Hexcel Corp (HXL) 2014 Q1 法說會逐字稿

Good day and welcome to the Hexcel Corporation hosted first-quarter 2014 earning call. Today's conference is being recorded. Hosting today's conference are Mr. Wayne Pensky, Chief Financial Officer; and 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 2014 first-quarter earnings conference call on April 22, 2014. 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 2013 10-K, our first quarter 10-K -- excuse me, our first quarter 10-Q and last night's press release.

Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be re-recorded or rebroadcast without our express permission. Your participation on this call constitutes your content 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 2014 first-quarter results detailed in our press release issued yesterday. First, Nick will cover the markets, then I'll cover some of the financial details before we take your questions.

Thanks, Wayne. Good morning, everyone. As you have seen in last night's release, 2014 has gotten off to a strong start with first-quarter sales of almost $462 million, up 9.7% in constant currency from last year. Our growth was driven, as expected, by a 12% increase in commercial aerospace revenues and helped out by nearly a 19% increase in industrial revenues as all submarkets rebounded from a very soft quarter last year.

Our operations continue to perform well delivering first-quarter operating margins of 16.2%, up 110 basis points from last year's period. Our adjusted diluted EPS of $0.50 was about 16% above the first quarter of last year -- great conversion on our top line sales growth.

Now let me turn to our markets. As usual, I will discuss year-over-year comparisons in constant currency. Commercial aerospace sales of $303 million for the quarter were up 12% from the same period of 2013. Total revenues from new Airbus and Boeing programs increased by over 25%, primarily driven by the 787 and A350. Sales for legacy platforms at Airbus and Boeing were up about 4% from last year's first quarter. Sales to other commercial aerospace, which includes regional and business aircraft, were up over 10% compared to last year's quarter and were at about the same level as Q4.

Space and defense revenues for the quarter were almost $96 million, down 1.4% versus last year. The decline was primarily due to some softness in aerospace and Asian helicopter sales, which offset growth in the A400M program; however, sales were up about 8% from the fourth quarter levels.

In industrial markets, sales for the first quarter were about $63 million, up almost 19% year-over-year. Wind sales were up by over 15% from the levels of last year's weak first quarter. Other industrial sales were also up nicely increasing over 20% from the first quarter of 2013.

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

Thanks, Nick. Gross margin of $129 million for the quarter was 28% of sales as compared to 26.9% in the first quarter of 2013 thanks to growth and continued operational improvements.

Our SG&A costs for the quarter were $41 million, or 7.9% above last year. Remember, due to timing of our equity compensation grants, first quarter SG&A is about $5 million to $6 million higher than the typical run rate for the remaining three quarters of the year.

Research and technology costs of $13.6 million for the quarter were $2.6 million higher than the comparable 2013 period as we invested in several development programs for aerospace. We expect our first quarter spend to be the peak for 2014.

Our operating income as a percent of sales was 16.2% this quarter. This compares to the 15.1% last year's period. Exchange rates had a nominal unfavorable impact as compared to last year as margin improvement would have been another 20 basis points higher if adjusted for the exchange rate impact. For the quarter, operating income leverage was 25.6% on incremental sales. We did have nearly a $3 million increase in depreciation expense this quarter over last year.

Our effective tax rate for the quarter was 31.3%, up from last year's effective rate of 29.2%. The 2013 quarter benefited from the full retroactive impact of the extension of the 2012 US research and development tax credits that was enacted in January 2013. Our guidance for the balance of 2014 remains at 31.5%, reflecting our best estimates for mix of income by country and state as well as the R&D tax credit not being extended.

Our net debt increased $75 million this quarter. First, the free cash flow was the use of $22 million compared to the use of $15 million in 2013 as seasonal effects typically cause cash usage in the first quarter. For example, our accounts receivable have increased $48 million since year-end but that is all due to the increase in sales as our past dues remain very low.

The largest part of the increase in debt was from the $48 million we invested and bought back 1.151 million shares of Hexcel stock. We have almost $62 million remaining under our currently authorized share repurchase program. The impact on earnings per share from the buybacks in December and the first quarter is expected to be about $0.025 on 2014 full-year earnings. Having said that, if exchange rates stay where they are, we expect to lose about $0.02 of earnings for the year versus our initial guidance.

We reaffirm our 2014 guidance. We maintain our sales outlook of $1.8 billion to $1.880 billion. Our adjusted diluted earnings per share guidance of $2 to $2.12 per share. We still 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.

We'd now be happy to take your questions.

(Operator Instructions)

Stephen Levenson, Stifel.

I think you set a record for prepared comments. (laughter) In terms of capital expenditures, can you please tell us how much of this year is related to precursor and how that plays out for precursor in 2015 and 2016?

So, Steve, we really do not get into the specifics with respect to how we allocate our capital. We have said before, carbon fiber -- and that is precursor as well as the carbon fiber lines -- are a big portion of our investment and do constitute a large portion of our 2014 spend as well. So not to say -- I'm not even going to give you percentages but it is a large percentage. Having said that, we are investing in our prepreg, various mixing and other technologies as well.

Okay. Understand. Thank you. And can you talk a little bit more about A350 and how you see the ramp? The latest I have heard is that they expect to be at 9 planes per month in the 2017 timeframe and how does that relate to you with lead times?

So with respect to lead times, I think we mentioned that we ship about six months in advance. And keep in mind we have about 50 ship-to's for the A350 to support that program. We basically continue to stay aligned with Airbus on their production schedule. And at this point in time, the sales have been growing nicely but we are really not at liberty to share the schedule that we have had on that program.

Amit Mehrotra, Deutsche Bank.

Hi, Nick. I had a question on margins. For the last several years the Company has largely been focused on growth. But my question really centers around the cost side of the equation. Are there any incremental opportunities for cost savings? And I'm particularly thinking about here with respect to the supply chain and the Company's ability to choose savings from your suppliers as volumes ramp. Could you help us put some meat around the opportunity there?

Certainly, Amit. First off, productivity with respect to our supply chain, whether it is purchasing activities or improving our throughput, scrap reduction, cycle time, et cetera, is all part of our 23% margin expansion. So certainly as we grow and continue to leverage the volume, that will provide us opportunity to continue to deliver on our 23% incremental margin on the upside sales. So productivity will be an ongoing part of the business and we certainly do you still see opportunity as we grow.

Okay. I would have just thought the -- that would imply then the -- just the pure operating leverage from the volume growth is lower than 23% because you are getting some non-volume related savings there. Is that how we should think about it then?

Well I think you need to look at it in all total. We -- obviously the volume leverage and utilizing our assets and running more through our plants with similar infrastructure creates great leverage, as well as the buying opportunities as volume goes up, as well as quality improvement. So we really don't break it out for you anything other than our 23% incremental margins going forward.

Okay. All right just one quick question for Wayne, if I can. It looks like SG&A expense was down or about flat after adjusting for the stock comp expense year-over-year. Sales were up double-digits. So obviously great performance on cost control there but can you offer some guidance with respect to should we expect an inflection in SG&A expense as the Company gets bigger? And maybe provide some sustainable SG&A -- what's a sustainable level of SG&A maybe as a percentage of the sales for the Company as it grows so quickly?

Yes, Amit. We still want to get leverage off SG&A but on the other hand we still need to continue to add some people and some infrastructure to support the growth as we go forward. We have been pretty good about managing to add people but only at a rate that's less than our sales growth.

If you look at it in constant currency, SG&A was up 6.7% versus last year. And if you look over the last three years, our sales were up 12.7% but our SG&A has been up 6%. So we have managed to both increase it but still get some leverage there and we would expect to continue that.

Okay. All right. Thanks, guys. Good quarter.

Howard Rubel, Jefferies.

Nick, in your share owner's letter you pointed out you were making good progress with Boeing on partnering for success. Could you talk for a moment about that? And then how is that lesson being implied to other parts -- other customers, if you will -- so that you can grow business opportunities there?

Good morning, Howard. So partnering for success is not the only initiative or request we have from our customers. As you can imagine, we get productivity and cost reduction opportunities and request across the board. With respect to Boeing, we really do not give details on specific programs but I would tell you that we continue to help Boeing, work with them to improve their manufacturing processes just like we do with the other customers.

What I would point out is that is in finding ways to take true cost out, whether it is volume leverage, substituting materials, alternate materials or jointly, through qualifications, finding more cost effective solutions that we can share with them. It's not just giving away margin and price or op income, which we have worked so hard to justify our heavy capital expenditures.

Oh, Nick, I was not imply that you were giving away (laughter) anything given the light weight and strength of the solutions you offer to. No, what I was trying to stress was that you have probably learned some lessons here and that is probably helping you more competitively in a number of other opportunities. Was hoping maybe you would point to some other successes elsewhere or even that you have been able to -- it has been able to lead to improved penetration at Boeing.

Howard, you pretty much know our assets are fungible so they are used across the board pretty much independent of customers. So when we do find an opportunity for a productivity initiative, we get the benefit across all products, all customers that run through that specific piece of equipment or through that part of our supply chain. So to say we are taking advantage of the total lessons learned in our supply chain, I would have to say absolutely we are. And I would also say that we to capture that and included that in part of our incremental operating margin that we are forecasting.

Just to follow up, you invested a very significant amount in R&T this period. I think it is probably the largest the Company has ever invested in a single quarter. When might we be able to see some indications of success related to that? Or can you point to where you've focused it?

Well you could anticipate with the NEO, the MAX and the 777X and a host of other new programs. As we said before, anytime there is a new opportunity, whether it's a new plane, new wing, new engine, we are working on it. R&T can be lumpy depending on the development program and the specific testing and work we're doing with our customers. So it is hard to predict exactly when that will flow through. It will depend on when we win and what we win on those respective programs.

I would also point out that we continue to invest in improving the productivity of our processes and equipment and that too can be lumpy as we break into production and do those testing and qualification efforts to improve the processes.

Noah Poponak, Goldman Sachs.

In the industrial business, what should we look for, for revenues sequentially through the rest of the year compared to that first quarter number?

Noah, we obviously had a good start for the first quarter. And if you -- and obviously the first quarter of 2013 was low so that was what made the comparison easier. I think as you look forward, we are not going to give quarter-by-quarter guidance. But we started the year with saying we expect both wind and industrial to be up in the mid single-digits.

Clearly we are on track to hopefully exceed that number. But in the absolute dollars that is probably not a big number in total -- with respect to the total Company in terms of how much we exceeded. But we are hoping it holds. It won't hold at probably the first quarter levels but hopefully it is higher than our initial guidance.

Okay. Great. In the space and defense segment, is that similarly maybe trending slightly weaker than the initial guidance where maybe the comps are a little tougher?

Well as we said before, Noah, you know we benefit from a broad range of programs, which are led by Rotorcraft, and that is around the globe including military and commercial. This quarter was down slightly from last year's first quarter although up 8% from the fourth and primarily driven by Asian and some European helicopter programs, basically due to some normal lumpiness and supply chain timing. So we'll obviously keep our eye on that but our outlook really has not changed. We still see single-digit growth for the year and are not changing our forecast on that. We are a little cautious with the decline in the European and Asian helicopters and, like I said, we will keep an eye on that.

Okay. Is it possible to update us on what the handful of largest single program contributors are to that segment now on a full-year run rate basis?

Sure. I guess that is fine. B22 remains our largest program and it still is. If we're talking a few years from now, it won't be but as of today it still remains our largest program. A400M is now our second largest program. After that you've got a number of helicopter programs. The C17 still hangs in there -- makes our top 10. And as we know, that it eventually going to -- we expect that to go away next year. And other ones I'd add on the top 10 list remains the Joint Strike Fighter and the Eurofighter. That is the main programs.

That's very helpful. Thanks very much.

Gautam Khanna, Cowen and Company.

Couple questions. First, you mentioned the defense and space helicopter programs. Are you seeing any evidence of formal destocking or is this just more timing of orders that will cover later in the year?

Again, we have numerous helicopter programs in the space and defense. And in the US, actually, they were up somewhat. And we really do not see an impact of destocking or inventory correction as we saw a little bit of in the fourth quarter of 2013.

Okay. That's helpful. In terms of uses of cash going forward, you obviously have bought back quite a bit of stock is six months, is there -- can you talk about the M&A opportunities out there if you see any and how big they might be?

First, I, again, would like to remind everyone that our priorities have not changed. First and foremost, it is to invest in technology and maximize our content on new programs within our core business. That is number one and we continue to do that. Number two, continue to look at the M&A pipeline and how we can enhance our offering to our customers to position us even better than we are today.

So we really do not get specific with respect to targets and/or plans. I can just say we are mindful of the landscape. We stay current and are looking for the right opportunity if and when it presents itself. And last but not least, returning money to shareholders. Those three continue and they are not exclusive. They are -- in total, that makes up our strategy to manage and basically manage our capital structure.

Okay. And maybe can you comment just a little bit about new growth vectors? Some of your competitors have tried to get bigger into the automotive space. What do you guys think about the automotive space and how are you positioned there?

We've been part of automotive. It's part of our industrial segment. Again, remember, industrial, [in] totals about 14% of our total business -- just over half of that is wind. So that puts all the other segments, automotive being part of it, rec, sporting, a whole host of other industrial sub segments, as very -- pretty much a small driver to our topline growth.

Having said that, we continue to invest in technology where we can identify sustainable competitive advantages. And we're doing that within the automotive segment just like we are continuing to do it in the recreation and wind and other portions of the industrial segment.

But this is probably not an area you would augment via M&A in terms of -- that's not where the focus is on the M&A front?

Again, I'm not going to get into specifics in that. Again, our M&A will be focused on technology solutions for our customers. And really when we talk about our customers, it is where we can drive competitive sustainable advantage, where we can offer technical solutions. And I'm really not going to limit where that growth might be.

Mike Sison, KeyBanc.

Hi, guys. Nice quarter. This is the first quarter you added the NEO and MAX in your quote-unquote new aircraft program commentary. Can you -- I know it is early but can you maybe talk about exactly what -- where you are at in there, what you are shipping, relatively speaking, and how you see those two programs peeking over the next couple of years?

As a reminder, Mike, our expectations are that ships at content will go up as much as 50% on the programs over the current models. NEO is obviously further along and we expect the content will be fairly firm within the next several months as it will enter production in 2016. The MAX is a little bit behind that entering service in 2017. So things are a little less secure and more preliminary on that program but we still feel good about our forecast on the 50% incremental volume.

Okay. Great. And then a couple of your competitors have announced a new IM fiber that, for what it is worth, maybe claims to be at the level of your highest end IM fiber. Clearly you've been -- I think you're the only one who's been [expecting] aerospace application there. But any thoughts on your competitor advantage with these two new offerings?

We are always introducing new technology. I believe we introduced our IM 10 fiber a year or two ago. It has been in the market place. So I really will let our competitors comment on their offering and what they are targeting but we think we are in very good position. We continue to innovate and don't for one minute think we are standing still.

Got it. And one quick one, just -- you've done a nice job at winning a lot of the A350. When you think about the 777X can you maybe talk qualitatively your strategy there in terms of how you are going to go after those applications, particularly the wing maybe. Will you use your highest IM fiber, use similar technologies on A350, any thoughts there?

I will tell you we will certainly propose the best technical solution for the application. And I wouldn't limited it to the wing. But the total 777X is obviously a position where the incumbents have very strong positions. And when I say incumbents, I am talking about the aluminum guys and the other composite guys. Having said that, we think we have got excellent technology.

We have got strong experience, not only in the 777 aircraft but the engines. GE9X will be a great engine with respect to the perceived performance as well as the new engine in the cell and it will build on the past success of the GE90. Keep in mind we have got the fan blades on the GE 90 and I believe that airplane engine just hit 40 million hours of operation with excellent overall performance.

We are excited about 777X. We remain very confident that we're going to increase our content. And again, other than that, I do not want to comment on programs that are still in development and being worked.

Yair Reiner, Oppenheimer.

Just first maybe a quick follow up question on that. Can you give us a sense of maybe what inning you are in, or Boeing is, in terms of developing your offerings for the 777X and when you think you might be able to start hearing back on some of your proposals?

I saw some news in the press the other day on the same question regarding systems and the basic electronic components on the engine. I think it depends. If you look at the plane, it is scheduled to enter into service in 2020. There is obviously long cycles and it will depend on the components, whether it is engine related, in the cell related, primary structure related, secondary structure related. So I think it will happen over the course of time but I am really not going to predict when Boeing is going to make their decision or, for that matter, comment on our content until it is secured.

Can you maybe give us a sense of what inning you're in your terms of your development work for the RFP's?

Again, same comment. It varies. Again, we are working -- keep in mind, the engine and the cell contain composites and composite structures as well as the aircraft. So it varies.

Okay. On the A400M, what is the production rate right now and where does it peak and when?

Actually, Yair, I just don't remember off the top of my head. I know it's -- it will continue to grow over the next few years but off the top of my head, I actually can't remember.

Okay. Are you kind of fairly early on in the ramp or are you getting towards the peak rates right now?

I wouldn't say we're getting near the peak but we are meaningfully into it.

Richard Safran, Buckingham research.

Nick, I guess I wanted to ask you about this -- the new seat that you're developing with Zodiac. There's been a trend towards integrated interiors. I was just wondering if you're thinking -- how you're thinking about this? Is this part of a larger initiative to integrate composites into the cabin interior? I know that you do have some of the products in that area so I'm just looking for any comment on how you're thinking about this partnership with Zodiac?

Richard, I'm glad to hear that you are attending the interior show. (laughter) I was very impressed with the display at Zodiac. I can tell you, and you have already mentioned it, we participate in the interiors with Boeing and Airbus and others and have for a long time. And we continue to look for opportunities to provide solutions that can meet weight reduction initiatives. The seat is one of those opportunities with Zodiac.

It is early in the program, obviously. Clearly trying to find opportunities to minimize space and reduce weight. And if you think of composites with the strength they offer and the weight reduction, it is an ideal solution. So it comes down to cost trade. It comes down to the interior requirements with respect to FST and quick producing methods -- things like molding, which we continue to invest in and develop new products for.

Okay. Thanks. I am just going to try this. I know in the past you have been somewhat reluctant to speak about this. So on your share buybacks, I just wanted to know if you could maybe make a comment here about how you're thinking about maybe a new repurchase program because Nick, in deference, also to the comments he made earlier, just beyond the $62 million current program?

Richard, we really are going to stick to -- we're not going to provide any guidance on returning to shareholder just like we can't provide guidance if and when we get into a M&A. We will report on it on a quarterly basis after the fact. And believe me, if something gets approved, you will be the first to know in our announcements.

That's fair. Thanks very much.

Avinash Kant, DA Davidson & Company.

I had a few questions, the first one related to capacity. Could you talk a little bit about your capacity utilization currently? And also, in anticipation of the ramp in some of the key programs like NEO, MAX, Airbus 350, several of them are ramping right now, how far do you think you have already build the capacity out? Would you say that you have the capacity currently to meet demand up until maybe 2015, 2016? How should we think about that?

Okay, Avinash. There's a few questions in there. I will try to hit them all. If I don't, come back at me. Again, first, remember our assets for the most part are fungible or flexible. We make multiple products with respect to fiber, with respect to prepreg. So when we are adding fiber capacity, pan, carbon fiber or prepreg, you have to think of it as we only add it when we have secured programs and we are, in essence, full on our existing capacity.

Having said that, you also have to recognize, depending on the type of equipment, it can be up to three years from the start time until the time the product is qualified and producing material off that new asset. So we have a wide range of products and processes and there is not one answer that can tell you what our utilization is. But just know that when we are investing and putting in new assets, our assets that are sitting there are pretty much being used.

So let me just follow up because I think you were getting at -- if you think of A350, where are we with the investment? We do not get specific with respect to how much we have invested in the A350. But I can tell you, A350 per Airbus is scheduled to be at rate in late 2018 and our CapEx spending and time, that capital comes in place is aligned with that ramp rates. So we do not have all those assets currently available to produce that and that is part of our continuous growth curve on our CapEx investment.

Right. So that is what I was hoping to get a little more color if you could because I know the ramp is from here to roughly next five years. Right? So what I was try to figure out is that how much ahead of the ramp you try to be -- like six months, a year or two? When do you put capital -- how much ahead of time you put the capital for the demand that you see?

We really -- I really do not want to get into how we ensure that we are never short. Because obviously being a sole source provider for many of these materials, that is not an option. So I cannot tell you or not going to give you a number because it varies. I can tell you, we are always working to make sure we are protecting our customers and their delivery requirements.

Right. Okay so beyond that, the one other thing I had was, in the wind business you have started to see some improvement lately and I think you talked about the year-over-year growth. I believe the business was up sequentially to roughly -- my math is roughly 10% or so. So how should we think of that sequentially for the rest of the year? Do expect improvements throughout the year?

Yes. So, Avinash, one year of math sequential is in the right ballpark. In terms of the outlook going forward, again we don't give quarter-to-quarter guidance but we expect the first quarter levels to hopefully hold for a while. Our objective -- excuse me, our expectation is we ultimately get back to 2011 levels for wind. Remember, 2011 -- after 2011 you had 2012 high and 2013 low and we are on pace to actually exceed 2011 levels and that is our expectations for this year.

And the final question coming back to the CapEx itself, I believe if you look at the CapEx budget you have had over the last maybe 10 years or so, 2014, maybe the second highest CapEx budget you have had in the history the Company. I believe, at least for the last 10 years or so. And then should we think of 2015 going up or down from current levels at least qualitatively? Any color on that?

To next point, it would just depend on what the build rates and the ramp up look like and we are not going to be short in terms of capacity to meet our customer requirements. So it will just depend on how quickly things ramp up.

Ken Herbert, Canaccord.

Just wanted to ask a question on the guidance. You didn't change the full-year EPS guidance. It implies about 10% for the next three quarters over last year, which is certainly lower than the average you have seen for the last few years. Can you talk about some of the puts and takes you're seeing from the earnings front either from the market standpoint or what you see as maybe the top few swing factors or variables for the rest of the year?

Ken, we still feel good to deliver double-digit commercial growth. The programs we are on, the predictable growth rates with the back logs, give us confidence that we're going to continue to deliver on the commercial side. As we said on the space and defense -- and you have seen it over quite a period now, that we continue to deliver single-digit growth and that is based on our secular penetration in the Rotorcraft and just the breadth of our global product offering. So we feel really good there.

Industrial is a little bit of the unknown in that you know we came off a record year in 2012. 2013 was very challenging, especially in wind, with the production tax credit late renewal. There is a big rebound in the first quarter, as you saw, 15% on the wind growth. So the question will be, where will the production tax credit go from the balance of the year? Will that affect the second half of the year? And how will the global economy and the recovery impact the other industrial segments? So we remain optimistic but we are not at a point where we feel that we are ready to change our guidance on the top line.

Okay. That's fair enough. But it sounds like from Wayne's commentary earlier that you're feeling pretty good about wind at least 2011, if not slightly better than 2011 levels. So it sounds like you are feeling better about this business certainly after the first quarter. Would that be a fair statement maybe relative to three months ago?

That is a pretty easy statement compared to 2013. (laughter) So we are optimistic. Again, Vestas has done a lot of restructuring and comes in with good backlog. So we're feeling good.

Okay. And then if I could just on the A350, I understand the comments on the capital spending and you certainly do not want to be late to your customer but you don't want to get too far in front from an investment standpoint. How should we think about margins on that program as the volumes ramp assuming Airbus hits the targets they have talked about from a delivery standpoint?

Ken, we have talked about that the A350 margins won't really change the overall margin for the Company. And remember, again, we are selling materials, we're not making parts. So we don't have huge learning curves.

I think the only swing items is more -- is not really A350 directed but more just about when new equipment comes on board and when the depreciation starts. And the equipment is obviously not going to be full day one when you start a new line and you've hired and trained workers and as you go through that process. So any swings will probably be more caused by that than anything else. Having said that, we have been living with that for years and hopefully you never notice it. So I don't expect any big swings to come.

Okay. And then just finally on that though, clearly you continue to outperform from a margin standpoint when you go back over the last few years. As you think about the curve on the A350, is there any reason to think maybe you can't continue to do better on that program? Or where do we think about that program relative to Company averages moving forward?

We are always continuing to push productivity and working to do better. Having said that, we are giving and providing guidance based on a learned rate or a rate in content at rate. So that is built into our 23% incremental operating margin as we look forward.

Okay. Great. Thanks a lot and great quarter.

Steven Cahall, RBC.

Maybe the first question just on the growth of the legacy aircraft in commercial aerospace. Can you maybe talk about the growth rate there? It looks it has eased a bit sequentially. And is there any upside to that going forward or should we continue to expect it to ease as Airbus and Boeing hit full rate on most of their legacy program?

Steve, I think it is just going to follow the build rates that have been publicly announced by both Airbus and Boeing. They have been tracking very well over the last several years to meeting their announced build rate increases. There are still a few more left and so it's really just following that. I don't see any really big swings from that. There is always a little noise but not huge amounts.

And we've also seen some sequential slowdown on the new aircraft programs. Is there potential for that to inflect again as A350 begins to ramp up? Or is the distance between what you are shipping now and where the rate is going suggest that we probably won't see any sort of snap backs over the next, say, 4 to 6 quarters?

If you look at new programs, we still have the A380 and the 747-8 in there. Those obviously aren't growing anymore and so it gets a little bit harder to make statements with respect to the growth rate going forward. I think as you think about the 787, it is now near its -- there's still a little bit of a run rate as they announced increases to 12 and 14 a month. But it is at its rate for the moment and so really, going forward, it is about the A350 and then the NEO and the MAX as they kick in. So really it just depends on how quickly those things ramp up.

Okay. Thank you. And then just a follow up on the L3 Seat. I was wondering if you could talk about how you are looking at this in selling to [SFE] versus retrofit in terms of how the business model looks. And could you give us any sense of maybe what your ship-sent content is on a narrow body that has that L3 Seat on it?

Yes. We are way early days on this and I think even the moment I thought it was much more of a concept than something that's actually fairly far along. So it is way too early. And again, we'll just be the material provider in this as opposed to the one leading the sales parade.

Okay. And then just a last quick one on the gross margin. Is there anything in the cost of sales that was a particular tailwind for you in the quarter? Anything in inventory that was particularly cheap and we might expect that to come down going forward? Or is that something that you feel pretty good about as a sustainable gross margin given where you are on the operating leverage?

I am not sure about sustainability of it. And I do not mean that to sound negative, just it always all depends on the mix. But I would say that the quarter was pretty clean. There was nothing unusually either good or bad in it.

Chris Kapsch, Topeka Capital Markets.

I have some follow-ups on the performance in the industrials business and the contribution from that business. Historically, the margins in industrial have been lower than I guess the corporate average. So I am just wondering with the strong sales growth in the quarter, did the mix there add to or detract from the corporate margin performance -- the overall margin performance?

Yes. Chris, so we live in an incremental world here. And when you're comparing the first quarter of last year, we're in the process of sales going down and we -- since that time we have made a lot of efforts to both cut cost and, like I said, take cost out of the system. So when the sales come back, actually on an incremental leverage basis, they contributed greatly this quarter. Now obviously they can't sustain at the rate they did in terms of an incremental leverage number but they have done a nice job of getting profitability backs. So comparing the first quarter last year, we look great.

And then just want to understand the demand. Part of it is just the soft comp. But, historically, when there has been periods of when the industry adds carbon fiber capacity -- since it is kind of a step change function, and when those slugs of capacity and when that is targeted for the aerospace applications where you are spec'd in and there is some time there, there's periods of time when there's fiber availability that ends up wanting to find it's -- find a home in the industrial space.

I'm just wondering if any of that is contributing here to your growth in the quarter? Just -- you had some excess fiber maybe that is ultimately going to find its way onto some commercial planes but in the meantime, it was convenient to develop some demand in the industrial applications. Or is it just simply a recovering demand across those end markets that you talked about?

It gets tougher and tougher now to -- because there's so much competition for carbon fiber outside of aerospace. It gets tougher and tougher to take aerospace carbon fiber capacity and sell down to the industrial market. So I wouldn't assume that, that wasn't an outlook for it or a big one.

That concludes today's conference. We appreciate everyone's participation and we hope you have a good day.

Thanks.