Hexcel Corp (HXL) 2015 Q4 法說會逐字稿

Good day and welcome to the Hexcel Corporation fourth-quarter and full-year 2015 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.

All right, thank you. Good morning, everyone. Welcome to Hexcel Corporation's fourth-quarter and full-year 2015 earnings conference call on January 22, 2016. 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 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 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 Investor Relations Manager. The purpose of the call is to review our fourth-quarter and full-year 2015 results detailed in our press release issued yesterday. We're also going to cover our 2016 guidance. Since this is first time in a while that we're providing the New Year's guidance as part of our fourth-quarter earnings call, we have posted a brief presentation on our website covering the details of our guidance.

Now let me turn the call over to Nick.

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 $465 million -- just above the fourth quarter of 2014 sales in constant currency. Our key growth programs remain on track and performed as expected. Our operations continue to perform well, delivering fourth-quarter operating income of $81 million, with operating income margin of 17.5%, up strongly from last year's period. Our diluted EPS of $0.56 was almost 4% higher than the fourth quarter of 2014.

For the full year, slide 2 summarizes the record results we delivered in 2015. Sales were up almost 4% in constant currency to $1.861 billion from last year. We again set new Hexcel records for operating income, operating income percentage, net income, and earnings per share.

Now let me provide more details on our markets; and, as usual, I will discuss year-over-year comparisons in constant currency. As you are aware, there was a significant strengthening of the dollar against the euro and British pound throughout 2015 as compared to 2014. This influences our results, and some of this impact is not intuitive. But the bottom line is that we root for a strong dollar, as our sales translate lower while our income increases, and so our margin percentages improve.

Our sales this quarter were again led by a 7% increase in commercial aerospace revenues versus 2014 as Q4 sales totaled over $326 million. For the full year, aerospace sales are up 7.6%.

Total revenue from new Airbus and Boeing programs, which include the 787, A350, A320neo, and 737MAX increased more than 40% in the quarter as compared to Q4 2014, primarily driven by the A350 and A320neo. Airbus and Boeing sales for legacy programs declined modestly in the quarter.

For the full year, revenue from new programs at Airbus and Boeing increased over -- about 40% over 2014 levels. Legacy sales decreased about 5% for the year, primarily due to the previously announced reductions in certain wide-body programs.

Sales to other commercial aerospace, which includes regional and business aircraft, were about 15% lower compared to last year's quarter and just higher than the third quarter. For the full year sales were about the same as 2014, which was in line with our 2015 guidance.

Space and defense sales for the quarter were $83 million, down about 14% as compared to the record quarter of last year but sequentially up 7.5% from our third-quarter results. For the year sales were down approximately 7%. Our top 10 programs, which account for about 55% of our space and defense sales, are slightly higher in aggregate for the quarter and full year than in the comparable 2014 periods.

The reasons behind the 2015 decline in this market fall into one of three buckets. The first was the decrease in sales associated with the C-17 program, which ended in 2014. Second, commercial helicopters, which now comprise less than 10% of space and defense sales, were about 25% lower than sales in 2014. And third, when you look across the more than 100 other programs we are on around the world, we experienced somewhat lower sales compared to 2014 due to a variety of unrelated reasons, such as the planned decline of the Eurofighter build rates; lumpiness from new helicopter programs such as the CH-53K; and unanticipated softness in several mature rotorcraft programs.

In industrial markets, sales for the fourth quarter were $55 million, down about 8% year-over-year and flat for the full-year as compared to 2014. Wind energy sales were about the same in Q4 as compared to 2014 and were stable for the full year as well, in line with our 2015 guidance.

However, the rest of industrial was down more than 15% in the quarter, driven by lower recreation and other industrial sales. For the year the rest of industrial was down about 2%, as automotive growth was offset by lower recreation sales.

Now let me turn the call over to Wayne to discuss some of the year's financial details and give you our 2016 guidance.

Thanks, Nick. For the full year, gross margin improved nicely to 28.6% from 27.4% in 2014. Of the 120 basis point improvement, 55 basis points were due to exchange rates, with the majority of the increase due to our continuous improvement efforts and increasing penetration of our intermediate and high-strength carbon fiber.

For the year, selling, general, and administrative expense was about $156 million, up about 8% in constant currency from 2014, as we added infrastructure to support our continued growth -- the step-up including implementing our new ERP and other systems. And for the full-year 2015, IT expenses were nearly $10 million higher than the amount incurred in 2014.

We're very pleased to report that we've now completed the installation of our new ERP system. And we look forward to optimizing it in 2016 to generate improved efficiencies while we continue to ramp up for our expected growth. Research and technology costs of $44 million for the year were essentially flat with 2014 spend in constant currency.

For the full year, operating income as a percent of sales was 17.9% as compared to 16.8% in 2014. Exchange rates contributed 90 basis points to the increase for the year. The fourth quarters of 2015 and 2014 both had a benefit from the extension in December of each year for the US R&D tax credits. These benefits added about $0.01 to EPS for the fourth quarter in each year.

Our full-year tax rate is 26.1% and, as a reminder, included first-quarter benefits of $11.6 million related to the release of reserves for uncertain tax positions. Excluding all discrete benefits, our 2015 effective tax rate would have been 30.9%, slightly higher than our initial 30.5% expectation for 2015.

For the year, free cash flow was a use of $4 million compared to a generation of $58 million in 2014, primarily reflecting higher capital expenditures and working capital usage, offset by higher earnings. Cash payments for capital expenditures were $305 million for 2015 as compared to $260 million in 2014. On an accrual basis, our capital expenditures were $289 million in 2015.

At this point let's turn to slide 3 to review our capital deployment in 2015. We ended the year with our gross debt to last 12 months EBITDA leverage at 1.35 times. We have steadily increased our leverage in recent years, as we will balance increasing our leverage ratio with our commitment to maintain our investment-grade rating.

During the fourth quarter, we repurchased $46 million of our shares under our authorized share repurchase program. We have $204 million remaining under this program. If you look over the past three years, we have invested nearly $1.2 billion in the growth of the business and return to shareholders. $760 million was cash for CapEx; $396 million was for share buybacks; $38 million was for dividends, which we reinstated in 2015. Additionally, the Board of Directors yesterday declared a $0.10 quarterly dividend, payable to shareholders of record as of February 5, with a payment date of February 12.

So now let's turn to our 2016 guidance, which starts on page 4 of the slide deck. The midpoint of our 2016 sales guidance is $2.020 billion or what's more easily said as twenty-twenty. This represents about 8.5% growth over 2015, including 2 percentage points of the growth coming from our Formax acquisition.

Our EPS in 2016 is expected to be $2.44 to $2.56. This is based on us holding share count flat at 96 million shares, as we expect to at least buy back enough shares to offset dilution. We expect our accrual basis capital expenditures will be between $280 million and $320 million, with free cash flow expected to be between $20 million and $60 million.

If you now turn to slide 5, we'll provide some more color on our core markets. We again expect strong growth from commercial aerospace markets, with sales up 8% to 10%. As you might expect, the A350 should be a growth driver this year, along with growth from the A20neo (sic - A320neo) ramp-up and the mid-single-digit growth of the business and regional jet market.

Coming off a challenging 2015, we're expecting space and defense to be stable across the board in 2016. And our top three programs will remain the Joint Strike Fighter, the A400M, and the V22.

Thanks to the Formax acquisition, we expect the industrial market to be up 10% to 15% in 2016. Wind energy remained a significant contributor in this market, and we expect those sales to be stable. We also expect our automotive sales to continue to grow nicely, while the rest of the industrial submarkets are projected to perform at a steady-state level.

Turning to slide 6 and our remaining financial guidance: we expect depreciation and amortization to step up $18 million in 2016, as prior capital expenditure investments come online to support our growth. We also want to remind you that the first quarter will see its typical use of cash as working capital begins its seasonal buildup in the first half of the year. Additionally, we expect operating margins the first quarter to be lower than the remaining quarters of the year as a result of the timing when we record our incentive stock compensation expense and additional costs in the first quarter from the start-up of several new manufacturing lines.

For the full year, we expect R&T spending to increase 8% to 10% as we invest in future growth opportunities and productivity initiatives. This includes development trials in our carbon fiber lines for new innovations to meet aerospace OEM requests for next-gen aircraft and engine materials. We also continue to focus on faster-cure resin technology for aerospace and industrial applications to address ever-increasing rate demands in new, higher-volume programs. All of this is done as reminder to further enhance what we believe is the world's leading advanced composite portfolio.

2016 we expect our effective tax rate will be 30.5% for the full year. Also, due to our higher levels of income and the 2016 payment of previously deferred amounts, we're expecting our cash taxes paid to increase this year $25 million to $30 million.

Lastly, as you are all aware, we were aided by a strong dollar versus the euro and the British pound. This is because our commercial aerospace sales to Airbus are in dollars, but we have some labor overhead and material costs denominated in euros or pounds. To protect ourselves, we hedged our exposures at the operating income line.

Presently, we're about 80% hedged on 2016's operating income. We place these hedges on a 10-quarter rolling basis, so the hedge rate for 2016 is more favorable than what we had in place in 2015 and should provide a $6 million operating income benefit. Looking out at the rest of 2016, each additional 5% movement will have a $2 million operating income impact, net of our hedges.

Now let me turn it over to Nick for some final thoughts before we take your questions.

Thanks, Wayne. As you have heard, we are expecting another strong year in 2016 as we continue to benefit from the growth in new model production in our commercial aerospace market. We expect our key commercial aerospace drivers to continue growing, and we are still targeting $3 billion in sales in 2020. We also expect to generate $4.50 in EPS in 2020 and continue to expect to generate free cash flows totaling $1 billion for the five-year period from 2015 to 2019.

Despite the recent stock market turmoil over the last few weeks, when I take a step back and look at Hexcel and our markets, I remain very optimistic about our future and confident in our operational focus. 2016 should be another busy and exciting year for us. For examples, we have the ramp-up of the A350 and the new re-engined narrow-bodies -- A320neo, the 737MAX -- as our core growth drivers in aerospace remain on track and continue to grow.

We announced earlier this week a new engineered core facility in Morocco, which will better enable us to globally support our customers' growing demand for products that Hexcel has developed a unique skill set to produce. We completed the 100% acquisition of Formax in early January and look forward to fully integrating their technology and capabilities into our business.

Our construction of a new carbon fiber and PAN line in France is now full throttle, on schedule and on budget; and we expect to make significant progress in 2016 so that we can start the qualification process next year. Our efforts for differentiating our materials for the premium automotive market are also bearing fruit.

We are very proud of our recent announcement that disclosed Hexcel materials are being used to reinforce the B-pillar of the new BMW 7 series. Utilizing our novel, fast-cure resin systems, we've also developed a fully automated production system to make the material assemblies. We continue to invest in technology and innovation to ensure that we are the leaders in expanding the use of composites in all of our core markets.

Last but definitely not least, we have a continuous improvement mindset and culture, where operational excellence that the foundation of everything we do. We continue to efficiently execute on our investment plans in order to position the Company for the forecasted growth as we support our customers by investing in technology, capacity expansion, manufacturing innovations, systems, and our people.

Operator, we would now be happy to take questions.

(Operator Instructions) Myles Walton, Deutsche Bank.

Curious if you could start with talking about the 350. And you are obviously feeding a lot of your supply chain content and material, and I'm curious what you're seeing in terms of the variability of inventories in your suppliers. Obviously, it's something that you'd be keeping a pretty tight read on. And what in terms of feedback loops are you getting from your suppliers relative to production rates over the next 12 months?

So, Myles, we do have very good visibility into the A350 supply chain. And we ship to 40-plus suppliers and suppliers to Airbus around the world. So as you could imagine, everybody is not at the exact same point in time; and everybody's parts and components don't necessarily get installed the same point in time in Airbus's production schedule.

So there is variation. There are suppliers that are ahead of others, and there are some suppliers that are probably behind somewhat. But overall, I would tell you -- I continue to be very impressed with Airbus's performance on the A350. I think they have taken a very conservative approach. I think we have seen the pull come through very consistently with respect to our deliveries as compared to what we see in the supply chain, what we see in the supply stream, as well as what we see in the Airbus plant.

So, you know, they were supposedly at five per month at the end of the year. Given that we ship about six months in advance, we were there sometime midyear. And we're in the process of ramping up to deliver 10 per month by 2018. So we see very good alignment. I know -- I believe there have been 15 delivered to date. And I'm also confident that deliveries will start to catch up with the production rate, which is fairly typical in a new launch of this magnitude.

Okay. And then one quick one: Wayne, what is the cash basis for CapEx expected to be in 2016?

You know, Myles, on the accrual side the midpoint is $300 million. I don't expect the cash basis to be terribly different from that number.

Okay, thank you.

Gautam Khanna, Cowen and Company.

I was wondering if you could elaborate on your automotive comments. How big is that business today? And when you look out to 2020, how big do you think it might be? And a follow-up.

Well, as you know, our industrial -- total industrial is about 13%, and slightly over half of that is wind. So the automotive market is a very, very small base. And we really -- it's early to get into program specifics, but it's more than just the magnitude on the size of this. It's how we differentiated; how we continue to develop snap-cure, fast-cure resin systems, where it can provide a sustainable, competitive advantage for our customers like BMW. So I think over the course of the next several years, we're going to continue to see strong growth there. But you have to keep in mind, it's on a small base. I'm also excited that the technology that we develop here and the production throughput required in industrial and automotive applications helps us look at aerospace differently and provide more competitive solutions there as well.

Okay. And just maybe for Wayne, can you comment on what the incremental margin is implied, ex-FX, in 2016?

Yes, Gautam, if you -- and I'll pull out Formax, because you're bringing in a whole company, and you don't just guess on that. We are not quite at 25%; we're close, but not quite there. We're working hard to get there, though.

Okay. And last question on the defense and space business: what have you been seeing? I know that a number of smaller programs have been a source of negative variance last year. What are you seeing in those programs? Are you starting to see any sort of normalcy return, or what gives you conviction that it's a stable outlook there?

With respect to -- I'm not sure I follow the question totally, but just with respect to space and defense sales for next year: if you look at our top 10 programs, which are roughly 55% of the total, actually those all look pretty stable, including the top three, which is the Joint Strike Fighter, the A400M, and the V22. Actually, we do expect to see some growth in the Joint Strike Fighter.

But even as you look across on helicopters in total and all that, they all look relatively stable. I mean, part of it is just having a low base to compare to. But there's nothing that's obvious. I mean, you will see the Eurofighter drop a little bit and a few others. But in general, we have other things to offset it.

And there tends to be lumpiness in some of the development programs like CH-53K, which had big sales in 2014, a little bit less. But it's a great program going forward.

Thanks a lot, guys.

Mike Sison, KeyBanc.

Nice end to the year. In terms of your outlook for 2016, when you think about the new aircraft programs -- revenue was up 40% in 2015; is that going to be up kind of in that range again in 2016? And what will legacy be? Will legacy be down again in 2016?

Yes, so Mike, it's sort of a little interesting transition. It depends on how you count the neo, right?

Yes.

You are starting to move -- if you move all of the neo into new programs, it's going to look, obviously, fairly big. And you're going to probably see similar growth rates. That also means the legacy is going to start dropping as a result of that.

But if you put that one aside, you do see a small drop in legacy, just from the full impact of the A330 dropping down to six a month. We've already seen the 747 drop a little bit, and they announced yesterday dropping a little bit more. But other than that, that's the only news there.

Okay. And then one quick follow-up on the A350. When you think about your guidance for 2016, I would assume that that -- it assumes that there's a step-up production in 2017 versus 2016, and then you would feel that sometime this summer. Is that right?

I don't think of it is a step-up per se, Mike. I think it's going to be more a gradual rate increase between now and 2018 up to the 10. So we see increased production in 2016, and equally we'll see similar increases in 2017.

Okay, great. Thank you.

Howard Rubel, Jefferies.

A couple things. You had started out last year with a working capital -- I'll call it a hedge against missing deliveries. How are you doing in terms of matching that surplus inventory against demand? It looks like you have wound it down a little bit. Your safety stock looks a little bit lower. Can you explain why?

For starters, I didn't quite get your first part of the question, Howard, on missed deliveries, but I think you --.

No, no, no -- it wasn't missed deliveries; I'm sorry to interrupt, but no, I think you had started last year or carried through last year significant safety stock to ensure that certain programs were on --

I got it. Yes, right.

-- so that your supported programs. And it looks as if you're reducing that safety stock a little bit. Can you elaborate on to why the change -- what appears to be a change? It may be confidence; it may be a whole host of reasons.

So when you think safety stock -- and thanks, Howard, I understand your question. When you think safety stock, our safety stock for the programs that are in the process of ramping up rapidly; i.e., the A350, neo, LEAP engines, we have not taken that safety stock down and really do not plan to until we reach more of a steady-state. Because basically, being sole-source, we need to make sure we protect our customers. So that hasn't decreased.

With respect to other safety stock that we put in place when we were implementing the IT systems throughout the course of last year and other productivity initiatives where we needed to build a little bank, we did burn a large portion of that off in the fourth quarter, with a decline of, I think, about $21 million, right, Wayne? So it wasn't the new program development safety stock that was affected.

But just to be clear, the safety stock for the new programs is at the level where we want. So it's not increasing anymore.

I understand -- so, right, so the working capital change for sales is going to be a lot more matched to a constant as opposed to an accelerating number.

Yes, correct. I mean, our target is to hold inventories flat in 2016. It won't be by quarter, and we'll probably have a buildup in the first half. But for the year we should be flat. And then receivables for us generally just moves those sales. They're quite clean.

Thank you on that. Staying with capital for a moment -- and, I mean, you're frustratingly difficult to provide an outlook with respect to CapEx. Sorry, Wayne. And every time we turn around, there's a new plant or something like that. I mean, granted, $20 million is small.

Can you provide any more color? I mean, I know once you get to 10 a month, you'll probably breathe easier until Mr. Leahy takes the 350 up to another higher number or something else happens. So how do you -- you know, you talk about a big free cash flow number. It looks like it's all going to be jammed into 2019.

Well, we -- again, and I know you remember this, Howard, but it doesn't prevent you from asking -- we basically said we're going to spend about $1.1 billion between 2015 and 2019 to get to our $3 billion of sales in 2020. And that would be heavily front-end loaded. And front-end, by definition, is 2015, 2016, 2017.

So your read is accurate: that provided we do not get a program that drives significant demand, which would require more CapEx -- which would be a success from my perspective, and I'd be thrilled to tell you about that, and I'll be the first one to tell you -- that's when the real free cash flow would start to flow.

So if there is a very large military aircraft program that shows up, and history would say you've done a nice job of providing fiber for a particular military aircraft programs, we would think that that's already incorporated into your CapEx profile?

I'd be a little careful on that, because I don't think between now and 2020 there is an expectation of a significant -- I mean, since you chose the word military -- program that would drive significant CapEx.

And then that's -- thank you on that. And then last, on Formax, if I do the math right, it was about $40 million kind of run rate. And if we do the add, it's about $40 million. How do you, Nick, either incorporate that so that it becomes a $50 million or $100 million business? And am I thinking that it was just generally flat, and now that you own it, it will be a big difference?

Well, that's certainly not our intent. And again, I'll go back to the motivation that prompted us to buy Formax, and that is it's a technology play. They have unique reinforcement capability that enables us to develop and produce higher performing fabrics -- non-crimp fabrics that can perform better, lightweight fabrics that can be used in different applications.

So our intent to certainly to integrate them. We have a team in place, and the integration is going very well. But the intent is to grow that business and to migrate Hexcel fibers into that business more than they are today.

But my point is that while you have owned it, and you've probably got good familiarity with it, in the near term there hasn't been a lot of growth. When do we see a knee in the curve? Or when could we see a knee in the curve?

So, Howard, if you're thinking from 2014 to 2015, yes, correct. There was not a lot of growth. Some of that, remember -- some of it is just simply exchange rates. But today their business is 100% industrial. It's going to grow, because we're going to grow both in aerospace applications and industrial. So that's where you'll see the big driver.

I've got it. Thank you very much for your help.

Okay. Thank you, Howard.

Noah Poponak, Goldman Sachs.

I wanted to follow up on that cumulative five-year free cash flow target line of discussion. It looks like in order to get to $1.1 billion of cumulative free cash 2015 to 2019, given you did about $300 million last year, the midpoint of the range $300 million this year; if I just stayed at $300 million in 2017, you would then need to drop to $100 million as a run rate after that. Is that the rough order of magnitude of how big the drop-off is?

And then if I grow your cash from ops in that period at a 15% CAGR, which is what you're 2020 earnings guidance implies, with that CapEx number, you don't quite get to $1 billion. It's closer to $900 million. And so is there a working capital or other tailwind beyond the earnings growth piece?

That's a long question, Noah. So with respect to CapEx, you're in the right ballpark. If you think of -- today our maintenance CapEx is in the $50 million a year range. When you gut out those last two years, there's not a whole lot spent on growth. $100 million still provides you some opportunity for maintenance and a little beyond that. So you're in the general right ballpark.

With respect to $1 billion of free cash flow, there's nothing -- it's hard to look at your math and figure out if there's any differences. But there's nothing obvious. We obviously intend to hold working capital as tightly as we can, but I doubt that probably is a big enough number to explain your entire math. So not quite sure.

Okay, I mean it's not --.

The only thing I'd add is as you think about earnings growth, remember, the depreciation is skyrocketing and there might be a little bit more EBITDA there than you think.

That makes sense. Yes, that could probably explain almost all of it, actually.

And then just one follow-up on the outlook for stable rotorcraft next year. Could you maybe just provide a little more detail on that? I guess I would have expected that to be down again, given what we're seeing in the commercial world.

And if I remember correctly, in 2015 you didn't quite start to feel the negative impact from that until the second half. So I would have thought first half would still have the tougher comps from that situation.

I guess the only thing I'd say to that is remember commercial -- when you look at our helicopter business, it's now down to about 10% commercial, 90% military.

Okay.

And so -- and the second half of commercial isn't that much lower than the first half. They're just not big numbers anymore.

If it's not at the bottom, even if it goes down a little bit, it's going to have a minimal impact.

Got it. Okay, thank you.

David Strauss, UBS.

Your forecast for business jet and regional jet, I think, up mid-single digits for 2016. Can you talk about how you're getting there, given the pressure that seems to be out there on -- at least on large-cabin business jet?

It's basically driven by Gulfstream G650 and Embraer. That's making up the bulk of our increases next year. And then we have a lot of other puts and takes, but we still feel good about the mid-single digits.

What exposure do you have at Embraer specifically?

Generally speaking, we're on everything. But for Embraer, actually, the regional jets look pretty decent next year. Just to put it in perspective, 5% on other commercial now is in the $8 million range.

Right, okay.

We're not talking about a big number anymore.

And Wayne, on the sales number, how much of a headwind is in that -- or the sales guidance -- how much of a headwind do you have in there for currency?

That's a little tough to answer. So if you compare 2016 sales versus 2015, it's at a rate -- when we gave guidance, the rate is a little higher than what it is today. So it's pretty comparable to 2015 actual rates. I hope that helps.

All right. So not much of a difference between --?

Not really. It's not much difference, but it's fundamentally similar to what 2015 was.

All right. And then last one for me -- maybe some updated thoughts on leverage. I think back at the investor day, you had talked about levering up by about $850 million over the 2015 to 2019 forecast period. You did about roughly 1/5 of that last year. Is it safe to assume that this year we're looking kind of in that same $150 million, $175 million range in terms of levering up?

So I'd view it sort of as two pieces. One, leverage that will go up just if we -- you know, as our EBITDA grows, and we just hold at the same debt-to-EBITDA levers, then we'll get some from that. But we will probably continue to steadily increase the leverage ratio we are after. But it will probably be slow, and --.

While balancing our investment-grade rating.

Right.

Okay, thanks, guys.

I think we're still on track towards that number. Nothing's really changed.

Okay, thank you.

Robert Spingarn, Credit Suisse.

I wanted to ask -- maybe this is a little bit smaller. You mentioned the 747; of course, you got an announcement last night from Boeing. I think that's a modest impact for you. What's your content there, just to refresh? A $1 million or so?

So our content is $1.5 million. So the announcement yesterday could be a $6 to $8 million impact in 2016.

Okay. And then on a program, I don't know how big of a participant you are. In 777, what's your content there?

It's about $1 million.

So there we could see a little bit more meaningful impact. It's not huge, still, and they haven't announced anything; but is there any kind of conservatism built in for the 777 potentially coming down in rate?

Well, in 2016, we do not have any change in that rate because it hasn't been announced. So no indication as of yet. We'll remain flexible. And if Boeing does take it down, we'll certainly adjust quick.

Okay. Do you have any kind of protocol or just hedging strategy against the OEM build rates that you can apply? Are you fully confident that they will achieve what they say they will achieve?

Well, I'd answer that a couple of ways. So, for example, on new programs, new launches, we tend to be a little conservative. And we have the capacity, but in our forecast we probably hedge a little down, just knowing that delays happen. And we take a more conservative approach.

On stable, mature programs, where we have very good line of sight on what the OEs are building. We tend to look at the supply chains and see if we see any tightness or oversupply. And we have very good visibility there as well. So not a lot of hedging in the mature programs.

And on the neo -- you know, you said this earlier -- neo is one of those funny ones where you can kind of classify it either way. But do you go with the former or the latter philosophy on that one?

So we've moved it for now, it is in new programs. It now gets a little bit more confusing (multiple speakers)

So you're essentially aligning with the 60 per month for a long-term target?

We're aligning for the 46 per month this year.

Correct.

Right, but long-term, you're going with what they are telling you?

Right.

Okay. And then just quickly, on defense, it sounds like F-35 and Eurofighter kind of offset and allow you to look for a stable defense line in 2016. Are there any other programs we should be mindful of where there could either be upside and downside?

I guess I'd point out the A400M. We always watch that. It has little bit of growth, given the economy and the environment. That's on my radar.

V22 has held strong. So we are looking for another good, stable year this year as well. So there's not -- we're on so many programs, there's really not another program specifically that would drive a material change in our outlook.

Okay, Okay. Very helpful. Thank you.

You're welcome.

Ken Herbert, Canaccord.

Wayne or Nick, which rate are you shipping at now on the 787? Or how much of the step-up from 10 to 12 do you see this year? Or how much have you seen, perhaps, in 2015, just considering sort of timing and lead times on that?

It's pretty hard to answer that exactly. For 2015, it's probably -- it was probably 10 a month for the whole year. I think we're --.

Maybe slightly above that.

But we didn't see too much of it. You'll see it more towards this year -- that big step-up to the 12, that is.

Okay. And I would imagine, you know, if you think about that step-up as, just sort of give or take, $70 million, $75 million, do you see -- how much of that would be captured in your guidance? Or how do you expect to see that step-up playing out from a timing standpoint?

So just to be clear, we're $1.5 million per chipset. So it's $3 million a month.

Yes, okay.

I don't want to get into quarter-by-quarter guidance, but you'll see it step up slowly throughout the year. I shouldn't say slowly.

It's going to be steady through the year.

Okay, okay. So maybe you would -- by the midpoint of the year, you would probably be at rate 12, I would guess?

Yes, you would -- just based on what we've heard, that's a reasonable guess.

Okay. And then just on the part of, obviously, the lower free cash flow in 2015 relative to when you started off the year with the third quarter, when you brought that guidance down, you obviously talked about the inventory and the safety stock that you've discussed. I think at the time, you mentioned part of that as well was a little pull-forward on some CapEx from an opportunistic standpoint.

Is that something that you could see again in 2016? And where might you -- maybe can you just talk a little bit about the puts and takes there, as you look at the CapEx this year and the opportunity to maybe take advantage of some opportunities to pull things forward; and how that -- where could you perhaps see those opportunities?

So you can imagine, we have hundreds of CapEx projects going on around the world. And I'm very proud of the job that the team has continued to do with respect to managing those projects -- on track, on budget, achieving the stated throughput.

We really basically -- it's pretty simple. We just align with our customer demand schedules. And as we increase productivity and have more capacity than what we may have had we did our original CapEx planning, we may push things out. If a program looks like it may be a little more aggressive, we'll pull them in. So there's no plan to pull CapEx in unless there's a reason, where a customer program and the demand requires it. So we feel good about the $300 million midpoint for this year. And I'd expect us to be right around that number.

Okay, that's great, Nick. And then just finally, on Formax: it sounds like, considering the incremental investment there, you're happy with that. And the comments around the exposure and the potential growth outlook seem encouraging. Has that experience or has anything else changed maybe the thinking around potential acquisition opportunities or other inorganic investment opportunities for you? And is there anything else you could comment there in terms of what you might be seeing or looking at?

Well, you know, we're looking at things very similar to Formax. That's -- when you think about what interests us, it needs to be a technology play, a bolt-on. What's going to enhance the position we are ready have? What's going to enhance our financial performance versus where we are today?

So, granted, Formax as an acquisition -- it's not going to translate at the operating income leverage that we're going to strive for always. But down the road it will, and it will do more than that with the top-line growth it'll generate. So not a lot to add on other deals, but we're continuing to look.

Okay. Well, thank you very much. Great start to the year.

Chris Kapsch, BB&T Capital Markets.

So obviously there's a lot of consternation about the order backlog and the commercial aero cycle more generally. So I just wanted to follow up on the line of questioning about your forecasts, and as it ties to what you've described as good visibility into the supply chain, and aligning your forecast with your customers' demand schedules.

Just want to understand if you could provide a little more color. The forecast and the guidance that you provide -- are those based on publicly-stated production build rates of your customers? Or are they specific orders to you? And then, you kind of touched upon this, but to what extent do you discount or risk-adjust those whether it's production rates or a specific order forecast that they provide you?

First, welcome back, Chris. And I'll start, and then I will let Nick add the appropriate --.

With respect to when we're looking out to 2020, that's based on basically publicly-announced build rates, or maybe the build rates beyond that, but that's not publicly announced -- what our customers have told us. With respect to 2016, it's really more about discussions with our customers of what they actually expect to order.

Now, we always check with the customers to make sure that's in line with build rates, to make sure everything make sense in that. But that's actually based on each -- by customer, by customer, what they actually expect, which on an overall basis is in line with announced build rates. So not really a whole lot of difference there.

That's very easy on commercial aerospace. When you get to the space and defense and industrial, it gets a little bit more -- there's a lot more variability, obviously.

I see, okay. And then the follow-up on this companywide ERP implementation -- obviously a big endeavor, and I think you said you expect process optimization benefits in 2016. Is there any way you could qualify or quantify what those anticipated benefits might be? Are those in the forecast?

And also, as you reap the benefits from a massive ERP implementation, is there opportunity for current capacity debottlenecks that could somehow free up -- you know, free capacity, defer CapEx, that kind of thing?

So I'll start here. First off, the ERP implementation -- again, I have to give my team kudos here for the fantastic job they've done implementing every single site, manufacturing and administrative, without negatively impacting our customers. So as you know, we stepped up costs last year for two reasons: one, for the ERP; and we pulled in to make sure we could finish it by the end of the year.

So the benefits do not come instantaneous. So we still have spend this year in the IT arena, on ERP as well as a multitude of other systems we've implemented. And over the course of the year, I would expect the productivity initiatives, the supply chain efficiencies to start being realized. But this is an ongoing capability. This really provides us the tool to take our systems and our processes to the next level. But it's going to take time as well.

Okay. Is greater capital efficiency one of the anticipated benefits over time, and any way to quantify that? Thanks.

So if you're talking about pure machine output, I would say that's more limited. If you say supply chain working capital efficiency, that's where the big advantage will come. And really not at a point where we want to give specifics on what our internal targets are for that.

Fair enough, thank you.

Steve Levenson, Stifel.

Just on A320, are you including all the content there, including engine rather than breaking out the engine? And if it's possible, could you tell us either the content or at least the percentage going to the engine as opposed to the airframe?

Well, while Wayne is digging through his notebook, I'll tell you: we are on track, Steve. When we give the numbers -- for example, legacy at 300,000, and a target to be at 450,000 on the neo, I can tell you we are on track and doing very well there.

We are not ready to declare the specific number. We want the program to stabilize a little bit, now that it's just started being delivered as of this week. We haven't, in history, provided the breakout. And I'm waiting to see how Wayne is going to answer this. (laughter)

So, Steve, when we talk about going to 300,000 to 450,000 for the A320neo, when you think about that, most of that increase is in the engines themselves. And I'd say overall I'd sort of view it as a 60%/40% split, meaning 40% towards the engines themselves. That's a rough number, but it's in that range.

Okay. Got it, thanks. And to get to your 2020 goal, is there anything you have to win? And if you win anything in between, is it more likely to pay the dividend after 2020 as opposed to during the period you've mentioned in reaching your goals?

So since we talked about the 2020 vision -- it's hard to believe it's been a year already. I feel very good about where we are. And to your point, Steve, most programs that get awarded today, the revenue really is not going to start flowing until 2020 or later. So we have very good line of sight on the programs.

There are certainly baskets out there and applications where we are working to maximize our content that aren't completely done. But based in our historical win rate, based on our opportunity portfolio, we feel really good about 2020.

Got it, thanks. And last one -- in terms of getting new lines qualified, is the amount of time it takes pretty much the same? Or have you been able to bring that down?

I'd say in certain cases, it's close to the same. We are making improvements; we're working with our customers and continue to drive certain areas down. But some of it is just brute force on running samples, making specimens. And it is time-consuming.

Okey doke. Got it. Thanks very much.

That concludes today's question-and-answer session and brings to the end our conference for today. Thank you for your participation.