Hexcel Corp (HXL) 2014 Q3 法說會逐字稿

Good day and welcome to the Hexcel Corporation third-quarter 2014 earnings call. Today's conference 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 2014 third-quarter earnings conference call on October 21, 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 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 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 a review our 2014 third-quarter results detailed in our press release issued yesterday. First, Nick will cover the markets; then I will cover some of the financial details, and I'll give it back to Nick for some final comments before we take your questions.

Thanks, Wayne. Good morning, everyone, and thank you for joining us today.

As you have seen in last night's release, we delivered another strong quarter, with sales of about $452 million, up 9.5% in constant currency from last year. Our operations continue to perform well, delivering third-quarter operating income of $79 million with margins of 17.5%, up 80 basis points from last year's period.

Our adjusted net income of $56 million was the highest in our history. Our diluted EPS of $0.57 was about 19% above the third quarter of last year's overall continued great conversion on the top-line sales growth.

For the first nine months of the year, our sales were up nearly 10% in constant currency from last year's period. Our nine-month adjusted operating profitability also grew nicely to 17%, up 70 basis points on the comparable 2013 period.

Adjusted diluted EPS was up 16.5% for the first three quarters to $1.62. As an organization we are very proud of these results, and that quarter after quarter we continue to raise our margins and our expectations. Now let me turn to our markets. And as usual, I will discuss year-over-year comparisons in constant currency.

Our sales growth for this quarter was driven, as expected, by a 13% increase in commercial aerospace revenues over 2013, as Q3 sales totaled $296 million. Total revenues from new Airbus and Boeing programs increased by about 20%, primarily driven by the A-350 and 787 programs. Sales for legacy platforms at Airbus and Boeing were up about 8% from last year's third quarter and were about 5% lower than the run rate we saw in the first half of the year due to seasonality.

Sales to other commercial aerospace, which includes regional and business aircraft, were up over 10% compared to last year's quarter and remained at about the same level we have seen over the past three quarters.

Space and defense revenues for the quarter were $88.5 million, down 6.3% versus last year, while nine-month 2014 sales are down 4.5%. Rotorcraft sales led the decline, down about 15% as we began to see the expected decline in V-22 sales.

Additionally, rotorcraft sales were soft in the European and Asia-Pacific regions. Lastly, we also saw that a modest amount of customer orders were shifted forward, which leads us to estimate Q4 sales in this market will be stronger than our Q3 results. We now expect space and defense sales for the full year to come in just slightly lower than our 2013 sales to this market.

In industrial markets, sales for the third quarter were about $67 million, up almost 20% year-over-year. For the first three quarters of the year, industrial sales are also up almost 20% over last year's period. Year-to-date sales increases were across the board, including wind energy, which is up about 25% as compared to 2013.

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

Great. Thanks, Nick. So gross margin of $122 million for the quarter was 27% of sales as compared to 27.2% in the third quarter of 2013, a strong showing for both quarters. There was nominal impact from exchange rates as compared to 2013.

For the nine months, gross margin was $380 million or 27.5% of sales as compared to almost $341 million or 27.2% of sales in the last year's period. Exchange rates were a modest 15 basis points headwind for the first nine months.

Our selling, general, and administrative costs for the quarter were $32.9 million, or flat with last year, as lower payroll-related spending in the quarter offset our investment in people and processes to support our growing business. Research and technology costs of $10 million in the quarter were just lower than the comparable 2013 period, and year to date is up 10.5% over last year.

Our adjusted operating income as a percent of sales was a record 17.5% this quarter. This compares to 16.7% in last year's period. And exchange rates had a nominal impact as compared to last year.

For the quarter and year to date, operating income leverage was over 25% on the incremental sales when adjusted for exchange rate impacts. We remain on track to hit our 23% target for the year.

Our composite materials segment reported a 9.7% increase in sales for the quarter, and the engineered products segment was up 9.3%. Operating income margins for the quarter were 20.7% for composite materials and 15.3% for engineered products. Our composite materials segment is significantly more capital-intensive than engineered products, so it needs a much greater operating margin to achieve the same returns on invested capital as engineered products.

Our performance expectations are high, and the year-to-date performance for both segments were in line with those high expectations. Our effective tax rate for the quarter was 27.7%, down slightly from last year's effective rate of 27.9%. Both periods benefited from a favorable tax return to provision adjustments and the release of reserves for uncertain tax positions. Excluding these discrete benefits, our year-to-date effective tax rate was to 30.8%, which is the rate we expect for the fourth quarter, reflecting our best estimates for mix of income by country and state.

For the first nine months, the free cash flow was a use of $3 million compared to a source of $63 million in 2013, as cash used for capital expenditures was $61 million more in the first nine months of 2014 as compared to the 2013 period. Our free cash flow guidance is reduced slightly to $25 million to $50 million for the year, with accrued capital spending now looking like that it will be towards the high end of our plan of $225 million to $250 million.

During 2014's third quarter, the Company invested $45.5 million and bought back nearly 1.2 million shares of common stock. We have $100 million remaining under our currently authorized $150 million share repurchase program. Year to date we have now bought back $160 million. The impact on EPS from the buybacks versus our original 2014 guidance is about $0.04 on 2014 full-year earnings. Remember, we do benefit from a strong dollar; and while it was a bit of a headwind in the first half of the year, it was essentially neutral for the quarter. And if rates hold at today's level, it will be a very slight tailwind for the fourth quarter.

If exchange rates stay where they are we expect to lose about $0.015 of earnings for the year versus our initial guidance. Finally, as previously announced in September, we entered into a new $700 million senior revolving credit facility that matures in September 2019. The new facility provides for modest improvement in interest costs, but more importantly, it is unsecured, which provides us with greater financial flexibility and capacity going forward.

The elimination of security from our facility reflects our continued great performance and the investment-grade ratings we received from S&P earlier in the year. Due to the refinancing, we accelerated certain unamortized financing costs to the prior facility and incurred a pretax charge of $0.5 million in the third quarter.

Now let me turn it back to Nick for some concluding thoughts on our guidance before we take your questions.

Thanks, Wayne. We have tightened our 2014 sales guidance and now expect sales of between $1.830 billion and $1.860 billion, as lower expected space and defense sales should be offset by higher industrial sales. We have raised our full-year adjusted EPS guidance to a new range of $2.10 to $2.16 from our prior range of $2.06 to $2.14.

To achieve the midpoint of our guidance, we need to keep pace and exceed our 23% operating income leverage target. I want to remind you that we do operate in a modest seasonal business, where second-half revenues and margins are typically not as strong as those in the first half, due to reduced customer activities during the summer and holidays.

Having said that, in the third quarter we had our highest operating income percentage in history. We remain confident in our operational focus and continuous improvement mindset while working to position the Company for the forecasted growth ahead, as we support our customers by investing in technology; capacity expansion; manufacturing innovations; and our people.

We would now be happy to take your questions.

(Operator Instructions) Gautam Khanna, Cowen and Company.

Thanks. Good morning. I had two questions. First, I was wondering if you have given any more specification on your expected CapEx requirements? You mentioned last quarter that they might be a little bit higher. And if you could quantify what they will be in 2015, and perhaps if you could give us a sense for how that changes your view on incremental margins at 23%? Can you do better than that, or is that still the right number as we look forward?

So we are in the process of developing our 2015 plan, so it's a bit premature to provide guidance on our expected CapEx for 2015 or beyond. But we certainly expect do that when we provide guidance later this year or early next. With respect to our CapEx plan this year, again, we constantly track and measure our customer schedules and delivery rates, so that we make sure we align our building plan and our capacity with their requirements.

So we are continuing to be very aligned on the A-350, the other growth programs with respect to LEAP fan blades, and the host of other programs that we've won and that continue to drive CapEx needs going forward. So it does not negatively impact our view and ability to deliver 23% incremental margin. We are always pushing that as far as we can, and we will continue to do so going forward.

And if you wouldn't mind just opining on what you are seeing in the defense market -- defense and space market. Previously you sort of expected it to grow over the forecast periods of 2017. I just wonder if what you have seen of late changes that view?

Well, we have seen some changes -- and just to remind you, we have over 100 active programs in the space and defense sector, with just under 60% of that being driven by rotorcraft. Over the last few years we were doing mid-single-digit, and we had single-digit growth projected for this year when we provided guidance in December.

What we've seen change over the course of the last several months are a couple of things. One, rate reductions in the V-22, which I believe all of you are well aware of, have started to come down and were expected.

Second, we have seen some softness in the European and Asian helicopter markets, as well as some customers adjusting inventories, which was unexpected. And then, third, we do have some customers pushing orders to the right in the US. And we expect those to come back in in the fourth quarter and first quarter of next year. So right now we're looking at flat to slightly below 2013 levels, but we feel comfortable with where sales are forecasted to come in.

Okay. Thank you.

Myles Walton, Deutsche Bank.

I was hoping you could maybe lay out for us what you expect as a corporate expense run rate -- fluctuating a bit here in the quarter in the right direction, and kind of what your look is for the fourth quarter?

Yes, Myles, the third quarter always tends to be a little bit low. I would expect maybe the fourth quarter to be a little bit higher, but not terribly different.

In line with the first half?

Remember, the first half probably -- the numbers you are looking at probably includes a $6 million environmental charge. So just make sure you pull that one out.

No, I've done that, but -- okay. And then in terms of setting the expectations on the A-350, imagine you've shipped something close to 20 chip sets equivalent year to date. Is that about the right level that we are looking at from a run rate starting basis going forward, as you commented that you are aligned on the A-350? What you will

Well, the best way to think about the A-350 is to start with what Airbus has said publicly, and that is that they will reach a build rate of three per month by the end of this year. So remember, we are shipping our materials about six months in advance to the 40 suppliers that are supporting the program. So you can pretty much infer that we are running at that rate.

They have also stated that they expect to be at the 10 per rate by the end -- or by 2018, so if you just draw a line and back out the six months, it gets you pretty close to a strong estimate on where we see the A-350 build rate and growth over the next couple of years.

Okay. And then the last one for me: you mentioned that the legacy aircraft run rate was down about 5% from the first-half run rate. What was the growth program in the third quarter versus the run rate in the first half?

So if you look at the legacy programs, up 8% -- about half of that was due to Boeing, the 737 increased rate. But I wouldn't read too much into it, because similar to last year, there is seasonality in there. And we saw a drop-off in third quarter last year, as well.

No, I meant the growth programs, though -- third-quarter run rate versus the first half. Was there a similar phenomenon?

Short answer -- no. I would say the growth programs are generally -- third-quarter levels were consistent with the first-half levels.

Okay. Great. Thanks, guys.

Steve Levenson, Stifel Nicolaus.

Just curious if you are getting any pushback on anything with oil prices being down; or if you think that's just temporary, and they are still looking for weight reductions? And if more weight reductions are being investigated, where do you have opportunities to displace other materials for additional content in programs coming up?

So starting with oil, Steve, obviously it has an impact in our raw material input with acrylonitrile, and our contracts vary. But for the most part we are protected with respect to the contracts we have in place. And there are thresholds on the low side and the high side where adjustments are made. So I don't see anything in the near term impacting that.

I would say, as all of you are aware, on cost reduction initiatives like PFS with Boeing and other programs, we continue to work with our customers in finding ways to improve our supply chain, improve their supply chain, offer alternate materials, and help them achieve their overall objectives. With respect to your second part of your question on --

Opportunities for new --

-- yes, the opportunities for weight reduction, typically when a new platform gets launched, there are some weight challenges. And there are always opportunities to look at redesigning some parts, whether they are currently metal, and transforming them into composite; or even redesigning composite parts. So we continue to work on those type of programs with A-350, with 777X, and others.

But I'd say in the scheme of things on the A-350, it's incrementally small amounts. 777X -- it's bigger, since the launch date is a little further out.

Got it. Thank you very much.

(Operator Instructions) Steven Cahall, Royal Bank of Canada.

I was wondering if I could just maybe revisit the cash flow questions. You talked about that it's a little early on in your plan to give numbers; I certainly understand that, but I was wondering if you could just maybe give some directional comments. Should we expect 2014 to be the trough in free cash flow? And when you think about free cash flow and where it maybe moves up off of the trough, is it a gradual increase? Is it step change? What are some of the qualitative things we can think about in this?

So Steven, first, when you think about free cash flow, it's -- we expect earnings to continue to grow over the next several years, but we also, for the next few years as the A-350, the neo, the MAX, the Joint Strike Fighter, etc. -- as those ramp up in production, that we will need to continue to spend CapEx for the growth of those programs. So really it will just depend on how quick earnings from the current programs are there to offset the CapEx required for the future growth.

I wouldn't go any -- you know, we've said we expect to be free flow cash flow positive every year, but it's not really until the CapEx ramp, I'll say, moderates that we would expect to generate significant free cash flow. Just as a reminder, there's nothing makes us more happy than investing CapEx for business that we have won. So we are happy to be doing this. As we say, we hope we never run out of CapEx projects, but I assume at some point we will.

Okay, that's helpful. And then, also, maybe on the R&T side, when we look at this big revenue ramp-up that we've got, going from 3 a month to 10 a month on A-350, is it reasonable for us to expect R&T to remain steady as a percentage of sales there, which means you are able to spend more on it? Or does it start to tick down over time because of that significant revenue ramp-up?

So this year, if you look at our R&T spend, we had some lumpiness. We had a couple of key campaigns first quarter, running new development programs in our plants. That drove a high number.

Overall, we think that this year is going to be close to 10% up. We really are going to continue to spend what we need to spend. So although we look at the sales growth, we do not put a leverage target on R&T. We basically align it with the opportunities out there in investing in new innovations -- both product-wise and processing-wise to win the next program, to drive productivity, and to drive continuous improvement. So again, we will provide more guidance on next year as we wrap up our plan and communicate our guidance.

Steven, another thing I would add is the R&T spend for the A-350 is behind us. So when we are talking about going forward, it's for new programs. It's not about the A-350 anymore.

Great. Thank you.

Michael Sison, KeyBanc.

Nice quarter. In terms of your 2017 plan, you talked about some confidence the getting there. Can you remind us -- that assumes you have won most of the new planes that you need to land in addition. Has there been any change in the mix between space and defense and industrial in getting to 2017?

So we remain confident in our 2017 projections of $2.5 billion, Michael. The programs that impact 2017 for the most part have already been awarded and are on contract, so it's a matter of execution. And again, looking at space and defense, there may be some small puts and takes. But we are having very strong incremental sales growth on industrial, which is more than offsetting that. So we still feel very good on our projections for 2017 sales growth.

Great. And then in terms of the 777X, you sort of mentioned that. Any update there in terms of timing for awards, or maybe confidence, or how do you feel about how you are going after that platform?

Well, I can tell you I remain very confident. We are continuing to work very closely and aggressively with Boeing on aircraft materials, with GE on engine materials, and with others on the cell materials.

So it's still a bit early for us to declare incremental content. Just as a reminder, we have about $1 million content on the 777. And I fully expect the 777X to have increased content.

Great. And one quick one on wind -- it's been a nice recovery this year. Oil has come down quite a bit here. Any thoughts? Or what are you hearing from your customers in terms of their backlog, maybe, heading into 2015?

Well, we do feel good about wind, especially coming off of a tough 2013 after a record 2012. Vestas's backlog is strong; I believe it's over 7.2 gigawatts. And we are well positioned with them, working on new programs as well as supporting the ongoing programs.

So we still like wind. We like where the technology is going. Blades are getting longer. The requirements for stiffer and lighter-weight materials are going up, which provides us an opportunity for continued growth. So we still like wind, still like renewables.

Great. Thanks, guys.

John McNulty, Credit Suisse.

A question with regard to the margins: you saw some pretty solid incrementals in the third quarter and when I look at the mix, at least how we perceive it, your commercial aerospace sales -- at least relative to, say, the first half of the year were down a little bit. Space and defense, which we also view as a pretty high-margin platform, is also down.

So how did you do that? What drove kind of the margin -- the solid incremental margins that kept the strength up relative to, say, the first half, even though the mix was probably working against you?

Yes. So, John, if you think back to wind last year, it was going through some tough times, as it had to resize the business to the volume that they had. And they did a great job of cutting back the costs.

So when the wind volume came back this year, the incrementals has been very good. So while the wind absolute margin percent might be less than the rest of the business, on an incremental basis it didn't hurt us on a year-to-date basis.

I would also add -- there's three things to think about, and they are all interrelated. One is new technology to help us reduce our scrap, to improve throughput, to improve changeovers. There's productivity and there's volume leverage, whether you talk about supply chain or overall SG&A growth as compared to sales growth. So you look at all three of those -- we continue to work very hard to leverage our incremental sales to make sure it translates into improved margins.

And maybe tied to that, do you think there are more levers to pull with regard to productivity and technology? I understand the operating leverage kicking in, but the other two parts -- I guess, how should we be thinking about what they might contribute as we look to 2015 and 2016?

Well, I can tell you the direction I'm setting and what I look for, and that's continuous improvement across the board -- whether we are talking about plant efficiencies, or SG&A efficiencies, or corporate efficiencies. So technology is constantly advancing and allowing us to get more out of our assets every day. So I think this is a long-term, continuous process that we'll continue to drive and continue to see strong results.

Great. Thanks very much for the color.

Noah Poponak, Goldman Sachs.

I wanted to ask about CapEx again, recognizing I'm not asking for a number for 2015; but is it the correct read that there's a decent amount of pull-forward and elevated drivers to the 2014 CapEx number, such that even with new business wins and 2015 CapEx being pretty elevated relative to all of history except for 2014, it should still be down pretty significantly from 2014, just because this 2014 number is setting up such an easy comparison? Or is this 2014 number kind of close to where it needs to be in 2015?

So I think I got the question here. First thing I'd say is our CapEx spending continues to perform at or better than we have ever expected. Our on-time, on-budget, and output per unit dollar invested has met or exceeded our programs across the board.

So with respect to 2014, our range was $225 million to $250 million. We are right there. Now, we continue to make sure we are aligned with the rate of ramp on the A-350 -- which, again, we haven't provided guidance, but I can assure you we have not installed all of the capacity to run the A-350 at a 10 per month rate.

At the same time, we do not have all the capacity to match up with the extremely aggressive growth rate on the LEAP engines and the LEAP fan blades and cases. So we do not build capital in advance of needing that or in advance of winning programs. This is booked business that -- what we are trying to do is measure as close as possible, without being short, to meet our customers' schedules going forward.

So, again, next year we are going to continue to invest. And I hope our number goes up, because that means we are being even more successful than what our prior guidance had been.

Okay. Got it. Is it possible to -- even if just rough order of magnitude -- size what percent of the defense segment the V-22 program is, just so we can all understand the negative growth rate from that program that you have to overcome next year? And I guess that's assuming that that is still running close to peak? Or perhaps you can tell us if that's true, or if it has already come off a little bit off of the peak?

We've always said that V-22, as you know, is our largest program; and it's been less than 15% of our total space and defense business, and it is still less than 15%. It's approaching towards the 10% range and going lower.

But for this quarter, it's right -- the A-400M is about ready to catch it. So at some point it won't be our largest program anymore, but still be a big, important program for us.

Okay. So if that ends the year at 10%, and it sounds like needs to go closer to 5% next year, is that something you feel like the rest of the segment can overcome or not next year?

I hate to answer this, but we'll give guidance a little later as particular. You know, we'll probably -- on individual programs, it gets a little bit tough.

But we talked about the rates being cut in half. So if, let's say, at the outset it was 15%, it goes down to 7.5% of our space and defense totals.

In rough numbers.

In real round numbers.

Okay.

But I think it's -- to predict a specific program is a little bit tough.

Okay. All right, thanks a lot.

(Operator Instructions) Chris Kapsch, Topeka Capital Markets.

I have a follow-up on the CapEx and cash flow discussion, and really more in the context of the Company's capital structure and its leverage ratio. So it looks like, just doing some back-of-the-envelope math, that given the implied free cash flow for the balance of 2014 in the fourth quarter -- and even if you did spend as much as, say, $250 million in CapEx next year -- it looks like you basically could exhaust your existing share repurchase program and really still have a decrease in net debt. And it looks like your leverage might finish 2015 less than 1 times levered -- call it 0.8 times.

So the question really is -- given, obviously, you are still working on CapEx programs looking forward and excited about the growth prospects, but also, at this point in the cycle, you are probably thrilled being this sort of under-leveraged compared to, maybe, prior cycles. So just wondering: what's the thinking at the Company in terms of what the ideal capital structure looks like and leverage ratio at this point in the cycle, given what's pretty good visibility going forward from some key growth drivers from your key customers?

I think you said it well in that we are pretty thrilled with where we are with respect to our balance sheet and the capacity we have looking forward. I think our last 12 month net debt to EBITDA is right around 1. And I haven't done the math yet, looking at next year, but I can tell you 0.8 is well below the internal targets we set on optimizing our capital structure.

So it's pretty simple, and we've said it before. But first thing we do is we look at the growth opportunities we have, such as the 777X, and the neo, and the MAX, and try to optimize our position and differentiate our technology to grow organically. That's what we are looking at first and foremost.

With that, we look at our product portfolio and gaps in opportunities on how we might strengthen our position with M&A activities. So our pipeline is active, and we are always looking at those opportunities and balancing them with our organic growth opportunities.

And last but not least, return to shareholders. So it's not one or the other. We are constantly looking at our capital structure. We are looking at our cash generation and our internal needs and then how we might return to shareholders and/or enhance our portfolio.

Got you. So the rate that I mentioned, 0.8 times -- based on what you said, it looks like there's capacity for both incremental share repurchases and/or acquisition activity looking forward.

That's a good assumption.

So, then, I just had a follow-up in the space and defense segment as well. Obviously, you called out a couple of headwinds. But in the past you had mentioned strength from programs like the A-400M could offset some of the anticipated weakness in, say, rotorcraft. And I think that's your second-largest program. I'm just wondering if that program still continues to grow, and is perhaps just not big enough to offset some of the sequential weakness you saw in some of these other programs, including the V-22 and other things that you called out?

Right. So, Chris, we were originally thinking that as the V-22 rates got cut in half, and as the C-17 -- remember, that goes away next year -- between the A-400M and the Joint Strike Fighter, they would offset those two. The A-400M is doing well but I think the absolute growth rate number -- the build rate for it now, going forward, is probably a little bit less than we would have thought in prior years.

Now, that's not a 2014 issue; but it's probably a little bit less than we originally expected. And then the Joint Strike Fighter is always a wildcard. I mean, we are looking for growth. And if it hits the growth rates or the build rates that people expect, then it will be fine. If it gets lower than that, then it was just the timing of how quickly it ramps up. So whether they really offset it, we will have to see.

Avinash Kant, D.A. Davidson & Co.

Two questions, maybe. The first one is that if I am looking at the top end of your guidance for the full year -- and I am talking just sequentially between Q3 and Q4 -- looks like your operating margin guidance is down a little bit. First, am I right in understanding it? And second is that -- with higher commercial aerospace, why would that be the case?

So if you are talking about with respect to the third quarter, the answer is -- that's correct. We don't expect to repeat the 17.5% again, but we expect to get close.

Would you have higher sales in commercial aerospace in Q4 versus Q3?

Not so much. I'm sorry -- the answer is probably a little bit, yes. But if you look at all our margins, it really just depends on the actual mix of products that we happen to sell.

Commercial aerospace margins are good. Space and defense margins are good. The industrials margins outside of wind are strong. Wind is the only one where it has a noticeably smaller margin, but it has a much lower capital employment, so you can get good returns. So it really just depends on the mix of products within that. But I don't think it's enough to make a large enough difference that you should notice.

Okay. So given the product mix and everything, I would have expected that margins could actually stay there if the mix is -- kind of looks like it's favorable.

Yes. Historically our second half, particularly the fourth quarter -- remember, last two weeks of December -- it's a pretty dead time. And we generally run about 1% lower in the fourth quarter than in the other quarters.

Okay. And one other question on the expansional plan that you announced in France -- nearly $250 million, and of course the construction will begin in mid-2015. Could you give us -- historically on projects like this, what percentage of the CapEx goes in the first year, typically? What is land, building, and all that kind of stuff that goes up front?

So we are excited with the announcement to build our first precursor plant in Europe and our first carbon fiber plant in France. We've been working on this growth initiative for over two years now to make sure we identify the optimum place for the location and put the fundamental plants in place, to build the team, to work with the local officials and the government to optimize our growth plans there.

With respect to planning and working with our supply chain on equipment design and ordering, that work is ongoing. Teams are in place, and we are hiring as we speak.

Groundbreaking should be around summertime next year and probably take about two years to complete. And then we start qualification, which will be 9 months to 12 months. So overall, we expect to be up at full rate in 2018 with about 120 people producing a significant amount of our precursor and carbon fiber needs for the European market.

So, Nick, did you spend any CapEx this year towards this one?

We did, but it's not a lot in the scheme of things. We'll spend, obviously, more next year. But we are not going to go out and identify on this specific project the exact timing. You can do some math on some models.

We've spent a negligible amount this year. Real spending will start next year, and we will complete in 2017 time frame so that we can start qualification.

Got it. Thank you.

David Strauss, UBS.

This is actually Matt on for David. A couple of quick ones. One, obviously wind is really strong, but can you give any other color on the industrial end-markets -- how those are growing, and maybe what the forecast is? And the other -- maybe I missed it, but where do you think your share count ends up for the full year?

With respect to the rest of the industrial outside of wind, nothing in particular to point out. It's all up a little bit. But there's no particular items to point out for you.

With respect to share count, for the full year the expectation -- if we stay where we are at right now, the share count for the full year is 99 million shares, and for the quarter, it's -- I think it's just under 98 million.

Okay. Thanks.

But that's excluding any buybacks for the fourth quarter.

Ken Herbert, Canaccord.

I just wanted to ask -- Nick, you have talked about M&A now as a potential use of capital. Clearly, you've got the buyback; you've got organic investments. But you've got some -- it looks like some potential capacity here, significant capacity.

As you talk about this and you talk about a pipeline being full, can you just provide some more color on where you would be looking in terms of markets, in terms of technologies? Obviously, it's not an area you've got much of a track record.

How would you approach this? And if you really are -- what gets you -- what you think is the most accretive? And how would you outline a strategy on that with any more detail? That would be great.

So I guess I would start by saying first thing, Ken, is we are looking at technology. And we are looking at businesses and/or technologies within our core competency. So very close to if not in the composite space.

We've got very robust technology roadmaps and very strong positions where we have invested internally, but there are some opportunities there where we can look at technology, and/or customer qualifications, and/or market access as bolt-ons that we are looking at as we speak. So we are very disciplined.

As you mentioned, we haven't done an acquisition in many years. We are going to be very disciplined. And we've got a team -- a cross-functional team that works this very aggressively and very hard. And it's one of those things that it's hard to give you guidance on until we actually do it and announce a deal. So I can tell you, I'm looking forward to announcing the first one.

Okay. No, that's great. Is it fair to say, or is it a reach to say, that as you look at something the benefits might be more on the cost side versus, then, maybe access to a new market or a new customer?

I would say the opposite. The benefits would tend to be on customer positions and technology. Obviously, we will drive for cost efficiency; but, again, this is really technology positioning to win the next programs or enhance our current position to give us a better probability to win even more content going forward.

Okay. That's helpful. And then, just finally, within the other aerospace -- I know it's coming off maybe some easier comps, but are there any particular programs you would highlight there, as maybe you saw notable growth in, perhaps on the business jet side?

Yes, Ken. We've had basically four quarters in a row at about the same level of sales. But when you compare this quarter versus a year ago, it's really Gulfstream that was probably the difference when you cut through it all.

Okay. Great. Thank you very much.

Noah Poponak, Goldman Sachs.

I just wanted to ask two follow-ups on financial targets of yours. So I just noticed reading in the press release the $2.5 billion for 2017 reads by the end of 2017. So I'm wondering, is the target there to have $2.5 billion for the full-year 2017? Or is it to be run-rating that number as you are coming out of 2017?

That was probably poorly written, Noah. I guess the good news is you at least didn't ask about 2015 CapEx again.

Come on, Wayne! (laughter)

It's meant to be $2.5 billion for the full year.

Okay. And then on the margin target, the incremental margin target of 23%-plus, I think that's a total operating margin target. Is that correct? Or is it a segment target?

It's for the total Company.

Okay. And should we think about you all driving towards something similar at the segment level? Or is there a reason why we segment number would be significantly different over the medium to long term?

I'm not sure if it will be significantly different, but we would expect the composite materials segment just to be higher. Remember, that's the one where we have carbon fiber, which is by far the most capital intensive. And they should have the highest margin percent. So that one will be a little bit higher.

On an absolute basis, not on an incremental basis?

I would say both. The answer is both.

Okay. So there is potential for the segment incremental to be higher than the total incremental?

Yes. I'm saying that without probably enough facts to base it on, but that should be correct.

Okay. Thanks a lot.

And with there being no other questions, this concludes today's conference. Thank you for your participation.