore blades, new designs, new approaches, that is where the competition really is on what the future looks like with respect to what customers use prepreg versus infusion.

Okay and also can you provide an update on the USEC program? Does your CapEx plans, do they incorporate the USEC program going forward?

Well, we are waiting to see what the conclusion is of the Department of Energy funding discussions going on. There has been a recent release by USEC that suggests it is still being discussed, and that is a part of what will go into our planning in December when we identify our capacity and needs.

Okay. And one last question. Giving Boeing had moved up their time line for narrow body production, has Airbus also done the same or provided similar communications for their legacy production rates?

Not that I'm aware of.

That's not been incorporated in the guidance for '11 yet?

Right.

Okay thank you.

We'll go next to Steve Levenson with Stifel Nicolaus.

Thanks, good morning everybody. Just to build on the discussion about revised airplane models like 737 max and A320 neo, I guess there is also some discussion about updated version of the GE 90 and a composite win for the 777. Being that you haven't, up to this point, been in primary structures at Boeing, do you think there is still a door you could go through to potentially go after that business?

There are certainly doors that we are willing to bang our heads against. So, many opportunities, so little time.

And did you mention on 737 max, I know from the artist's drawings it looks like there is a different empennage, is there any news that, that might be in part made of composites?

I have no information on that.

Last one is on capital expenditures. If defense budgets end up cutting or slowing down the production of F-35s, would that have any factor on capital spending?

It would certainly be a factor in our long-term build demand profile. We try to monitor and map every program, commercial, military, USEC, we have a pretty big sophisticated model we update, we run through Monte Carlo and now we decide when we need to start precursor lines and when we need to start carbon fiber lines. That would be one of the many factors we'd have to look at for our December outlook.

Do you think the impact would be more -- greater reduction in capital expenditure as opposed to the impact of fewer sales into F-35? Is commercial making up for that?

I would say that commercial aerospace is much bigger than any near term F-35 outlooks. The small airplane compared to an A350.

Got it. Thanks a lot and stay away from those drainage pipes.

We'll take our next question from David Strauss with UBS.

Wayne, can you maybe talk about how you expect to see this -- the increase in CapEx flow through to the income statement and how that might impact your incremental margins on a go forward basis?

Excuse me. We will see depreciation go up, obviously. But it does take a couple of years for the major CapEx projects there in process for as much as two years. When you talk about the 2012 CapEx spend, a lot of that you won't see hit until 2013 or even in some cases 2014. In December we'll give a little bit of guidance on depreciation expense for next year, just the increase as a result of next year's spending. In general, for the major projects, think of roughly a 20 year useful life.

Just to remind you, David, back in 2008, we spent over $175 million in CapEx and then had the measure pulled back from the global credit crisis. Coincidentally, today's year-to-date sales are almost exactly what they were in 2008. So, with all the depreciation and everything else, we still have an after tax return on invested capital that's now 12.5%, 80 basis points better than 2008. Our operating income margin is up 270 basis points from 2008 year-to-date and our EPS is up 38%. Our net debt is down 43%. So, we really view this capital as our acquisition program. We expect profitable growth to come from this organic growth.

Great. Thanks for that color. Along those same lines, maybe you could talk about the opportunity you still see from a gross margin perspective. Obviously, you have been right around 25% gross margins here for the last couple of quarters. Where do you see, potentially, gross margins going forward with higher volumes?

I would say that historically, I always look to see a 30% incremental gross margin. The 30% gross margin leverage on incremental sales. So that, historically, has allowed us to raise our margin rates the current levels. But easy leverage volume comes more difficult when facilities start to bump up against capacity as we have this year. Adding premium shifts, training new people, leasing additional space, increased depreciation, they'll put pressure on factory overhead.

So, our year-to-date gross margin leverage is about even with what our margins are. So, I think the easy leverage on gross margin is gone. And now it's about managing productivity and pricing to offset inflation, input costs and depreciation. I think 24% to 25% gross margins are a likely outcome through the growth. Operating and net income leverage is another matter, of course. We don't need to proportionally expand corporate functions and with double digit growth we should see a real good bottom line earnings gains.

Okay. This bucket of -- that you are calling new programs, the wide body programs, it looks like, based on what you've disclosed, that those programs, revenues for those programs in aggregate have grown 30% to 40% this year. Would you expect that bucket to grow at a similar rate next year, even though it is, obviously, going to be a bigger bucket?

I actually haven't done that math. We'll try to include that in our December guidance, if you would wait until then.

Okay. Last one for me. Wayne, I think you talked about 31% tax rate in the fourth quarter. I believe you talked about 32% tax rate for 2012. Is that still right to you?

Yes, I would still continue with that number. We'll probably address that in December as well. Again, it just depends on the mix, where our income is by country. I would stick with the 32%.

Okay. Thanks guys.

We'll go next to Avinash Kant with DA Davidson and Company.

Good morning, Dave and Wayne. Quick question on utilization rate. Could you give us some idea about where you are maybe overall? Or maybe business segment wise? Whichever way you want to talk about it.

Well, it's pretty difficult to do a general number because machine by machine you have certain lines that are qualified with certain customers. So, it's a bit of a complicated topic. I would say in general, we are bumping up against capacity in many of our lines and factories and that is why we are pulling up the capital spending profile, both this year and next.

And typically you start adding capacity, I would say when you get above the 85% or so utilization rate, 80%, 85%?

We calculate when we need the capacity and we work back the lead time for how long it takes to get the equipment in, up, qualified and, running efficiently and that is when we launch it. It is a wide range of lead times from some easy equipment that can be done in four or five months to carbon fiber precursor line that takes three years. Just depends on the product.

Right. And did you specify for the current year, the CapEx would you be closer to the high-end or the low end of the overall?

Yes, we said we'd be close to the high-end 175.

So, that means your CapEx on a sequential basis could be up more than two times right in Q4 compared to Q3?

Correct. We are 104 year-to-date.

Sequential quarterly you mean?

Yes.

Yes. We did 49 in the third quarter.

Okay. And talking about anything relate to the pricing, have you seen any increases in the raw material input material prices? And how is that going to impact your margins, if at all?

We have seen input increases for this year in particular with acrylonitrile, although it pulled back a little bit in the third quarter. It is still up versus last year. As we have said before though, we try to match our long-term customer contracts with long-term supply contracts. So, we generally match up with what we call back to back alignment. And don't have big swings one way or the other on our input costs.

You do have long-term contracts with your suppliers?

With a number of suppliers. Not everyone does. Some materials we pay on a commodity basis, like acrylonitrile. But generally, we have most of our input materials covered.

And final question. There may have been some doubt about confusion about, or confusion about how much incremental content you have in the Airbus 320 neo and the 737 max. Where do you stand on that now?

We -- it is way too early to declare. I gave an indication that it could be as much as 50% increase in the meeting a few months ago that we had to put an 8-K out on. Only to sort of put a band on what it could be. It is not going to be like an all new airline, like a 787 or A350. It is just the engine and the cell incremental content at this stage and we don't have a specific answer for you anytime in the near future.

Would you say the 320 is higher versus 737 incrementally?

Don't know yet.

Perfect. Thank you so much.

We'll go next to Mike Sison with Key Banc.

In terms of your capacity, do you have enough to sort of keep pace with growth that is out there for 2012?

We sure intend to.

Okay. I just wanted to clarify, given that your operating rates are pretty high, back to '08 levels, wouldn't the overall incremental margin be better as we head into the higher operating rates?

Higher volume? I expect better than 20% operating income, incrementally on growth. That is what we've managed to do over time. We fell behind in the first half, but we caught it up in this quarter. I think year-to-date we are up over 21% on the increment. That's sort of always been my target. That is what we hope to continue.

When you think about the backlog heading into '12, can you give us an idea how it looks relative to, let's say, where it was about a year ago?

We don't report our own backlog. We mostly look at our customer's backlog. So, in the case of Boeing and Airbus, their backlog today is 13% higher than it was a year ago at this time.

Okay. Great. Thank you.

Ladies and gentlemen, we have no further questions at this time. So, that will conclude today's conference call. We would like to thank you all for your participation. Have a great day.