Hexcel Corp (HXL) 2013 Q4 法說會逐字稿

Good day, everyone. Welcome to the Hexcel Corporation-hosted fourth-quarter and full-year 2013 review. Today's call is being recorded.

Hosting today's conference are Mr. Wayne Pensky, Chief Financial Officer, and Mr. Nick Stanage, Chairman, Chief Executive Officer, and President. At this time, I would like to turn the conference over to Mr. Pensky. Please go ahead, sir.

Great. Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2013 fourth-quarter and full-year earnings conference call on January 24, 2014. Before beginning, let me cover the formalities.

First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statement 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 third-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 rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

With me today are Nick Stanage, our Chairman, CEO, and President, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2013 fourth-quarter and full-year results detailed in our press release issued yesterday.

First, Nick will cover the markets. Then I will cover some of the financial details, and we will go back to Nick for comments on our guidance before we take your questions.

Thanks, Wayne. Good morning, everyone. Fourth-quarter sales of almost $427 million were up 9.1% in constant currency from last year as a 21% increase in commercial aerospace revenues more than offset tough year-over-year comparisons in our space and defense market and continued softness in industrial markets. Our operations continue to perform well, producing fourth-quarter adjusted operating margins of 15.7%, up 170 basis points from last year's period.

Our adjusted diluted EPS of $0.46 was about 28% above the fourth quarter of last year, a record close to a record year.

For the full year, sales of $1.678 billion were up 5.6% in constant currency from 2012, led by strong growth in commercial aerospace. We converted these sales into $271 million of operating income, 16.1% of sales, 90 basis points higher than 2012 and a new annual record for the Company.

2013's adjusted earnings per share of $1.85 was up 19% from the $1.56 we generated in 2012.

Now let me turn to our markets. As usual, I will discuss year-over-year comparisons in constant currency. Commercial aerospace sales of almost $284 million for the quarter were up nearly 21% from the same period of 2012. Total revenue from new Airbus and Boeing programs increased by over 30%, primarily driven by the 787 ramp-up as expected. Sales for legacy platforms at Airbus and Boeing were up over 15% from last year's fourth quarter, and in line with the run rate for the first half of this year. First half of last year. Excuse me.

Sales to other commercial aerospace, which includes regional and business aircraft, were up about 9% compared to last year's quarter. For the full year, commercial aerospace sales were up 14.5% with new program sales up about 25%, legacy Airbus and Boeing sales up 12%, and regional and business aircraft about the same as last year.

Space and defense revenues for the quarter were almost $89 million, down 6% versus last year. The decline was primarily due to the expected lower V-22 production rates and customer year-end inventory reductions.

For the year, space and defense sales grew, sales were up 4.5% as we continue to benefit from a wide range of programs globally, including rotorcraft, transport, fixed wing, and satellites.

In industrial markets, sales for the fourth quarter were about $54 million, down 11% year over year. As expected, wind sales were down by less than 10% from the levels of last year's fourth quarter and they have remained at about the same run rate for each of the four quarters of 2013. Other industrial sales were down about 14% from the fourth quarter of 2012.

For the full year, the industrial market was down nearly 23% from 2012 levels, with the wind submarket down over 25% and the rest of the industrial sales down about 15%.

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

Thanks, Nick. Gross margin of $113 million for the quarter was 26.5% of sales as compared to 24.7% in the fourth quarter of 2012, thanks to growth, continued operational improvements, and sales mix. For the full year, gross margin improved to $450 million or 27.1% of sales, which was 130 basis points higher than last year's 25.8%.

Our selling, general, and administrative costs for 2013 were $141 million or 7.7% above last year in constant currency, reflecting added infrastructure to support our growth and higher variable incentive compensation. For the year, our research and technology costs of $41.7 million were in line with our expectations as we continue to invest in new products and process technology.

Our adjusted operating income, as a percent of sales, was 15.7% this quarter. This compares to 14% in last year's period.

Exchange rates had a nominal impact as compared to last year. Our gross margin and operating income margin and dollars were the highest for the fourth quarter in history and our full-year performances were records as well.

For the full year, 2013 adjusted operating income leverage was 34% on the incremental sales after adjusting for the impact of exchange rates. This was well above our target of 23% and driven by sales mix, continued improvement in operating performance, and that the first meaningful step up in depreciation does not start until the fourth quarter.

Our effective tax rate for the quarter was 28.7%, down from last year's effective rate of 29.7%. This quarter benefited primarily from the release of reserves for uncertain tax positions. All of 2013, our effective tax rate was 28.9%, down from 2012's effective tax rate of 31.2%.

Excluding discrete items impacting this year's provision, our effective tax rate for 2013 would have been 30.7%.

Our guidance for 2014 remains at 31.5%, reflecting our best estimates of mix of income by country and state, as well as the R&D tax credit not being extended.

Free cash flow for the year generated $78 million, as compared to a use of $31 million in 2012, reflecting higher earnings, lower working capital usage, and lower capital expenditures spending versus last year.

Our accounts receivable collections have historically been very good, but this year was exceptional. Even with the 10% increase in the fourth quarter sales, our accounts receivable were $6 million lower than last year in constant currency.

In December, we invested $40 million to buy back next Hexcel shares, bringing the total buyback for the year to $90 million. We have $110 million remaining under our currently authorized share repurchase program. The total debt, net of cash at December 31, 2013, was $229.5 million, an increase of $5.5 million from December 31, 2012.

Now I will turn the call back over to Nick for some final comments.

Thanks, Wayne. We are proud of our accomplishments in 2013 and are very excited with our opportunities looking forward. We remain highly focused on delivering earnings leverage and cash on anticipated higher sales in the coming years.

We are reaffirming our guidance provided in December 2013; we expect sales between $1.800 billion and $1.880 billion. We expect adjusted earnings per share to be between $2.00 and $2.12. We expect to invest between $225 million and $250 million in capital expenditures for capacity needed to support our growth in the years ahead, and we expect to generate between $25 million and $75 million in free cash for the year, with the typical use of cash in the first quarter.

With that, we would now be happy to take your questions.

(Operator Instructions) Amit Mehrotra, Deutsche Bank.

Nick, back in October you expressed some concern that your customers may reduce year-end inventory levels. That didn't seem to play out, given the growth of the quarter. Do you still have that concern and maybe just offer some color on where you think inventory levels are for some of your products?

Well, I think what we have seen, especially in space and defense, we do think we saw a little bit more than maybe we expected in the fourth quarter, and a little more than we historically see. So we are keeping a close eye on that.

If you look at -- on the commercial side, we continually monitor build rates and our ship tos and performance against those build rates and feel that we are pretty well aligned there. So we will keep an eye on space and defense. I think it is mostly year-end type supply chain type tightening and I wouldn't expect it to continue.

Okay. And just a quick question on acquisition or M&A activity. In the last quarter you said you beefed up the M&A organization and the pipeline was active, but that was before the big increase in CapEx for this year. Are those two things sort of separate from each other or does this year's higher CapEx plans push to the right any M&A activity that you guys were entertaining?

No. It does not change what we have said before and, just to remind everyone, our first priority is basically innovation and new technology to position us for the next new aircraft or wing or engine and basically win new business, which, ultimately requires investment in CapEx.

Second, we are always looking at our portfolio. We have technology roadmaps. We have strengthened our M&A organization, our business development organization, but that happened several years ago and we have got an active process where we look at how we might enhance our portfolio to offer even better solutions to our customers.

And then, last but not least, is return to shareholders. And, as you know, we have a stock buyback program where we initiated in 2013 and we have got available capacity going forward.

Okay. And just one quick one for Wayne. Wayne, can you just offer us a way to think about working capital for this year?

Our working capital actually has been pretty stable and just roughly moves with sales. So I don't expect any surprises. I mean, the only pleasant surprise for this year is, as I mentioned, our receivables collections. But, generally speaking, I'd just [move it with] sales.

Steve Levenson, Stifel Nicolas.

Given the fact that commercial aerospace is growing in the incremental margins, sort of show that with the decline in wind in 2013, even if wind grows, do you think you are being a little conservative on the incremental margin target?

Well, we do believe wind will grow in single mid digits looking into 2014. Having said that, we have got investment that we are continuing to put in place. We have had depreciation that picked up in the fourth quarter of 2013 and we are going to see a step up this year.

So we always look to leverage the incremental volume. We always look to drive efficiencies, but we believe the 23% continues to be an aggressive target and one that we are going to work hard to make sure we deliver.

Okay. Thanks. And I know in the past you have talked about platforms and content, like 787 and A350. What else is up? I saw something about the Irkut MS-21. Now, I don't know if that is going to be a big seller, but can you give us some details about what you have got on that plane, please?

Sure, Steve. Well, we have said before, whenever there is a new program, whether it is a new airplane, a rewing or reengineering, you can pretty much assume that we are working on it. The Russian application you have talked about, the 21, we are working on that. It is a little early to get ahead of ourselves or our customers on content (technical difficulty) [awards]. But I can tell you, we are very aware of what is going on there.

With respect to other programs, you know we are continuing to work on the A320 NEO, and the 737 MAX as those re-engine applications are continuing to move forward. And then the 777-X, which was launched this past year at Dubai with very strong orders, is certainly on our radar as well.

Richard Safran, Buckingham Research.

First, I wanted to just ask, if I could, on cost reduction here. Nick or Wayne, could you discuss how you're thinking about cost reduction and efficiency efforts in 2014? Is this something where you see a lot of potential? Is this factored into your guidance?

And I know you are a bit interested in ROIC so I wonder if you maybe could also include in your answer how you are thinking about improving ROIC?

So, I will take the cost reduction and I will let Wayne comment on our return on invested capital. So I would say cost reduction, regardless of how you define it, whether it is volume leverage or productivity or continuing to drive efficiencies with processes and systems, has been an ongoing priority for us and certainly will be in 2014. Our capital that we put in place, we are always looking at ways and technology on how to improve it so that we get more throughput per dollar invested.

So I would say, Richard, we focus on productivity. We focus on cost reduction. That helps drive margins. That helps put us in position to win even more and additional business. So with ROIC, Wayne.

With respect to ROIC, if you go back several years ago, with the higher earnings we have gotten the number up to we're now approaching 15%. As you look forward, and you make the assumption that incremental leverage at 23% continues or sales growth continues, and we do the CapEx ramp-up as we expect, we basically -- our targeting is really to hold ROIC where it is during the CapEx ramp-up period. And once that period is over and we are clicking, then the number will go from there. But if we can hold during this ramp-up period, We are happy.

Okay. Thanks for that. Just switching topics here, I wanted to ask about composite repairs in the aftermarket.

With the 350 in-flight test and hopefully first delivery soon, I just wanted to know if you are participating in a program to support composite repairs and aftermarket services. Is this something that is kind of factored into your relationship with Airbus in the 350 program?

So I would tell you, it is absolutely factored in with our customers, including Airbus. As composites penetrate and the secular penetration increases, there will be an increased focus on scrap reduction and repair procedures and how the product actually get used and repaired in the field. So we are working multiple programs on that topic.

Yair Reiner, Oppenheimer.

So just to start, a couple of modeling questions. Can you help us think about how the incremental D&A paces in over the course of 2014?

I would just say that this model is steadily increasing. We are not going to get into quarterly specifics, but remember it stepped up almost $2 million in the fourth quarter, and we expect it to sort of steadily rise, and for the year it is about $12 million.

Got it. And then, SG&A was higher in the fourth quarter -- I think higher than maybe some of us had modeled. Can you help us think about SG&A this year?

So with respect to the fourth quarter, almost all of the increase in the SG&A for the quarter over last year is really due to variable incentive compensation. Just the timing and the amounts and just in terms of how it hit. The probably only number you actually see in our financial statements that is visible is some stock compensation expense, and that alone was about $1.5 million higher for the quarter and a little over $3 million for the year.

With respect to going forward, our goal was to continue to hold SG&A roughly at inflation and we expect to continue to do that and then leverage from there on the higher sales.

Got it. And then, just one other question. On the 777-X, when would you expect to have a better sense of your content? And when do you think there might be announcements about some of the content going to specific suppliers?

So, the launch took place this past year, introduction at the end of the decade or early 2020, so it will happen over time, depending on components and the various suppliers and the technology that is changing. So I really don't want to get into specifics. I will let Boeing potentially comment on that next week, but we wouldn't expect to get confirmation until maybe later this year, early next.

John McNulty, Credit Suisse.

This is [Rob Vess] in for John. So on industrial, you guys reiterated your guidance for mid-single digits growth in 2014. How should we think about the sequencing of that growth through the quarters with the recovery in wind versus the comps in 2013?

Yes. In terms of 2013, the sales were pretty even each quarter during the year so it was pretty flat all year. So the comps are obviously going to be at a similar level. So we would expect to see, without getting too specific on quarterly guidance -- we are hoping to see the growth in the first quarter as well, to start then.

Thank you, that is helpful.

Mike Sison, KeyBanc.

Nice growth in the quarter. In terms of space and defense, when you look to 2014, you still feel pretty good that you will have good growth next year even with the destocking being a little bit weaker here? Near term?

We do. Keep in mind, the strength of our space and defense is in the breadth of the programs we are on, including global business. So we are starting to see some of the V-22 wind down. We believe seasonal inventory adjustments end of the year, which we will recover. And then we are seeing the growth with the A-400M, JSF, and a host of helicopter programs that we believe will allow us to deliver single-digit growth in 2014 and beyond.

Okay. So if the destocking did subside, then it would be pretty linear. I mean, you will have growth in the first quarter, second quarter, third quarter, fourth quarter, throughout the year? Or is there some lumpiness with how the new platforms come in?

I would say it's more just the generic lumpiness of what is going on that makes predicting sales quarter by quarter a little bit tough. But I wouldn't read anything into it that a particular program is intentionally causing the lumpiness.

Okay. And then, in the industrial market, aside from wind, any update on trends in the other markets -- maybe transportation, auto? Are those improving, getting worse? How does the outlook for 2014 in those other areas look?

So in our other industrial, which includes the markets you've talked about, as well as winter sports rack, et cetera, we see mid-single digit very similar to what we see in the wind going forward. We really do not see a catalyst that is going to drive significant growth in 2014, but we will continue to work opportunities and find those where we can provide sustainable competitive advantage.

Okay. Great. And last one on regional business jets, looks like it is putting up a little bit. Should that get better as we head into 2014 as well?

You know, Mike, it has generally been -- and I think we would be happy if it was stable.

Howard Rubel, Jefferies.

Nick, one of the things that happened with the V-22 is the contractor signed a multi-procurement contract. One of the requirements there is usually a 10% give back somewhere along the way. How do you manage to play and yet, at the same time, hold on to margins?

Well, V-22 wouldn't be the first program or customer that came to us looking for cost reduction ideas and initiatives. So we certainly work with our customers. We recognize the cost pressures that they are under and we offer up reductions through supply chain efficiencies, alternate materials, and approaches, or leveraging assets with increased volumes, all areas where we can reduce costs and transfer some of that into our customers.

So we are not looking at -- to shaving margins and using that as cost reduction. We are really looking for true cost reduction that we can share.

Well, I mean, Sikorsky has the same issue. They did that as well in their most recent multi-year. So it is pretty much, how do I either help them -- how should I say it? How do you help them get to their numbers as well, is what you are really saying.

Exactly.

Can you be a little more specific, though, of where you break down barriers and how that links you better to --? Because it is clearly in some of your numbers, because it is not as if the V-22 was a mystery all of a sudden in the fourth quarter. We have talked about it before.

Right. Well, we -- as I mentioned earlier, we focus on productivity. We have internal challenges and targets to leverage our resources and assets. We are looking at quality improvements, scrap reductions, more efficient uses of our assets that we have in place, and you can see from the financials that is translating through. And we will continue to do that.

We have lean projects, Six Sigma projects, that continue to be worked in every one of our plants on identifying cost reduction, improvements, quality improvements and safety improvements. So it is an ongoing process. We are not running out of ideas. Actually, it seems to continue to grow as we build capability and volume helps that as well, Howard.

Got that. Two more things. One is taking sort of this and talking about structurals for a moment. Have you been able to take your capability there and find some new opportunities with some of the primes or the air framers that you could elaborate on?

Howard, just to be clear, when you mention structurals, are you referring to our engineering product?

Yes.

Yes. So we are expanding our engineered product capability. We have got expansions going on in our sites in Washington. We continue to work with our customers and identifying areas and opportunities where we can provide cost-effective solutions, technical solutions, and help them possibly free up space where they can bring in other product into their facility. So I think the productivity works as well in engineer products and we continue to see opportunities and win business there as well.

If I am not mistaken, I am trying to think about 78 versus 350 at the moment. 78 is probably still maybe three times as large as the 350 in terms of volume.

I don't know that we shared exactly what our split is today. Obviously, the 787 is getting much closer to their stated 10 per month target, whereas the A-350 is -- it is not delivered yet. It is not certified yet. So much earlier in its production ramp up cycle. So I don't have the numbers at my fingertips.

A good try, Howard.

Well, Wayne does, but he is not sharing. And then, last, are there some changes going on in European energy regs that change the dynamics with respect to wind? And how do you think about that? (multiple speakers) immediate, obviously, but (multiple speakers).

No. There is some press and I am sure you are picking up on EU is giving up on the targets for individual member states for renewables. And they are setting an overall broad 40% reduction in CO2 emissions by 2030. And they are saying that they are trying to help harmonize the EU energy prices and maintain competitiveness.

So it is going to be more up to the member states on how they prioritize, how they set policy, and how they ultimately achieve that renewable. So it is really too early. We still feel good about wind, but how this might impact priorities and spend levels, in combination with the global economic challenges that the European community is faced with, is something we will keep an eye on.

Maybe you can do composite masks for the additional cold that will be spewed out (inaudible).

(Operator Instructions) Gautam Khanna, Cowen & Company.

I wanted to follow up -- I think -- remember last quarter, one of your competitors cited a destocking of some sort in the rotorcraft blades market. I just wondered, was that part of what you saw in the fourth calendar quarter?

We suspect, within the space and defense, that there was some seasonal inventory reductions and I wouldn't expect rotorcraft to be completely immune to that. So I suspect that was part of the inventory correction.

Okay. And just to follow up on your response to Howard's question on just how you can find real savings that you share with customers. Where are you on your PFS agreement with Boeing? Have you already come to terms or is that something that is ongoing and how have you factored that into your margin targets at 23% incremental?

So we obviously have been working very closely with Boeing on identifying ways where we can help them deliver their cost objectives. We feel good about where we are at. Really inappropriate for us to say where we are at with respect to signing any agreement or reaching final conclusion with Boeing.

Keep in mind, as I mentioned, we are constantly working cost reduction and productivity to make us more competitive. And that always offers more opportunity for us to penetrate, win new programs, and help our customers win new programs. So I am not going to get into specifics, but we feel we are well aligned with Boeing's PFS objective.

Okay. And last one. Just in terms of your assessment of the maturity of the supply chain in the A-350, program with respect to composites, I know you guys have talked about there is a learning curve. So early on, it is well in excess of the $5 million ship set content. And then you work down that curve. And when do you think you actually get to that $5 million per ship set level? Is it a couple of years there? How many ship sets do you usually have to get to before you kind of cross over to where you are at, that maturity?

We have provided the $5 million per ship set as the learned rate, which would be as they -- once they get up to rate, which as I believe the latest communications from Airbus is that they would reach rate by the end of 2018. So we really aren't going to break out what our curve is with respect to learning, but you have to anticipate that. It is just higher today versus where it will be fully learned.

And is it dropping fairly rapidly now or where are you in terms of that curve -- in terms of just relative slope? I don't need numbers; I just need direction.

You know, that is -- you have got to keep in mind, we are shipping to 40 -- over 40 OEs and suppliers and subtiers, which are all across the map with respect to their maturity and their place in the supply chain with respect to where they are. So, some will be more mature where others are still learning and changing processes and refining processes.

So it is too early for us to really give any indication on where we are on a fully learned curve versus a day one type introduction.

Maybe just to answer it a different way. If you could just speak by analogy on other programs, historically. Early on, is it kind of 2 X the targeted rate so, by analogy, $10 million a copy right now relative to the $5 million target, if you are looking out three years in terms of when you are going to get to that? I mean, I am just curious. How much excess is there usually early on?

You have to remember, we have got two programs that have pushed secular penetration up above 50%, both of them relatively early in their lifecycle. So I don't want to guess on the learning curve for composites.

I can tell you it is a technology that continues to drive innovation and technical solutions, which we are working on, both to enhance performance with respect to mechanicals, as well as processing. So it is kind of a moving target, what you are asking us to calibrate on. Very long cycle time. And I just don't want to throw out any numbers. It wouldn't really be meaningful.

Good job, by the way.

Steven Cahall, RBC.

Maybe just a quick question on the A-350. Airbus has talked a bit about changing the 800; making that a bit bigger, possibly moving up the -1000. How much incremental upside might there be for you if this happens and, with some of these changes, are you essentially already scoped in or does this introduce new competitive processes? And what is the upside and downside risk to some of the changes Airbus has talked about?

So we are working very close with Airbus on the -900 as well as the -1000, which is next in line and certainly will on the -800 when they decide to move forward and solidify that design. So I don't want to get into specifics because there are a few moving parts that continue to be worked, but we are in a good position. We have got a contract with Airbus and really like the progress of the program.

Okay. Thanks. And then maybe just a follow-up on your R&D spend. We have a good sense of where CapEx is going to track. Can you give a bit of a feel maybe over the next 12 to 24 months of how you see the R&D in terms of headwind versus any potential tailwind?

Our R&D spending has been, I'll say, relatively stable. I mean, we will spend what we need to, as Nick has talked about. We are a technology company and we will do what we need to make sure we get on the next new programs, but I wouldn't -- it is surprisingly steady and I wouldn't expect any unusual lumpiness, at least in the next year. We do expect it to grow faster than inflation, but probably not as fast as sales growth.

So just to clarify, stable means sort of stable on a nominal or inflated basis, not necessarily as a percentage of sales basis.

Correct. Well, I expect it to grow faster than inflation, but probably not as fast as our total overall sales growth. So, I mean, we have been -- for example, this year, we were in the sort of $10 million to $11 million range each quarter. And I expect that to slowly sort of pick up, but not in any -- it is surprisingly stable. I mean, there is a lot of noise going on underneath, but I don't expect any one quarter will have $15 million and the next quarter will be $10 million. I think it will be steadily increasing.

That's great. And just a quick final one. Is there any scope for the share count to go down as we push through the last bit of the buyback or are we really thinking this is more of a creep offset for 2014 or 2015?

Well, I think if we did the full -- once we do the full $110 million, that it drops a little bit. But that is more than just offsetting the increase.

Ken Herbert, Canaccord.

Nick, I just wanted to attack this marketing question once more from a different angle. If you look at the benefit of productivity that you have done, obviously the volume you are looking at in 2014, some of what you just talked about on supply chain, could you, within those three buckets, just help me with where you see the biggest opportunity from a margin standpoint to maybe do better, perhaps where you see the upside, and then, conversely, perhaps where you see some of the most risk heading into 2014 and your 23% incremental goal that you have talked about. Or if there is something else that you highlighted as particularly critical for the margin, that would be great.

Yes. If I don't hit all those, Ken, just come back to me. So again, just a reminder, when the growth -- revenue growth is in the 4% to 5% range, the results get a little bit magnified so you have to keep that in mind. We do continue to improve the operating performance, but, remember, we benefited from a bit of a mix shift from wind to aero. We also, with wind being our lowest margin product, as we said before, drives the change there.

Leverage target continues to be more challenging as chunks of capital capacity come online. As Wayne mentioned, potential step up or expected step up this year of around $12 million in depreciation.

So where the opportunity comes is from leveraging the volume. We are duplicating assets. Our investment are in assets that we know well, that we are replicating. They are fungible so we can move product around, optimize the output to optimize scheduling.

So whenever you can take advantage of the infrastructure, i.e., plant managers, quality systems, to run more volume through, I would expect leverage. And it is no different to me on the SG&A side with our sales and our marketing and our HR and our corporate staff.

So I think there is continued opportunity going forward. We still feel really good about 23% and I think, as obvious to you, we are not shy about pushing it harder and yielding higher results when we can. But long term, we still feel 23% is a good number.

Okay. That's helpful. And then, if I could just follow up on that. When you look at volume, specifically on the aerospace side -- and I know you have got still some capacity to perhaps add -- but, to what extent does that incremental volume leverage existing capacity and maybe any comments you can make about where you are with utilization with the existing footprint that you have today?

It varies depending on the equipment, but you have to remember, we build capacity when we have identified and are on contract for demand. So you have to assume, what we are putting in capacity it is because we filled up the existing capacity.

Again, some of our capital, with respect especially to carbon fiber, can take up to three years to put in place. And then it comes in place in a chunk or a block and it is not immediately filled. So that is the process we are running through and, again, it varies depending on the equipment we are running, the demand profile we are ramping up against, and the future programs that we are positioning for.

Okay. Great. And then just finally, sorry if I missed it, but could you -- or can you identify more specifically for the inventory issue in the fourth quarter in space and defense? Was that one customer? Was it a group of customers? I understand it was -- it sounds like it was more international versus domestic, but any more granularity you can provide on that would be helpful.

I would say it is handfuls and it was Europe and Asia as well as a few in the US. Beyond that, there is probably not much to say. Ken, I do want to get full credit for one thing with respect to leverage. Our sales increase for the year was exactly $100 million so we did what we could to make sure it was easy to calculate the leverage for the year. I hope you guys appreciate that.

Yes. Much appreciated. Thanks, Wayne.

Avinash Kant, D.A. Davidson & Co.

The first question I had was that up until lately your content in the Airbus 350 program has been going up and you are now up to $5 million a plane. How much upside do you see to this as the new generations come out? And maybe some order, like what is the best case scenario? How far can you get to?

So we are pretty much sticking to $5 million. We feel comfortable with that number. I don't believe we will see it grow significantly, if at all, with the derivative applications, but we will continue to monitor that. But, again, $5 million is what should be used for A-350 in total.

Okay. And your CapEx budget went up lately. Of course, that is partly primarily because of the increased content you have in Airbus 350. Now, if you take off the CapEx that you are going to spend in 2014, and the programs that we already know about, where do you think CapEx could come down to in 2015 if there were no new major programs to come to through?

So you are asking me to predict a failure scenario because our objective is to continue to win and penetrate new programs. So I don't see that as a likely or certainly not a desirable scenario to model.

Having said that, again, we are putting in capital and capacity to meet the programs we have. We have very accurate tracking systems and a team that does a very good job in implementing and managing our capital budget and making adjustments if and when required. So we tweak it up and down, depending on what that demand model does in total. And we will continue to do that going forward.

So I would prefer to think of us winning the next program and the capital implications that might have. But (multiple speakers).

No, actually, I definitely did not mean that, Nick. So what my question was that we know the targeted build rate at Boeing 787 and Airbus 350. What I am saying is that, with the $225 million to $250 million in place this year, would you already have the capacity to meet the full run rate of Airbus 350 and Boeing 787 or not?

Today, we do not. We have continued capacity that needs to go in place for those programs.

If you think about -- wait, wait. Between the A-350, the NEO and the MAX, they are not at full ramp run rates until 2018 or 2019 and so we are adding capacity along the way. So even at the end of 2015, we are not going to have enough to supply (multiple speakers).

I see. I see. So you're adding it incrementally, based on the demand most likely over the next year or so, not for the full program at one time.

Absolutely. We have schedules that we are aligning our capacity buildup to align with Airbus and Boeing and our other customers' ramp rates. So we do not put the capacity in all at once upfront.

I see. And the final one check, the D&A target that Wayne talked about, that is $12 million upside for the full year, right? So if you were at close to $60 million that is $72 million for the year, right?

Right.

That's correct.

There are no further questions at this time so that does conclude today's conference. We thank everyone for their participation.

Great. Thank you.

Thank you.