Hexcel Corp (HXL) 2016 Q1 法說會逐字稿

Good day and welcome to the Hexcel Corporation first-quarter 2016 earnings conference 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.

Thanks, good morning everyone. Welcome to Hexcel Corporation's first-quarter 2016 earnings conference call on April 21, 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 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 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 first-quarter 2016 results detailed in our press release issued yesterday. 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, 2016 is off to a strong start with first-quarter sales of $498 million, 5 % above the first quarter of 2015 sales in constant currency. Our key growth programs remain on track and performed as expected. Our operations continue to perform well, delivering first-quarter operating income of $84 million with a solid operating income margin of 16.9%.

Our adjusted diluted EPS of $0.59 was a record first quarter for us and a penny better than last year's first-quarter. We are also pleased that our continued strong performance and robust outlook has led us to increase our quarterly dividend by 10%. Now let me briefly provide more details on our markets. As usual, I will discuss year-over-year comparisons in constant currency.

As you are aware currency movements influence our reported results and some of this impact is not intuitive. But the bottom line is that when the dollar is strong, our sales translate lower while our income increases and so are margin percentages improve.

Commercial aerospace sales now accounts for 70% of our total sales and these sales increased 8.5% versus 2015. Total revenue from new Airbus and Boeing programs which include the 787, A350, A320 Neo and 737 Max increased more than 50% in the quarter as compared to Q1 2015 driven by the A350 and the A320 Neo. Airbus and Boeing sales for legacy program declined slightly in the quarter as compared to Q1 2015, but we're above the run rates we saw in the second half of last year.

Sales to other commercial aerospace, which includes regional and business aircraft, were about 15% lower compared to last year's strong first quarter. However they were more than 10% above our 2015 second-half run rate.

Space and defense sales for the quarter were $79 million, down about 11% as compared to the first quarter of last year, but in line with the run rate we saw in the second half of 2015. The quarter sales decline was driven by Rotorcraft, which make up just over half of space and defense sales. As you know, we are more than 100 programs and our challenge for the full year versus planned boils down to two areas.

We are expecting to see some customer supply-chain adjustments on the A400 M program and we anticipate further reductions in some of the Sikorsky programs, both from lower spare blade orders and lower commercial helicopter demand, due to the oil and gas industry being down. As a result, we now believe that it will be challenging to maintain our 2016 space and defense sales at the same level as 2015. We are not changing our guidance on total sales, as we believe the other markets will offset any shortfall.

In industrial markets, sales for the first quarter were $68 million, up more than 10% year over year. The growth we saw in the quarter came from our recently announced Formax acquisition. As expected, wind energy sales were stable for the quarter as compared to a year ago.

Now let me turn the call over to Wayne to discuss some of the quarter's financial details.

For the quarter, gross margin was a strong 28.7%, but down from the record 30.1% in the first quarter of 2015. Last year's quarter benefited from a favorable product mix while this year's quarter saw additional costs related to the startup of several new production lines for capacity to achieve our forecasted growth.

For the quarter, selling, general and administrative expense was $47 million, $700,000 higher than last year's period while research and technology expenses were $800,000 lower than last year's quarter. I will remind you that the timing of our research and technology spend can be lumpy and we expect our investment in research and technology to pick up as the year progresses.

For the quarter, operating income, as a percentage of sales, was 16.9% as compared to 17.5% in 2015. Exchange rates contributed about 50 basis points to 2016's operating-income percentages compared to 2015.

Our engineered product segment delivered 12% operating income margin for the second quarter in a row as compared to the 14% to 16% margins we have achieved over the past few years. We do experience a learning curve in this business as we start up new programs and replace mature legacy programs as they wind down. We will continue to work to optimize our margin and is increasingly competitive segment, though a 12% operating-income margin still produces a very attractive return on invested capital.

The first quarters of 2016 and 2015 both included tax related benefits. This year's first-quarter benefit of $1.2 million is due to the early adoption of the new accounting standards regarding the accounting for share-based payments. The adoption was on a prospective basis and therefore had no impact on prior years. Excluding this discrete benefit, our effective tax rate was 30.5% in line with our full-year guidance. 2015 we had a first-quarter benefit of $11.6 million, primarily related to the release of reserves for uncertain tax positions. Excluding the $11.6 million benefit, our first-quarter effective rate in 2015 was 30.4%.

For the quarter, free cash flow was the use of $75 million compared to the use of $110 million in 2015's period as seasonal effects cost significant working capital cash usage. Working capital usage in the quarter was $91 million versus use of $113 million in 2015's first quarter, primarily due to timing. Cash payments for capital expenditures, primarily related to capacity expansions, were $85 million for the first quarter 2016 as compared to $95 million last year.

On an accrual basis, our capital expenditures were $73 million in the quarter. We also purchased $35 million of shares under our authorized share repurchase program and we now have $169 million remaining authorized under this program.

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

Thanks, Wayne.

2016 is off to a great start. We are executing on plan and we are on track for another record year. The outlook for growth in our commercial aerospace market is very strong thanks to our positions on new programs such as the A350, the A320 Neo and the 737 Max.

Our Board of Directors have authorized an increase to our quarterly dividend by 10% to $0.11 per share. This reflects our robust outlook and confidence in our ability to grow the business and consistently deliver strong operating performance.

While, in general, things are going very well, there are and will always be issues we need to manage. As I mentioned earlier, we think there may be some challenges in space and defense over the balance of the year. However, we expect to offset any shortfalls in space and defense with additional sales in commercial aerospace and industrial markets. As a result, we are maintaining our full-year sales guidance of $1.97 to $2.07 billion and our EPS guidance of $2.44 to $2.56 per share. We also still expect free cash flow to be in the range of $20 million to $60 million after CapEx of $280 million to $320 million.

Now, I would be happy to take your questions.

(Operator Instructions) Our first question from Gautam Khanna, Cowen and Company

A couple of questions. One, I wanted to ask if you could quantify the impact of the 777 rate reduction that occurred after you previously provided initial guidance. Also the four seven, and how should we think about that for this year and for next year the one that actually starts to affect you guys? Additionally, to the extent that we have seen some movement on some of the Airbus platforms like you mentioned the A400M, I think there's some scuttle on the 380 and the 350 ramp. How should we think about that this year in terms of what you initially were guiding in January?

If my memory serves correct, the 777 adjustment came like literally a few days after we announced -- gave our guidance near the end of January, beginning of the year. I think for us it is probably less than $6 million of impact on the year; I think of it as roughly $1 million per plane and I think they've dropped it one per month, right? And probably six of those impacts. This summer they drop to once per month starting in 2017, so we would probably get hit a little bit in the back half of 2016.

Similarly with the 747, they dropped it, what, another half a plane per month starting towards the back half of the year. We will probably see a similar size decline. We have a little over about $1.5 million in the 747.

I would add for A330 whereas it was at a rate of 10 per month last year; it is down to 6. It will increase to seven back in 2017.

So that will offset part of it.

Right. With respect-- and I will talk to the A350 specifically, we continue to see the pull from the supply chain in Airbus as you can see reflected in the Q1. We continue to be aligned with Airbus on the schedule. Just as a reminder, they stated they were at 5 per month at the end of 2015 with a ramp rate up to 10 per month in 2018. And we agree with that and are supporting that. So, based on our deliveries being six months in advance of the line build, you can assume we are over five and probably headed toward seven.

Okay, that is helpful. Could you also comment a little bit about inventory across -- you mentioned the 350 are aligned. Are you seeing any evidence of missed alignment among any of the customers that you are shipping to and not just on the A350 but broadly whether it be the 777 or elsewhere?

I will talk to the inventory in total. We certainly expect inventory from a dollar perspective to go up to some ratio of sales. Having said that, we are also holding strategic inventory for growth programs such as the A350 being one of the bigger ones, but also for the narrow body ramp up and engine programs like the Leap which drive various materials. Being in a sole-source position, we need to protect our customers and we just, by plan, put in strategic inventory which, for the most part, is at steady-state now. Having said that, we feel good about our position and now we're really working on our terms to ultimately improve the efficiency within our system so that we can drop the absolute turn numbers.

Okay more specifically, I meant, are you seeing any sort of inventory destocking or restocking or misalignment among your customers? As some of the rates go down, like the 777. (inaudible)

We look at that on a regular basis. You have to keep in mind we are providing materials some of it, common materials, across many platforms. So knowing our ship set content and, tracking the build rates of the OEs, we see very good alignment. Other than, we did comment that we expect to see a little bit of supply-chain adjustment for the A400 M. Other than that, we believe we are aligned.

Thank you.

You are welcome.

Myles Walton, Deutsche Bank

Good morning.

Good morning.

Can you size the level of shortfall at defense you might be thinking about? Is it going to be down mid-single digits instead of flat is that the kind of A400 M plus Sikorsky supply chain changes that you are seeing?

We have a feel for it right now; as you saw that first quarter was down over 10%. But that basically came right in on our plan. We're talking about numbers in the 2% to 4% range if we cannot claw back breakeven.

The other comments you put into the queue was around competitive dynamics and learning curve on the engineered products and then, Wayne, I think you mentioned that in your remarks as well that this 12% was kind of covering the business plan. Is the 12% what we should think about is the new go-forward run rate and also could you comment on that competitive language you put into the queue?

I am not going to say I am satisfied with 12%. I would tell you that 12% still yields excellent returns on invested capital, which I am very happy with. As Wayne mentioned, this business is a little different than our fiber business and prepreg business in that we continually have legacy programs that are transferring to our joint venture in Malaysia or programs that are going away like the C17 and we are bringing in new programs. Now there is no question, those new programs we are bringing in, it is a very competitive environment and we want to be competitive in that space and are taking that work in.

At the same time, when you bring the work in initially, there is a learning curve because this is not a continuous flow process; it is a parts business where you have to learn your processes, your procedures, your efficiencies. Again, we are not giving up on the range we have delivered over many years. But we remain happy with the 12%.

Would you characterize this as the peak of the competitive dynamics and then 12% is the base you grow from or is this a conditioning for you could go a little bit lower and still cover your business plan?

We could go lower and cover the return on invested capital without a problem, but we're viewing this as, it is a competitive environment. We are continuing to drive our efficiencies and our performance so that we can offer competitive product while still holding the margins that we are accustomed to.

Thanks.

Thank you, Miles.

Robert Stallard.

Good morning. Maybe to follow on from Miles's question on the competitive environment, has the consolidation in the materials and the composite structures area had any impact on the competitive environment on the annual broader business?

We have not seen any impact; you have to remember the cycle times in our business are very long, the development programs are very long and there are very few players that can provide the breadth of product and offerings that we have. So I don't know if you're referencing a certain consolidation or not, but we think our technology positions us to continue to win, to continue to lead the market going forward in the broader range of products we provide, ranging from fibers to prepregs, stuffed core and engine in the cell components.

As a second one, there has been some talk this morning about Airbus bringing down the A380 rate. I was wondering if you give us an idea of what size that program is in terms of your revenues.

In terms of an A380, our content on the plane is a little over $3 million. So, if you just multiply the number of aircraft times that number, you'll get the impact.

Thank you.

Thanks.

Howard Rubel.

Thank you very much. Your CapEx was finally down in a quarter on a year-over-year basis. I have asked before Nick, maybe we can get a trajectory here as to going forward. Can you elaborate a bit more?

Well, I can tell you Howard, our CapEx spending tends to be a bit lumpy depending on what we're bringing online and, I know Wayne mentioned some of the depreciation step-up, we had pretty significant assets come online in Q1. We remain on track for the $300 million CapEx spend this year. I would also say we remain on track to what we basically said when we gave our vision that 2015, 2016 and 2017 would be probably one of our highest capital spend periods to ramp up for the growth that we expect in 2020.

I feel good about where we are at. Again we continue to execute our CapEx very well. We continue to get more output and continue to build in and improve systems and processes in the CapEx that we are putting in place.

So how should I look, then, at the share repurchase in the context of that? It was fairly aggressive repurchase program so it might be that you do see some-- I mean there are two questions in this and we will see if you will answer one; which is you can see end of line of sight to the end of -- or renewed to a lower level of CapEx. And also, is there something that we should read into the opportunity you used to buy as much stock as you did in the first quarter?

I will start here, Howard. We, internally we, have leveraged targets that we feel real good about and we always look at those; we look at the organic growth platforms that we're working on and the likelihood and timing for those to hit. And we look at things like Formax to see if we might have an opportunity to bolt something on or expand our portfolio. While we go through that process, and again, it is not an annual process, it is really ongoing, then we look at how do we return to shareholders to maintain the leverage in the range we're happy with. Share buyback, dividend or dividend increase are some of those ways that we return to shareholders.

I don't know if I necessarily think we were overly aggressive in the first quarter. I would expect us to be in the market. We'll be opportunistic when we can. But again, there's there is no fixed formula if you look at everything in our capital lens and we basically manage it that way.

That is fair. Thank you very much, Nick.

Thank you, Howard.

Robert Spingarn.

Good morning.

Good morning.

I wanted to ask about how your guidance holds in light of some of these negatives the pressure you have experienced in space and defense, the biz jet market is clearly week. And yet you've held your guidance and said that any incremental downside you'll offset in industrial and commercial. You sound fairly confident about that; where is the upside there?

Well first, just to point out that the downside on the space and defense in absolute dollars is not a big number, nor is it on other commercial aerial. And if you look at the range we provided with respect to commercial aerospace for the year being in the 8% to 10% range; in industrial 10% to 15% range, you know we are probably leaning towards the higher ends in those ranges which easily offset the shortfalls that we have mentioned earlier during the release.

I see. So the guidance accounts for that. Are there particular programs in commercial and industrial that support that higher range?

You know, it's really across-the-board. I would point out our acquisition in industrial, the Formax acquisition, those sales are performing very well. And wind is holding very stable as well which was in our forecast and our guidance. Commercial aerospace, we've noted some of the legacy that are dropping off, but there is some upside with narrow-body rates going up, a little bump on the 787 and we should see positive forecast in that market.

Okay and just a final question, a little detail on the defense side. How should we think about Eurofighter and F-35? Are those progressing in the same direction? Is one maybe offsetting some pressure from the other?

Well so, the big three programs for us in the space and defense segment are the V22, the F-35 and the A400M. Eurofighter has trended down, whereas on our growth programs and the big ones, the V22 has held well. The A400M is growing, even given the supply-chain challenges; it is still providing growth this year as is the F-35.

Thank you very much.

You are welcome.

David Strauss, UBS

Good morning, thanks for taking the question.

Good morning.

Good morning. The release highlighted startup costs at some of your new facilities. Wayne could you quantify the impact there and where those costs go from here? They trend down from here and how big of an impact that just was in Q1.

So I won't give you specifics, but in terms of, if you look at our depreciation and amortization, versus 2015, it is up about $4 million. So, you start the depreciation and you start to hire the labor and the people to run the equipment and that, of itself, it is not a huge number. You have to have them there running, in terms of training, and getting them going and then you are running the lines and are really not developing. You are going through the qualification process.

So we're not going to get you too specific, but you sum all of those up and it's just, we've had those throughout the past few years, we periodically have them. It's enough that we can absorb it, generally speaking, but, when you go to compare the first quarter of 2015, we didn't have any of those and it gets to be a tough comparison.

Okay. Biz jet Regional was down 1 the first quarter; I think your forecast for the year for that part of commercial was up mid-single digits. Is that still in place or was Q1 in line with what you were anticipating?

Q1 was maybe a little bit light; I suppose we are probably not ready, quite, to give up on our guidance for the year in that area. Again, if you look at Gulfstream and Bombardier and Embraer and Doso and all of the easily identifiable customers, those are about where we think within other commercial aeros, always that is the hardest part to identify and that is really where we are down. Some of it, to be honest, could just be how we don't know exactly where the sales ended up last year as opposed to this year; but we're not quite ready to give up on it yet.

Okay. Last one, the A330neo, is your content on neo much different than CO on the A330?

Our content on the legacy 330 is about $900,000 per ship set. That program launches, the first derivative launches the end of next year and the second one early in 2018 and we expect to have higher content on that, but, keep in mind, we're still working on packages and since it's only an engine the sell refresh, it will be somewhat limited.

Right. Okay. Thank you.

Thank you, David.

Ron Epstein

Good morning. Just a bigger picture question, when Alcoa reported their earnings last week they highlighted that the pricing in aerospace was a source of pressure for them. When you guys think about your longer-term contracts, are there milestones, as outsiders we should keep an eye on or in terms of price step downs, so on and so forth? I mean typically, when you do these contracts, how should we think about it?

So there's not one formula, as you can imagine, for all customers; so they vary with respect to indexes, timing and volume. I would tell you there are certain cases where there are volume levels; as we achieve certain productivity and leverage on that increased volume, we share some of that. But it's really impossible to give you any formula where you could see that. We don't expect our margins to decline over time because of those.

Maybe just as a follow on to that question. When you think about a big customer like a Boeing or an Airbus, is it structured like it is for some suppliers where you have a master contract or is it a bunch of little contracts?

Again it depends on the program, but it varies. We have got master contracts that cover multiple programs and then we have individual.

At the pricing is set and flow down to the subcontractors.

Okay. And then one last one. When you mentioned that we could fill the hole in defense with industrial, what specifically are you talking about? Is it wind or what?

It is the combination of Formax and some of the nonwoven reinforcements as well as the other industrial, automotive, winter sports, rack, and wind.

Okay. Thank you.

Thank you.

Chris Kapsch, BB&T Capital Markets

Good morning. It's Chris Kapsch with BB&T Capital Markets. Nick, when you were at our industrial's conference in Florida last month, one of the messaging points was for your comfort level with your five-year targets as laid out early last year. The question is, like with first quarter here in the books and you reaffirming guidance, assuming that there is nothing about the macro that changes that conviction, so I wanted to confirm that. But also, just if you could comment, there was the one thing you said that maybe you would be least confident about would be the CapEx. I'm just wondering if you could elaborate a little bit more on what sort of new growth programs that might actually lead to increasing your CapEx and just how you see the cash for the cumulative free cash flow over the next five years at this juncture.

Yes, Chris. So, our 2020 vision we still feel really very good. We are in the process of rolling up our strategic plan this year and have seen the top-line numbers and there's nothing there that leads us to believe it's going to be anything less. My comment on CapEx was my optimistic nature that we are going to go out and win new programs.

What they may be, I am sure there will be more engine derivatives, maybe an A380. I am sure there will be some development work for potentially the next level of derivative on the 320, the 737 and possibly even a middle-of-the-market aircraft. Which, as you know, you have to work on those programs 5 to 10 years before even the first aircraft is built and even before delivered to get a position in his programs.

So we don't have clear line of sight on what those are today. Other than we are working with our customers on advanced technology, advanced solutions, so that we can provide a lighter material to provide an even better solution going forward.

Okay, I appreciate the additional color. And just a follow-up, I guess you can't get away or have a conference call without having at least one question on incremental margins. (laughter) Right. So the question I guess is twofold; one is how the A350 plays into that and, as that program continues to ramp and becomes a bigger part of the mix, I am just wondering if that would make it sort of easier or more challenging to achieve your targeted incrementals on the A350 program specifically. And then also, with your comments on the parts business being sort of more competitive, same question, how does that play in to the incremental outlook looking forward? Thanks.

So, first we haven't given up or lost sight of our 25% op income and we still are holding that for the year. Okay? Now, if you look quarter to quarter, it does tend to be lumpy. As Wayne mentioned, we had a step up in depreciation, almost $4 million. You have to keep in mind, we rolled in the Formax acquisition which is currently going through the integration and we've got some start up and some conversion costs going on in there.

So obviously, the first-quarter leverage was not what we would expect over the long term. Having said that, the A350 is basic material running through the same assets through the same facilities at higher rates and, per our plans, higher volumes and higher speeds. So that will help us drive our leverage going forward. And similarly we commented on the parts business, that is program specific and part specific and we just continue to work on efficiencies and productivity to make sure we get our op income and leverage back up in that business as well.

Great. On the A350, what juncture in the program's ramp do you think where it becomes big enough where it starts to move the needle on the incrementals? I understand there is transitory cost right now with the recent capacity adds and the Formax integration like you mentioned. But is it sort of a second half of 2016 kind of phenomenon or more like 2017? Thanks.

While I see it more as just a gradual slope. Again, we have been ramping up; keep in mind we are at five-plus per month, which is halfway up to our 2018 run rate. So we have been seeing incremental improvement on A350; at the same time we are bringing in a lot of new other programs and materials throughout the business. So again, the 25%, we feel good about that. We look at it on a quarterly basis, but we don't get excited when we have one down and one up.

Got it. Okay thanks Nick, thanks guys.

Ken Herbert, Canaccord Genuity

Good morning.

Good morning, Ken.

Nick or Wayne, I was wondering if you could provide any more granularity on the growth you saw in the quarter, the 50% from the new programs, you obviously called out the A350. But can you just mention how much growth in that was maybe 787 now that you are up to 12 versus probably 10 last year and if you are seeing much.--

On the new programs, it is fairly straightforward; it was primarily driven by the A350 and the A320 NEO. 737 Max is a bit early and it is very small, at this point in time; and the 787 ramping up, it had a minimal impact, so just think of the bulk of the new-program growth were those two from Airbus.

Okay. That's helpful. I know it is obviously a small, on an absolute level, but does Formax, when does that get to Company margins or does it ever get there and become a positive contributor to the margins?

So those are different questions. It is always going to be a positive contributor, but when you're in the reinforcements business, it's a lot less capital employed, but it is also a lower margin percent, just like the reinforcements business we also have today, it was a significant amount of. And so, its value add is relatively low compared to the material costs that are going through it, so you're always going to see it as a lower-margin percentage

Now, having said that, once it has been here for a year and you are comparing year over year, on an incremental basis it will look fine; but when you are adding it all in the first year, it is lower margin percent than our total average of the Company, but not any different than our existing reinforcement business.

Okay and then as a quick follow-up on that, as you move forward with this with Formax, is there much opportunity to continue to expand margins or is it really volume driven?

So we always believe there is opportunities to expand and volume will help. And so, we will continue to work it then and volume will help. A big opportunity for us there is the industrial business is primarily what they have today, but the real big growth opportunity for us is how successful we can be in aerospace and we see a number of opportunities up for that. Those are long-term; it will take a while to develop, but that is where the big home run will occur.

Okay. Thank you very much.

Mike Sison, KeyBanc Capital Markets

Nice quarter.

Thanks.

In terms of space and defense, the rotorcraft blade business has been weak for a couple of years here. Is there any secular changes? Are they still using carbon fiber blades? Any issue there or is it kind of a cyclical issue with the oil markets?

Well, certainly on the commercial side, I think it's cyclical and it's following what's going on with the oil and gas industry, not much doubt there. With respect to composites and the penetration in the space and defense sector, I see no changes. We see no changes and actually we have some great new programs, things like the CH-53K that are still in development which will translate into nice dollars as it ramps up. And then, just some differences in ordering patterns and blade replacements primarily on the Black Hawk impacting us in Q1 2016.

Okay. Great. And then, for the A350, you mentioned you are supporting the to 8 to 10 by 2018 and that you are heading towards 7, at some point, your order pattern. Does that affect you this year or is that something that affects you in 2017, heading to 7?

No, that affects us this year. We are in that process as we speak.

Okay. Great. And then, final, longer-term what do you think needs to happen to maybe get space and defense? Or maybe just your view, is space and defense an area that you think can grow longer-term?

Absolutely. We have not changed our vision. Again, if you remember, we basically felt comfortable at mid-single-digits. Granted, we got some pressure in the early years, but we still look at the programs we are on; we look at the growth programs with the F-35 and the A400M being strong as well as some other new rotorcraft programs that are coming online. We certainly like the business and see it as single-digit growth going forward, Mike.

Great. Thank you.

Thank you.

Richard Safran.

Good morning.

Good morning.

I just have one quick question for you. Nick, on your comment on stable wind, I noticed that Vestas orders are up a little bit, so I just want to get your perspective. Is there something in the mix that's causing you to be stable or is there some incremental upside here if Vesta's orders continue to improve?

I think you are spot on that Vestas' performance is very good and their orders are strong, backlog is high. We continue to position ourselves with them and, basically, it is a mix issue. We're virtually on every blade that Vestas makes; some have more content than others. And depending on the size and the class and where it is being shipped, in Asia-Pacific, Europe or in the US, there are differences there. So, in essence, that's what you are seeing, Richard, is a mix impact.

Okay Nick, thanks for the help.

Thank you.

Ron Epstein

I just wanted a quick follow on. There has been a lot of discussion, at least in analyst circles, that we could see the 777 dip down to five per month in the 2018, 2019 timeframe. How do you think about it? How should we think about it and what kind of operational headwind does that present for you guys?

Well, if you look at the 330 and what is going there as they transition to the neo, I would expect something different. There will be a transition going on, but you have to keep in mind, as they are ramping down on the legacy, they're going to be ramping up on the new one and fill in the supply chain with new product and material. So, although there could be a dip, we have $1 million on the legacy, so if it drops down 1 per month, that's pretty much a run rate of $12 million impact to the year provided they are not ramping up the new derivative, which would not be the case.

But, from an operational point of view, it is a broad range of products that we sell and so it's not a huge carbon fiber intensive for us and so it's capacity spread across a number of items, so it is capacity spread across a number of items, so it's not a huge mover.

Thank you.

Thanks.

There are no further questions at this time. Please continue.

This concludes today's call. Thank you for your participation. You may now disconnect.