Hexcel Corp (HXL) 2013 Q2 法說會逐字稿

Good day and welcome to the Hexcel Corporation second-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2013 second-quarter earnings conference call on July 23, 2013. 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 2012 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 recorded or rebroadcast without our express permission. Your participation in this call constitutes your consent to that request.

Last night, we announced that as of August 1, Nick Stanage is being elevated to President and CEO, and Dave Burgess will move to Executive Chairman until his planned retirement at the end of the year. With me today are Dave and Nick, as well as Michael Bacal, our Communications and Investor Relations Manager.

The purpose of the call is to review our 2013 second-quarter results detailed in our press release issued yesterday. First, Nick will cover the markets, then I will cover some of the financial details; Dave will have some comments before taking your questions.

Thanks, Wayne. Good morning, everyone. Second-quarter sales of $423 million were in line with our expectations, up about 5% from last year, as strong aerospace revenues offset tough year-over-year comparisons in our industrial markets. Operations performed well, producing record adjusted operating margins of 17%, up 90 basis points from last year's period. Our adjusted diluted EPS of $.48 was 14% above the second quarter of last year. All in all, a very satisfying quarter.

Commercial aerospace sales of $270 million for the quarter were up over 15% in constant currency from the same period of 2012. Total revenues from new Airbus and Boeing programs again increased by over 20%, driven by the 787 ramp-up as expected. Of course, highlight of the quarter for Hexcel was the first flight of the Airbus A3 50 XWB, a program that will be a key contributor to Hexcel's growth in the years ahead.

Sales for legacy programs that Airbus and Boeing were up over 10% from last year's second quarter and in line with announced build rate increases. Sales to other commercial aerospace, which includes regional and business aircraft, were down about 5% compared to last year. Space and defense revenues were about $97 million, up over 9% versus last year. Growth was again led by sales of materials for rotorcraft with help from the new European A400M transport.

In industrial markets, sales for the second quarter were $56 million, down almost 29% year-over-year in constant currency. As expected, win sales were down over 35% from record levels of last year's second quarter, though just above the first quarter of 2013 sales. Other industrial sales were also down from 2012, but up modestly from unusually low levels of the first quarter.

Now let me turn the call over to Wayne for some additional comments on our financials.

Thanks, Nick. Gross margin of $117 million for the quarter was 27.6% of sales, as compared to 26.4% in the second quarter of 2012, thanks to continued operational improvements and a bit of a richer sales mix. Our SG&A cost of nearly $35 million was 7% above last year's second quarter, primarily driven by additional staffing and investment to support our projected growth. Our R&D costs of $10 million for the quarter were in line with our expectations of the last two quarters, as we continue to invest in products and process technology improvements.

Our adjusted operating income as a percent of sales was 17% this quarter, with only nominal help from exchange rates. This compares to 16.1% last year's period. I should remind you that last year's second quarter, we recorded a $9.5 million benefit from the settlement of an insurance claim in the tornado damage at our Alabama facility in 2011. But our GAAP operating income in the second quarter 2012 was an eye-popping 18.5%.

Our effective tax rate for the quarter was 30%, down from last year's effective rate of 31.7%. We continue to expect our effective tax rate for the rest of the year to be about 30.5%.

As we previously announced, in late June, we entered into a new five-year $600 million senior secured credit facility that replaces our old $442 million facility. The new facility will provide us with lower interest rates and expanded flexibility. The transaction resulted in a $1 million pretax charge in the second quarter, as we accelerated recognition of certain unamortized financing costs in the old facility and the deferred expense and related interest rate swaps.

Free cash flow for the first half of 2013 was a source of $16 million, as compared to a use of $71 million in the first half of 2012, reflecting lower year-to-date CapEx spending versus last year and better working capital usage. We still project CapEx spending for the year to be $180 million to $200 million. We also completed our previously announced $50 million share repurchase program in the quarter by investing $35 million in Hexcel stock. And lastly, for those of you keeping track, we set records this quarter for sales; gross margin; adjusted EBIT, both in dollars and percent; adjusted net income; and market cap. Most of you view market cap as the ultimate measure of Dave's success. So just to remind you how we did, when Dave started 12 years ago, our market cap was $300 million; today it's around $3.5 billion. That's nearly a 23% CAGR over a 12-year period, or three times higher than the S&P 500 average. So we think he did pretty well; or as our English colleagues would say, not so bad. We are excited to help Nick keep the run going. So Dave, I will let you get the last word in.

Thank you, Wayne. I didn't see that on the script. Our 2013 outlook remains very positive. Industrial markets are certainly been even worse than we expected year to date, and there is little evidence of a recovery yet. But because of aerospace strength and great operational performance, we have reaffirmed both our sales and earnings guidance for 2013. With sales expected to be between $1.64 billion and $1.74 billion, and adjusted diluted EPS to be in the range of $1.73 to $1.83. But because of our improved cash outlook, we are increasing our cash flow targets for the year by $20 million to a range of $40 million to $80 million. On a related note, because of our improved cash outlook, yesterday our Board of Directors authorized a new $150 million share repurchase program.

And finally, as Wayne said, yesterday the Board of Directors named Nick Stanage the next Hexcel CEO effective August 1. This is a culmination of a carefully orchestrated succession plan that began in earnest four years ago, when I inform the Board I didn't want to work past 65 next year. In the 3.5 years that Nick has been with us, he has reorganized the Company around markets, worked seamlessly through four very senior retirements on his staff, created a forward-looking business development team in the process, delivered the product and process improvements necessary for us to meet demands of the A350, oversaw the biggest capital expansion program in the history of the Company with flawless execution, and established product-by-product market-based technology roadmaps to focus our R&D efforts on the inventions needed for 5 to 10 years out. Sadly, however, he read his first script flawlessly, which I have not done in my entire 12-year career. My wife actually counts my stumbles and tells me when I get home as a method of positive reinforcement. And also for 12 years, I've preached to both inside and outside stakeholders that we should have 20% incremental operating leverage on our near certain growth. Nick has made me look silly by delivering over 25% leveraged earnings during his three-year tenure. But I'm thrilled that the Board recognizes his leadership and want to be the first to congratulate Nick in a public forum. Congratulations, Nick.

Thank you, Dave.

And now we would be happy to take your questions.

(operator instructions). Howard Rubel, Jeffries.

Well, she's also been flawless in not getting my last name pronounce correctly. We are all (multiple speakers) --

Howard, I think you should just change your name.

You're very right. Well, you know, the first question, Nick, other than good luck is so do you think you can repeat Dave's market cap run here?

Well, Howard, thanks for the question. That is certainly our objective. I think we've got the team in place. Dave certainly has set the standard and developed the organization roadmap, and we are going to certainly deliver and give it everything we have going forward. So I'm confident we are in position to deliver, Howard.

Let me ask three very specific questions, and then I will move on. First, Boeing and Airbus are relentless in developing new products. As you talk to them, do you still see some incremental opportunities for penetration? And can you help me a little bit outline some of those?

Well, I think you've heard Dave say multiple times that any time there is a new plane, we are ecstatic. Any time there's a new wing, we are excited. And when there's a new engine, we are delighted and working all of them aggressively. So as you see in the press, there have been launches at the Paris air show with Boeing. The NEO and Max are in development, and contracts are being let. I can tell you we are working all of those programs, as well as new military programs that are on the radar as well. So we focus on technology and development. That's who we are. We are not going to change that. And we are very close to our customers. And certainly Airbus and Boeing are key to our future and customers we focus on every day.

The second thing is industrial has been pretty mixed. And while the good news is that it's not as high profitability, the bad news is there's a lot of market opportunity out there. What you doing to make a difference there?

Well, as you know, win makes up approximately half of our industrial segment. The other half is a combination through distribution, automotive, other applications. I'd say a couple of things. First, part of the reorganization a couple of years ago, we focused on industrial, and I pulled that out to have it be a standalone segment. Second, we've gone through our internal strategic plan process, and the team have done deep dives in those markets to better understand those segments, to better understand where Hexcel can position our differentiated technology. And really, Howard, that's what we're working on for the long term. Day to day, we are aligning our operations to align with the market conditions. So as you can imagine, with the wind being challenged, we have had to make some tough decisions. But that is what we do.

And then last, Wayne, as the business moves a little bit more towards the 350, one would suspect that as operations are a bit more centered in Europe, we could continue to see long-term tax rate come down. Is that a fair sense? And where might you think it could go?

Yes, you know, Howard, my ability to predict our tax rate's not very good. If you look at the two countries where most of our taxes we pay -- where we are a big taxpayer, it's the US and France. And both those rates are high. So it really just depends on the (technical difficulty). (multiple speakers) within each company -- country.

Okay, thank you very much, gentlemen, all of you.

Amit Mehrotra, Deutsche Bank.

Dave and Nick, congrats to the both of you. Quick question. First on margins, specifically the gross margin, incrementals were close to 50% in the quarter. Was there something you characterize there as extraordinary? It just seems like it gets really high versus what you've done recently. And I noticed, Wayne, that DNA is actually down the quarter. So what's going on there given the increase you've seen in the CapEx the last couple of years? And if could you provide some run rate for us in the back half of the year.

Yes, with respect to margins, on the gross margin being so high, I wouldn't get too excited over a short trend in time. Our sales increase wasn't that huge. The mix of products we had was fairly rich, so that helped as well. But I think you probably got to look at that over a longer period of time than just a quarter. With respect to depreciation, I promise you, some day it's coming. We will give you more guidance at the end of the year towards what 2014 will look like, but there will be a big step up. If you remember, at the fourth quarter of 2012, we changed the depreciation lines for the new assets we put in service. So you're really comparing this quarter with the quarter before that; it had a little bit shorter lives. That had a little bit of an impact. But depreciation charge is coming, but we will let you know before it happens.

Okay.

Amit, excuse me, I want to just do what I always do in the second quarter and remind all of you who are modeling that seasonal effects almost always cause a margin decline in the second half versus the first half. You'll see that, I think, every year you look. Last year was probably 1.5 points, I think, on gross margin just because of holidays and summer vacations in Europe, etcetera.

Okay, understood. And then just, Nick, a little sort of open-ended question for you. Can you just give us your perspective on what you think Hexcel's biggest opportunities and risks are over the next few years? And then can you just provide us an area where maybe you're going to increase your focus now that you're, so to speak, steering the ship?

Well, I think from the 3.5 years I've been here, the first thing I really focused on was making sure we have the right team in place to deliver on the programs we won. The market positions in aerospace, which as you know is who we are, driven by commercial; the new programs making up 30% -- over 30% of our commercial and growing, with the A350 starting to ramp, the 787 approaching 10 per month. So execution is critical, and operational performance will be a focus, identifying the right metrics, holding the team accountable, empowering them to deliver. Technology -- continued to investment in R&T. I think you'll see compared to last year, we've raised that. Some of it driven by process improvements and productivity in our plants, specifically around precursor and carbon fiber, but also on new products. Again, to align with next-generation aircraft and applications that we are working. So this isn't broke. Dave has created a tremendous organization. And basically, I'm going to continue that trend and find [nets] and opportunities and growth pursuits that we are going to work from here on forward.

Okay. Good luck, and Dave, congrats again, and we will miss you on the earnings calls.

Steve Levinson, Stifel Nicolas.

Congratulations on the changes. And have fun, Dave, and I will say good luck, but I think you've got it going in your favor (inaudible). Has Airbus given you any sort of timetable on how to build rates are going to go for A350? That you could talk about at least?

I have to tell you, we've got people in virtually every plant every day. We are working with Airbus always. They do keep us updated on their schedule and their revisions to the schedule. We really do not advertise that. We let you get that from our customers and not get ahead of them. But we think we are very aligned. Obviously, after the first flight, there's a lot of momentum and we are continuing to support the program with healthy deliveries.

Okay, thanks. At the air show, you did have a release about your arrangement with Safran. They showed a lot of things that are made with 3-D woven fiber. I guess a lot of that is going into the leap, and it sounds that it's going to go into the GE9X. Given your druthers, would you rather be selling fiber for that sort of application or pre-preg, or are you also selling resins?

Well, given my druthers, we would always like to have as much content as we can win and provide as much value as we can to our customers. Prepreg, such as on the GE90, which is used on the 777 or the Genex, used on 787, use our prepreg, one of our highest performing prepreg. And as you know, it's been flawless since its introduction. The leap is looking at different design. As you mentioned, it's using a woven material that is infused using our fiber. So the resin system is different. It's not Hexcel's. Nevertheless, we've got good content and good positions in that program, not only on the fan case but the blades, as well as prepregs and other materials on the nacelles.

Got it. Thanks a lot. Last one. Given what happened to 787 a couple weeks ago now, can you talk about what sort of opportunities you see for repairs? Is this something you think will be repaired or a big piece replaced or the whole thing scrapped? And how does 787 differ from A350 in that regard?

You know, I probably know as much as you do and what I read. It looks like the engineering team are evaluating whether or not there's a fix possible, or whether the certification process would be so cumbersome that it would not just be easier to replace that section of the airplane. So we've got our eyes open. We certainly have technology where we are working on repair systems. So that is a part of the aircraft life that we need to be able to address going forward. So I guess the short answer to that is we are going to have to wait and see.

Okey-doke. Thanks very much, and congratulations to everybody again.

John McNulty, Credit Suisse.

David, congratulations. It's definitely been a heck of a run. And, Nick, I'm sure you can pull 1000% out of your back pocket as well. Just a couple of quick questions. First of all, with regard to the margins, they were clearly strong in the second quarter. I guess how much of it is that you are reaching kind of a tipping point in terms of filling utilization rates and that type of thing, versus maybe some of the mix issues around win being weaker? Can you quantify that at all?

John, I'm not sure if we will quantify it for you, but the mix clearly helps. And it also helps with respect to the fact for this quarter we weren't adding new capacity for the quarter. So you didn't see depreciation charges start up or the ramp-up in hiring of new people; or you're running machines where you're qualifying the material and not generating a lot of it. So as we've said, in those kinds of quarters, we better have great leverage. When we talk about a target of 23%, it's the overall and it factors in -- some quarters, we're going to be starting up equipment and we're not going to be get any anything out of it other than depreciation costs and running the lines with no revenue. So I think it's a combination of the two of those items.

Okay, fair enough. And then just two questions with regard to uses for cash. So your share buyback definitely happened or concluded a lot faster than we thought it was going to. So I guess how should we think about the timing of share repurchase going forward? Is it more opportunistic and you'll do it whenever either the stock is dipping or what have you? Or is it going to be a relatively consistent rate going forward at these kind of rates we saw in the first half?

John, I've been given a little wallet-sized card from legal. It says, the amount and timing of purchases will depend on a number of factors, including the price and availability of shares in common stock trading volumes in general market conditions. Does that help?

Anything beyond what legal is telling you?

Essentially, we acknowledge that with our cash outlook, in the absence of a compelling acquisition, our low leverage isn't an efficient use of capital. So we like Hexcel as an acquisition and we promise you will be accretive as we go there.

Got it. And then that brings me to the last question. We've seen, I guess in the last year or so, one of your -- actually two of your big aerospace competitors, Toray and Cytec both making investments in auto-related industrial platforms in composites. Can you speak to whether or not that may make sense at some point for Hexcel or if it doesn't really make sense?

I think at some point it will make sense for everyone. The economics of composites in automotive have never been compelling other than Formula One or extreme high-priced cars. However, government mandates that insist on energy efficiencies that go beyond the capability of engines that are electric vehicles, government mandates will cause people to do things that are not financially practical and the costs will go up. And as that environment changes, carbon and composites will have a role. I think it's a well-served market so far. A lot of people are very interested in it. We are certainly monitoring it. But we want to find a place where we've got a technology that will provide a sustainable competitive advantage, not a temporary fix to meet some standard while they find a lower-cost solution.

Got it. Okay, thanks very much.

Gautam Khanna, Cowen and Company.

Congratulations to both of you. Just wanted to touch on the topic that we hear Boeing talk a lot about, which is this whole partnering for success initiative to drive down supply chain costs. I wondered, how does it affect you guys? Have there been any renewed discussions about reducing price and/or in exchange for share or anything else? How does this initiative, which started a couple years back, actually play out for Hexcel?

So if you're wondering if Boeing is looking to us to participate, absolutely. They view the market competitive and a need to drive cost out. Being a partner with them, we certainly work to offer up cost reduction ideas, cost reduction initiatives, and ways for us to help them deliver their result without pulling it out of our margin, which is a nonstarter for us. So we have multiple ideas and ways on how we can eliminate waste in the supply chain, as well as how incremental leverage can be gained through more business. So we are having discussions ongoing with Boeing and certainly are helping them -- working to help them deliver what they need to be competitive in the marketplace.

Okay. And to switch gears, your defense and space business has been very strong. Obviously, we are coming up on difficult B-22 comparisons. I heard Cytec talk about F-35 destocking on their call. Could you frame for us when you expect you'll start to see negative quarters in defense? I mean, it sounds like that might be as early as Q4. Is that a fair assessment?

We can have some swings quarter to quarter. So I'm not going to forecast any specific quarter. But we still continue to believe we are going to have single-digit growth going forward. We've got all the activity in helicopters, not just in the US but in Europe. And in India and in China. We've got the at A400M ramping up, which has got a composite wing, and it's a pretty big airplane. F-35 is not growing like everybody had hoped 40 years ago, but it is still incrementally more than what it has been. So we think we can grow through the tough comps on the V-22.

And lastly, Nick, could you just comment on whether you think there's any technologies or properties, or types of properties, you would actually want to get into inorganically? Besides just buying back stock, are there any other M&A opportunities that you think you kind of need to get to the next level? Maybe just in terms of technology or what have you.

Well, I would say we've got a very comprehensive view of our technology roadmaps aligned with future customer needs. We look at internal development, and we look at if there are any gaps and how we might be able to fill those gaps. As you could expect, that's kind of sensitive, so we don't advertise it. But I would say we've got a very aggressive and active program to make sure we are positioned to win the next-generation aircraft.

Thank you.

Noah Poponak, Goldman Sachs.

Dave, congrats on your retirement; and Nick, congratulations to you as well on the appointment. You mentioned the A400M specifically as a driver of the defense segment strength. Can you quantify how large that is now on an annual run rate basis?

We don't have anything that's over -- I think we've said our biggest program is not over 15% of the segment. So our top programs we've named before, A400M is not yet a top program, but incrementally it's growing because it had been sort of on a lull for a number of years. So we are getting a boost from that. It's not dominating the segment; it's just additive to the year-over-year comparisons. And we add it now along with helicopters as one of the reasons that we've seen the step up. In fact, as well as euro fighter this particular quarter.

Got it. And are you able to quantify how much of the space and defense segment now is US DOD?

I think we've indicated it's in the neighborhood of 60%. It's plus or minus 10%, depending on (multiple speakers) --

It's in the low 50s, probably.

Okay, great. And then, Wayne, can you just walk us through what drove the change in the cash flow guidance?

We've been doing much better in working capital, and that's really probably the biggest driver. Now, the assumption is no change in our CapEx spending. It's really about (multiple speakers) --

No change to CapEx?

Correct.

thanks a lot for taking my questions.

Ron Epstein, Bank of America-Merrill Lynch.

Good morning. Just a couple of quick questions. Maybe a follow-up on Noah's. As we think about the introduction of the LEAP-1, the new engine and the fiber that you guys are going to provide for the blades, and as the rollout of the those various airplanes that had engines on happens, how do we think about the impact that will have on CapEx?

I don't think it's going to be as overwhelming as the A350 from a (inaudible) standpoint. We are really happy to be on the engines, and they will be a good count, but those blades are much smaller than what you'd see on an airplane. So I think we have given guidance that we think we're through the peak of our capital spending. If programs continue to ramp successfully, as they seem to be in the last year or so, it will be a little steeper. But I don't think those are going to be overwhelming, not like a new airplane with a primary structure.

Okay, great. And then just to follow on, I think in the past you've said that, on average, your content per narrow-body is about $300,000. With the new engines on the narrow-bodies, does that push that up to maybe $450,000, $500,000 per plane?

Yes, well we've said, Ron, before is the opportunities increase it by about 50%. So your math is correct.

Okay, great. And then maybe just one more quick one. There's been a lot of discussion around potential M&A opportunities and new technologies. Is ceramic matrix composites anything that you guys would look at our be interested in? Cause the engine guys have -- particularly GE, CFM -- have expressed more interest in using more ceramic matrix composites throughout the engine. Right now, I guess it's not the hot section, but there's potential that it's going to move there.

We keep an eye on it, but it's not a lot like what we do. Composite really just means a combination of materials. It's not necessarily carbon fiber-based. So we are aware of the technology and pay attention to it, and it is interesting. It's highly technical, and we like that about it. But we aren't in a position to talk about any significant move in our base of business.

Okay. And then maybe just one more. When Cytec sort of split up their company, how does that change the competitive dynamics? Or doesn't it at all in the markets that you compete in?

I don't know if they'ved changed their behavior at all. They're focusing on the aerospace OEM market just like we are, just like anybody should be, including you investors. It's a market like I've never seen before. Despite what everyone thought were ridiculously high backlogs at Boeing and Airbus -- everybody but me -- we find ourselves after the first air show with Boeing and Airbus backlogs 19% higher than they were a year ago, despite [line-area] increases and an enormous backlog. So I'm not at all surprised that they want to focus on commercial aerospace just like we do, and most everybody else in the industry. I'm flattered that they followed our lead.

Great. Thank you. Think very much, and congratulations.

Avinash Kant, D.A. Davidson.

And he has disconnected. Mike Sison, KeyBanc.

Dave, congrats on a great run, and I hope you have a lot of fun. And congrats to you as well, Nick.

Thank you.

I've been having a lot of fun. (laughter)

Yes, that's true. Nick, when you think about the 2017 long-term targets that Hexcel has put out there, any thoughts on that? Do you feel pretty good about it? Any areas of focus that you're going to pay attention in terms of that plan to ensure that it will succeed?

Well, I mentioned we just recently went through our internal strategic plan. And I feel even better about it now than I did a year ago, and I felt pretty darn good back then. I think we've positioned our technology and our solutions well. Our win rate is good. And I feel confident that we will deliver on our basic communication that we gave in the December analyst meeting, $2.5 billion by 2017.

Okay. Then there's been some questions on acquisition, but wind has been a business that has been great and it's been sour. Is it still in your mind, Nick, a business that makes strategic sense for Hexcel longer term?

Well, we all know the challenges that wind has been faced with over, certainly, this year compared to 2012. Tax credits and green energy, from my perspective, are not going to go away. At the same time, I don't think we will see the type of growth we saw in the 2008/2009 timeframe. But if you look at the need for energy, if you look at the cost of fuels, I'm a believer that they will continue to go up, although it maybe will take more time. I think the wind will be a competitive technology, and I think there's a future there.

Okay. And then final question. Heading into 2014, I know it's a little bit early to give a specific outlook, but when you think about commercial airspace segment, it's had a very strong run here with double-digit topline growth. When you think about some of the new platforms coming on and maybe some commentary on regional business jets, do you think that you can sustain similar momentum as we head into that year?

Well, we are just getting ready to go into 2014 plan, so I'm certainly not going to get into specifics. But with the development of the NEL and Max coming up, the ramp-up of the 350 continuing to increase, and the 787 still pushing towards its max rate, I feel really good about 2014. We will see how the numbers rollup, but I'm feeling good right now.

Great. Thanks again.

Avinash Kant, D. A. Davidson.

Hi, this is Taryn Kuida, filling in for Avinash. Sorry, for being disconnected earlier. But congrats to both Dave and Nick. I just have a few quick questions. So you mentioned that other commercial aerospace was down 5%, and you talked how it was mainly the business jet and regional jet businesses. I was just wondering what percent of the total commercial aerospace business is from those two combined.

It's definitely less than 20%. It's probably in the 17% or 18% range.

Okay.

The run rate is in the 100 to 150 range over the last couple of years. We peaked at $200 million for all other commercial aerospace back in 2008 or 2007, before the credit crisis. But $140 million or $150 million seems like the normalized rate.

Okay, perfect. And then looking that a key wind customer has been weak on a year-over-year basis, but it has seen a meaningful uptick this recent quarter. And you talked about the year-over-year decline in your wind business, but I was wondering if you could give us an idea about what you're seeing on a sequential -- on a quarterly basis and if you expect any notable uptick.

We don't have a lot of great visibility in this as the markets -- or the economy in particularly, in Europe stays slow. The third quarter does have a bunch of shut down holiday sort of events that make sequential look a little funny typically. So we don't have a lot of visibility, but what we -- what you should look at is what the comparative quarter is. So last year, there was a decline in the second and third quarter, but then again in the fourth and the first. So we are coming off of the toughest comparison but not yet all the way lapse. So I think if our total industrial was flat sequentially, industrial in total would be down 15% year over year in the third quarter. So I specific that we'll be talking about another down year-over-year quarter in the third. And then by the fourth, we start to have easier comparisons, and I would think we -- I'm hopeful we'll start seeing something more stable.

Okay. I believe in the last call, you mentioned on a sequential basis, wind was down 9%, and the two quarters before that it was down 15%. So what was it, again, for -- on a quarter-over-quarter basis in Q2?

It was actually up just a touch, basically the same as last quarter but up little bit higher.

Okay. Thank you. And then, third. Thus far, you've talked about the opportunity from the A350 planes being greater than $4 million. Would you mind providing a little more clarity to that number and addressing any changes recently?

It is greater than $4 million.

I wasn't sure if you could explain -- is it closer to $5 million or closer to --

It's less than $10 million. (laughter)

Okay, thanks. And then just lastly, I was -- with the recent announcement to the secured credit facility and the lower interest expense, would you mind providing what you're expecting on a quarterly basis going forward?

Yes. We said in the first year that the savings on the interest, that as long as we're at our current borrowing levels and current leverage ratio, the savings is about $2.5 million a year the first year.

Okay. Thank you.

Chris Kapsch, Topeka Capital Markets.

Good morning. Just had a follow-up question in the discussion on when -- I appreciate the longer-term opportunity there and understand the notion that clean tech and renewables will play a role. But, Nick, listening to your comments about your excitement about the portfolio, how it's positioned to be a technology-driven Company focused on differentiation, how the greatest opportunities are commercial aero, some of the innovations that are taking place have been in carbon fiber and process and precursor improvements and how you're focused on sustainable competitive advantage, I'm just wondering how much of that discussion is really skewed more towards carbon fiber and carbon fiber-based composites. It's really relevant to wind, so I'm just wondering if you think of it that way and just how relevant is the wind business, given that it's class-based to your -- strategically to the portfolio?

So as you know, we have -- we are vertically integrated on producing carbon fiber. But we have quite a few other products within our portfolio, including engineered products, where we make subassemblies, all the way to completed products, tooling, and engineered core, and core. So we have a broad range of product offerings. The other point I'd make is when I think of technology, certainly product technology and mechanical performance and life are critical. But I also think of technology and manufacturing processing and processing time, to improve the competitiveness on products, both from a manufacturability as well as a cost position. So we are looking at all of those on wind. Obviously cost is a concern, and there's a pressure to help align and compete with the other fuel types. So -- and at the same time, if you look at the technology in the wind markets, the blades are getting longer. Longer blades require engineered solutions to help them offset the length, the flexion, and the better stiffness requirements to prevent them from hitting the tower. So there are opportunities within wind to drive technology that we are looking at.

Okay, fair enough. Appreciate the comments. And then just had a follow-up on the updated guidance of free cash flow. It sounds like mostly it was out of working capital. Just wondering if you could provide some color what specifically might be contributing to working capital there. Is it just manufacturing efficiencies, less WIP?

I guess it's two things to me. So on the inventories, we've continued to do a nice job of better managing (inaudible). And second, our receivable collections have always been excellent, and they continue that way. And we've picked up a little bit just in terms of mix of customers, and what their terms are. And we are just continuing to do better.

And not to ignore the obvious, if our margins keep expanding, you're getting more EBITDA for a smaller receivable. So we have less working capital and receivables and higher EBITDA that comes from them.

Got you. Thanks.

Yair Reiner, Oppenheimer.

Just a couple of questions. First, any impact so far that you could attribute to sequestration?

No. (Laughter) No, the programs we are on are long, long-term programs. We are on over 100 active programs around the world. And to the extent they slow the ramp-up of F-35 or slow reblading of a helicopter, it might have a little bit impact in the out years. But we've just got way too much momentum for these kinds of discussions to be a worry to us.

Great. I was just thinking on the rotor side, in fact, could have an impact. Then the other question, on the 7478. Have you begun to see lower polls on the updated rate there, or is that something that is going to flow in more on towards the end of the year?

We would normally expect to be six or eight months ahead of their build rate changes, but it's a little complicated with the long supply chain and all the customers that we deliver to. So there's not a big noticeable swing. It's sort of overwhelmed by the growth in 787 and the volumes on the 8380 and the growth of the A350. So it's not appreciable.

Thanks and congrats.

And it appears there are no further questions. I will turn the conference back over to our presenters for any additional and closing remarks.

We don't have any additional are closing remarks. Adios.

And this does conclude our presentation for today. Thank you for your participation.