Hexcel Corp (HXL) 2016 Q3 法說會逐字稿

Good day and welcome to the Hexcel Corporation 2016 third-quarter earnings conference. 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. Wayne Pensky. Please go ahead.

Thank you. Good morning everyone. Welcome to Hexcel Corporation's third-quarter 2016 earnings conference call on October 20, 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 and 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 press release.

Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material that cannot be recorded or rebroadcast without our expressed 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 third-quarter 2016 results detailed in our press release issued yesterday. 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 had a strong third quarter with sales of $500 million, 12% above the third 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 third-quarter operating income of $89 million with a solid operating income margin of 17.8%. Our adjusted diluted EPS of $0.65 was 18% better than the third quarter of 2015.

For the first nine months of the year, revenues are up about 9% to $1.520 billion as we remain on pace to achieve our first $2 billion sales year. Our adjusted diluted EPS for the first nine months is $1.94, 10% better than last year's first period.

Besides the strong commercial aerospace sales growth and an 18% increase in adjusted diluted EPS this quarter, we also did a great job of generating cash. After generating $76 million of free cash flow this quarter, we are now at a positive $55 million of free cash flow for the first nine months of 2016. Wayne will provide more information on cash.

Now, let me briefly provide more detail 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 our margin percentages improve.

Commercial aerospace now accounts for 72% of our total sales and our third-quarter sales increased over 15% versus 2015. Total revenue from new Airbus and Boeing programs, which include the 787, A350, A320neo and 737 MAX, increased by about 40% in the quarter as compared to last year, driven by the A350.

Airbus and Boeing sales for legacy programs declined modestly in the quarter as compared to Q3 2015. Sales to other commercial aerospace, which includes regional and business aircraft, were about 20% higher compared to last year's weak third quarter. Sales for the first nine months of 2016 were just under the comparable period in 2015. Quarterly sales for this sub-market have been fairly stable in total for 2016, unlike last year.

Space and defense sales for the quarter were almost $82 million, up 5.4% as compared to the third quarter of last year. Rotorcraft, which make up just over half of space and defense sales, were up modestly in the quarter. For the year-to-date, space and defense sales are down 4.7% as compared to 2015's results for the first nine months, driven by a 10% decline in rotorcraft sales.

In industrial markets, sales for the third quarter were $58 million, up 3.2% year-over-year. Wind energy sales were up modestly for the quarter and for the first nine months of the year. For industrial as a whole, we saw sales increase by almost 10% for the first nine months of the year with our Formax acquisition driving the growth, partially offset by weakness in recreation and other industrial markets.

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

Thanks Nick. For the quarter, gross margin was 27.1%, and for the first nine months of the year, gross margin was 28.2%. These strong results include a start up execution of several new production lines for additional capacity to support our forecasted growth. Exchange rates had a nominal impact on the third-quarter gross margin as compared to the third quarter of 2015.

For the quarter, selling, general and administrative expense of $35 million was slightly lower than the third quarter of 2015. As you recall, the third quarter of 2015 was our peak spend for the implementation of our new ERP systems and we did benefit from less system spend this quarter as compared to last year.

Research and technology expenses were nearly $1 million higher than last year's third quarter, and for the first nine months of the year, these expenses are now 4% more than the comparable 2015 period and 7% higher in constant currency.

I would remind you that the timing of our research and technology spend can be lumpy, and we expect the fourth quarter to be the largest quarter for the year, driven by development initiatives.

For the quarter, operating income as a percentage of sales was 17.8% as compared to 17.4% in 2015. And for the first nine months, our operating income is $273 million, or 18% of sales. Exchange rates contribute about 20 basis points to 2016's third-quarter operating income percentage, and 40 basis points to our year-to-date performance as compared to the respective 2015 periods.

Depreciation and amortization continued on our planned ramp with the expense for the first nine months of 2016 about $14 million higher in constant currency than the comparable 2015 period. In the quarter, we recognized a net benefit of $6.6 million, or $0.07 per diluted share, from the release of reserves for uncertain tax positions. As these benefits relate to matters that are several years old, we have excluded the $0.07 from our adjusted EPS. This item represents the only difference between GAAP EPS and adjusted EPS this quarter.

Excluding the $6.6 million benefit, the effective tax rate for the quarter was 27.2% as compared to last year's third-quarter rate of 28.2% as both periods benefit from favorable tax return and provision adjustments. This quarter's adjusted EPS includes about $0.03 from these adjustments as compared to a $0.02 benefit in the third quarter of 2015. If we exclude all of the discrete items, our year-to-date tax rate is about 30.5%, in line with our full-year guidance excluding the discrete items.

For the year-to-date, free cash flow was the source of $55 million compared to the use of $85 million in the 2015 period, so a $140 million improvement versus last year. Our working capital is seasonal as we tend to use cash in the first half and generate cash in the second half. So our working capital is a $72 million usage in the first half of the year, versus a source of $34 million in the third quarter. So for the year-to-date, the usage is $38 million. That compares to working capital usage of $117 million for the first nine months of 2015 -- again, a $79 million improvement over last year.

Our account receivable collections continue to be very good. Inventory has dropped nearly $18 million this quarter and cash used for inventories is only $5 million for the first nine months of the year. While there are still areas to improve on, we are quite pleased with our progress.

Cash provided by operating activities was $287 million compared to $164 million in the first nine months of 2015. If you took our cash from operating activities and deducted maintenance CapEx, that is excluded our CapEx for capacity expansion to support our secured growth, and our year-to-date adjusted free cash flow conversion rate is over 125%.

Cash used for all capital expenditures was $232 million in the first nine months compared to $249 million in the 2015 period.

During the quarter, we repurchased $30 million of shares under our authorized share repurchase program, and we have $119 million remaining under the program. Additionally, as announced last night, our Board of Directors declared an $0.11 quarterly dividend to all shareholders of record as of November 2.

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

Thanks Wayne. Our strong performance year-to-date demonstrates we are executing on plan, and we are on track for another record year. We have increased our adjusted earnings guidance for the third quarter's $0.03 tax benefit, so the range is now at $2.52 to $2.58 per share.

Our sales in total for the year remain on track with our initial guidance. Accordingly, we are simply narrowing the range on full-year sales guidance to $2.0 billion to $2.03 billion. With the strong improvement in our free cash flow, we now expect to be at the high end of our guidance for both free cash flow of $20 million to $60 million, and CapEx up $280 million to $320 million.

Looking ahead, I would like to let you know that we expect to issue our 2017 outlook on December 13, and we look forward to discussing it with you at that time.

Also, I would be remiss if I didn't take a moment to talk about the extension and expansion of our agreements with Airbus that we announced last week. Our contract for the primary structure of the A350 was extended from 2028 through 2030. Additionally, we amended our contract for virtually all other products with the Airbus group, including all commercial aircraft, rotorcraft, military programs and aeron launch vehicles. So we now are covered for the entire A-320 and A330 families and derivatives. This secures the business through 2030.

Hexcel is proud to be a key partner to Airbus and we look forward to further enhancing our strong, long-term relationship as we support the full Airbus suite of products. We believe these are mutually beneficial agreements that are excellent for Hexcel and our commitment of delivering strong returns to our shareholders.

We would now be happy to take your questions.

(Operator Instructions). Myles Walton, Deutsche Bank.

Thanks. Good morning and good numbers. Can we start with the cash flow, which is terrific year-to-date and maybe why the lack of more upside in the full year? Obviously, fourth quarter is usually seasonal. Is there anything in the working capital that looks maybe closer to a neutral in the fourth quarter versus the source it has historically been that you can point us to?

We certainly hope that we are being a little bit conservative. Having said that, you know the seasonality we have, and certainly the usage in the first half, and especially the first quarter.

I'd also point out that we've invested in system improvements and process improvements to help us manage our working capital day-to-day versus big end of month or quarter swings. So we've made a lot of those improvements in the third quarter. And for example, areas like Accounts Receivable, we ended September extremely strong, and we would be hard-pressed to improve much there. Our challenge will be to hold that for the balance of the year. And at the same time, we've got some opportunity to pull some CapEx in for efficiency, and we are probably going to err towards the higher end of our CapEx range. So, all included, we are happy with the progress and we are certainly not going to give up, and maybe there is a little conservatism in there.

Okay. And congratulations on the move with the contractor for Airbus. Is there anything to read into as it relates to pricing, or other aspects of the contract, that we have to consider in terms of the extension of timing?

We've had contracts with Airbus, long-term contracts, and as with most of our contracts and how we deal with our customers, we have continual cost reduction initiatives built into those contracts where we drive cost out and we share part of that with our customers. These contracts are no different. The great thing about these are the continuation obviously of our primary position on the A350, and the (technical difficulty) 1000 as well as the legacy programs where we actually added components and pieces to the agreement to the tune of about 10% additional business within that contract. So securing both of those contracts up through 2030 with very reasonable and acceptable terms from our perspective just excites us on our path forward.

Okay. And Wayne, the adjusted increment margins if you adjusted for Formax, 25%, 24% something like that, is that about right for incrementals?

That is correct.

Okay. Thanks.

Gautam Khanna, Cowen and Company.

Thanks. Good morning. You mentioned in December you're going to give us 2017 guidance. I was wondering if you had any plans to update the 2020 guidance. And if so, kind of what are the variances you see already to what you previously put out there?

Yes, so we are going to release guidance, and we are actually going to have an investor day on that same date in New York City. We will provide guidance and we'll also update our longer-term view.

I would point out that there are some headwinds that we will address and quantify in much more detail with respect to foreign exchange quite different today versus where it was when we provided that vision, as well as space and defense looks a little different, specifically rotorcraft. And then there's even some wide-body reductions, as I'm sure you are well aware of. So, we will summarize that and put a good package together for December.

Okay. And maybe could you comment? You did say in your prepared remarks that the biz jet regional stuff was a compare issue, kind of it was relatively stable quarter-to-quarter, but year-over-year would be up [20] was just a function of dropping off last year in Q3.

Yes, last year was very lumpy. The first half of the year was extremely strong and the second half was extremely weak. So if you just look at the average quarterly sales last year compared to this year, it's pretty much comparable, maybe just a little different.

Can you talk a little bit about your visibility in that part of the end market? Are you seeing any incremental pressure as you look at your order book in Q4 and Q1?

I would say clearly Gulfstream, Bombardier and Embraer are three of the biggest, and there is no specific program that really drives that segment. I would tell you Gulfstream has been particularly strong in the third quarter but, going forward, there's really nothing that jumps out that really leads us to believe it will be much different.

And last one, A350 inventories, what are you seeing in the supply chain to characterize any destocking or over-stocking, or how do you feel about the balances of the material in the supply chain?

We -- obviously, it's a huge program for us, and we are very vested in the A350 and we stay very close and aligned. So, as we've said before, we are producing at a rate of about seven per month. We track Airbus' build rate. We are excited with the fact that they've delivered 26 to date and actually 14 aircraft in Q3. So clearly they are ramping up and better aligning the output with the delivery cycle. And I'm certainly a fan and a supporter for them to continue to ramp up and try to get to or at least close to their objective to hit 50 for the year.

So we don't -- we've got close to 50 ship-to locations, and we ship about six months in advance. So it's a pretty complex supply chain. There are some that are a little low, some that are a little high, some that are right on. But in total, if we do our top level checks and look at the build rate, we are pretty much aligned.

Thanks a lot, Nick.

Howard Rubel, Jefferies.

Thank you very much. Nick, you spent a bunch of time addressing CapEx. Is there any way for you to provide us with some insights into how you have been able to improve the productivity of the capital as you invest it?

Well, that's a big question for a big investment. As you know, we are going to be pushing the high end. In the last couple of years, we've had high CapEx.

And this has been really an unprecedented time period for Hexcel. If you look at the new lines we've brought on, the new plants and the building expansions through this year, it's clearly an unprecedented time for us with respect to bringing new lines on.

I can tell you we've enhanced our team where we manage the projects, where we track projects, where we manage the cash, where we manage the schedules, and the team continues to perform extremely well. I'm also very excited that we are not only delivering the programs on cost and on budget, but at or above our expected throughput.

So, from a perspective of balancing our cash and our capital investment, we are constantly looking at our new throughput rates and putting that into our equation, Howard, because, as you know, a continuous flow operation, you want those lines running full, and when you are bringing on new lines, the objective is to fill them up as quick as you can before you bring on the next tranche.

So I think I'm excited with our performance to date, and I'm even more excited with the opportunities going forward. We've got more technology. We see more data with online inspection from a throughput, an uptime, a scrap and overall productivity for line. So we are certainly not done driving improvements in that area as well.

Okay. I guess that sort of goes to the point you made that you are, what, excluding maintenance CapEx, you can talk about a cash conversion ratio that's -- how shall I say it -- a different way of looking at cash conversion and maybe more appropriate. Is that the point you were trying to stress?

Exactly. We look at our maintenance capital in the $50 million to $60 million per year range, and basically the balance, or $250-plus million, is to put in capacity for secured programs where we have long-term contracts. So from our perspective, that's really our acquisition, our organic acquisition strategy, where we are going to grow. And I think we've demonstrated over the years we're very good at it, it's very low risk, and when you are replicating assets, you get a nice volume leverage within our plants to continue to expand our margins, which is certainly our objective.

Just to stay on something else you talked about is new products. And I think, in the Q, you addressed what appears to be new engineering product startups. I know the market has become more competitive, but how are you going about battling the competition?

And then second, can you address some of the new programs that you've captured?

I'd rather hold off on the new programs, because I don't want to steal our thunder for December. We are going to show some of them which we are really excited about that go in our engineered core business, and on some of the new platforms like the 737 MAX.

I will tell you our engineered products business, we've had some big mature programs come out, like the C-17, and we're bringing in some new programs for like the 777X and the MAX as well as other helicopter rotorcraft blades. It is more competitive. It is more global. But having said that, with our partnership in Malaysia, we are in a great position to basically position ourselves for the lower value or lower technology products into Malaysia and keeping the higher technical products into Kent and into our US-based engineered products business. So yes, it's more competitive, yes, there is some learning curve there, but we are very happy at a 12-plus% op income. The return on invested capital continues to be fantastic.

And then last, Wayne, I think you talk about a 2017 debt issuance, and you have some form of a hedge. How do we think about what that will do to interest expense? You brought it up in the Q, so I figured 2017 is now -- I can talk about it or you can talk about it.

Absolutely. So, you know, we've talked a lot about our debt to EBITDA ratio and trying to get it up, and we've slowly and steadily increased it. We ended the quarter about 1.5 times. As we continue to try to increase that ratio, and as earnings grow, that just means we are going to be borrowing more money. And so what that references to, we've entered into a treasury lock for $150 million as part of the first step in the process to lock in rates for next year. So as we look out to our next opportunity to increase our debt, we've got part of those rates already hedged in. So, you will always see us increasing our debt. The issue will be how are we going to use proceeds. And proceeds, you know, we have always been fairly clear. First is always to fund our organic growth. Obviously, we can do that on our own. Second will be M&A, which you may or may not be able to control or be actionable, and third will be return it to shareholders. So we will look at those three in the combination together and we'll continue to increase our debt up.

So just to close the loop on this, if you did just the $150 million, it may be kind of in the $4 million-ish to $6 million increase in your cost of money versus what you have now?

Yes. Obviously, it depends on what you do with that money and whether you get an appropriate return to cover those interest costs.

Okay. Thank you.

We are hoping we would do that.

Thanks Howard.

Rob Spingarn, Credit Suisse.

Good morning. So, just on the CapEx at the higher end of the range, is that an increase from earlier expected spending? Did you bring next year spending forward? How do we think about that?

Our original guidance was $280 million to $320 million, so it's in the range. But as we get into the end of the year, we like some flexibility so that we can balance our workload and our resources, and in some cases some supplier end-of-the-year discounts. So really it's right in line with what we had expected and it goes into our total CapEx plan. It's really not a material change.

So maybe a function, the working capital came in better and freed up some cash, and so you take advantage of those discounts and timing?

I would say independent of our working cash capital performance, we probably would've done the same thing.

Okay. And then just a couple of questions on the revenue outlook. I know you're going to go long-term when we see you in December, but just the range that you're contemplating for the fourth quarter here by virtue of the full-year guidance, I think it's something like 2% growth in the quarter up to the low teens depending on what the end number is. What are some of the levers there? And specifically, can you talk a little bit about the organic decline in industrial and how that trends forward and also what's driving space and defense?

Okay. So, that's a number of different questions. So, in terms of if you look at the midpoint of our guidance, that puts the fourth-quarter sales just under what the third quarter came in at. And if you look at it, we have, in terms of now when you go to compare that to the prior year, the fourth quarter of last year was a little bit higher than the third quarter of last year. So, our comps, for example, in space and defense, the comparative will be a little bit tougher. And so while we had growth this year, we could do the same space and defense sales in the fourth quarter and there won't be growth when you look at it year-over-year versus the fourth quarter. So, we've got a little bit tougher comp comparison.

On the industrial side, I wouldn't say anything too in particular other than, year-end, you always have a little bit of people deciding whether to move stuff out into the following year or not. So, it doesn't take much to move those sales.

And then in commercial aerospace, we are again thinking of a number that is sort of in the same range as what we did in the third quarter.

Okay. And then on the space and defense side, how is V-22 trending for you? Because, if I think about what Textron said earlier this morning, the number that they did in the quarter was six, but I don't know that's a sustainable number based on the US and Japanese rates that we're going to have.

Our V-22 sales have actually held pretty steady all year, and are in line with what we expected. There hasn't been for us any surprises.

So that's steady going forward?

Yes. I won't make any commitments on going forward just now. But for now, it has been holding.

Okay. And then just again, the organic decline in industrial when you take out the acquisition (technical difficulty)

Yes, it's not a huge number, but it's across -- well, it's not any one particular item. If you look at our recreation business and the all other, which is really to distributors and items, not necessarily where it's going to. The automotive part has been held up fine. It's been the recreation (multiple speakers)

And wind as well.

And wind has also held up fine as well.

Okay. And then last question, any more color on content on Max?

You know, we probably will give guidance on both the 330neo and the 737 MAX in December since they are going to enter service next year. It's still a little early on the 777X, so I don't know yet if we will give that, but it's still a little early today.

Okay, thank you.

Michael Sison, KeyBanc.

Nice quarter, almost as nice as the Indians win. So Nick, when you think about the new contract with Airbus, can you maybe -- and I think you highlighted some efforts, but what opportunities within that does it give you to grow the business there? Will it give you an edge in certain parts or primary parts longer-term? And is there anything on the R&D front that you are working on that -- for them that really helps you out longer-term in terms of growth?

Okay. So, I'll try to capture all the responses there. If I don't, Michael, come back to me. So, first off, our focus with Airbus is continue to provide perfect delivery, perfect quality every time. So it's operational execution, and that is paramount, especially as we are ramping up.

The other thing is we are constantly working innovation and R&T collaboration on the next new opportunity, the next new opportunity to convert a heavier part to a lighter part, to help them achieve their weight objectives, to help them achieve their noise and sound and environmental objectives. So, it's a heavy technology push.

You know, the contracts that we've amended, they are virtually equal in size. And by 2020, they will be over $1 billion of annual revenue. So it gives us an opportunity to take advantage of the volume and drive continued efficiency and productivity while we deliver what they need, as well as deliver what our shareholders expect.

Okay, great. And then as a quick follow-up, you talked about some factors that may influence your outlook through to 2020. I know you are going to give us an update in December. Can you maybe give us your thoughts on clearly folks are worried about the cycle, and given where your stock is at and your strong performance this year, it seems to be weighing in. If you think about where the aerospace cycle is, overall deliveries, how much would that influence your growth potential, if at all, given where we are at?

I first look at a couple of things. One, I look at air traffic and whether it's going down, going up, or it's trending towards the 25,000 historical, which, from what I've seen, it is. So air passenger travel continues to grow.

I then look at the backlog, and the backlog, I believe the last time I looked, and Wayne will correct me, it's over 12,000 aircraft or close to nine years of production.

It's true the book-to-bill so far this year are below 1. That didn't surprise me as when you have backlogs as big as it is, at some point in time, burning some of that off is inevitable. Having said that, the other thing the commercial aerospace market is going through now is really a transformation with new aircraft coming online, new derivatives, and new engines and new neos and Maxes coming online. And those transitions are not simple. They are very complex supply chains. And in some cases, rates come down a little bit as others ramp up.

But overall, I like the position we're in. It's not only the rates that excite us, but we have the secular penetration where we've gained positions replacing heavier materials, and we have new opportunities to replace even more. So, I just feel good about the cycle. And again, our objective is to execute and continue to innovate, which I can tell you we're focused on and working on every day.

Great. Thank you.

David Strauss, UBS.

(technical difficulty) Can you hear me now? Sorry about that, technical difficulties. Good morning. I wanted to ask you about, on the wide-body side, you highlighted lower rates there on a g-forward basis. Are you actually seeing any of that impact yet in your numbers, specifically talking about A380 and 747 stepping down to lower rates?

So, we have started to see some of the A380, and that was expected, and we've included that into our full-year, and certainly will be included in our guidance for next year. 747 has been going down, so we've seen a little impact, but the strength and the other programs that are ramping up have more than offset them. Again, A330, if you remember, went from 10% to 6%, and now it's coming back up to 7%. So there's some puts and takes there. But we have seen the A380.

All right. Wayne, I guess a couple of questions for you. SG&A as a percent of sales, I think this is as low as we've ever seen it. Can you talk about kind of on a go-forward basis where that should be? And then thinking a little bit about 2017, are we looking at a similar step up in D&A in 2017 relative to what we've seen in 2016?

So, with respect to D&A, obviously we'll give guidance on actually both of your questions in December. But in general, yes. The answer is it will be going up. Whether it's exactly the same as this year or not we'll get to later, but it will be a double-digit million increase.

With respect to SG&A, our goal is to leverage SG&A as our sales grow, and we would expect some inflation in terms of how it increases. And that's our target.

Okay. And then the last one for me, can you just give us a currency update, hedging, where you stand relative to 2017? Thanks.

Sure, yes. We are probably, as of today, 70% to 75% hedged for 2017. We'll give specific numbers in December, but in general, the hedge rate for 2017 is better than the hedge rate for 2016. So FX will be a little tailwind.

Right, okay. A tailwind again, but probably not as big of a kind of incremental tailwind as what you saw in 2016, right?

Probably not, but we'll get specific in December.

All right. Thanks guys.

Ken Herbert, Canaccord.

Good morning. Nick and Wayne, I just wanted to dig into the gross margin a little bit. Can you quantify, in terms of your, say, output either in the quarter or year-to-date, what percent is coming from the new capacity you've added versus I guess what's been in place? And the nature of the question is really some of your comments earlier on, Wayne, when you highlighted some of the startup costs being a bit of a headwind to the gross margin. I am just trying to get a better sense as to how we should think about that from a size or impact standpoint.

That's a difficult question to answer. So let me start it this way. So if you look at the first quarter of last year when we didn't have any startups or anything like that, that's probably as good as you're going to get. So, if you look at it versus today, where we had a number of different lines start up during the course of the year and during the quarter, as you go through the process, you obviously start depreciation; you hire and train a workforce to run it; you go through the qualification process; and you're incurring all these costs without actually generating a whole lot of revenue. And then obviously, the lines aren't full day one because you have to ramp up because of the capacity requirement. So you add all those up, and in the grand scheme of things, it's any one thing is not huge, but we are down 1 or 2 points percentage in total from our peak, and maybe that's probably the best way to think about it.

Okay. That's helpful. And as you look at -- obviously as you're bringing the capacity online, for all those items you mentioned, has there been any part of these that -- obviously they're small individually, but as a collective, any aspects that have been either better than you expected or we are maybe seeing certainly a little better drop-down than you may have thought initially, or any areas where you are seeing maybe a little more headwind?

Again, overall, I think our performance has been very good, and nothing stands out, certainly nothing on the downside, just incremental opportunity to continue to drive productivity and increase throughput. So, we have pretty much executed as we had hoped or better.

Okay. And then, as you've typically said, I imagine volume going forward, clearly the biggest driver when you think about absorption from this standpoint. Is that still the right way to think about it?

Yes. That's correct. As Nick mentioned, we are always trying to get more throughput and increase better yields, etc. And we will always push for that. But volume always helps.

And then just finally, have you seen anything in the last quarter or two relative to material costs, or anything else that's moved one way or the other against you?

Not really. Remember, most of our materials are under long-term agreements as well. They line up with our long-term agreements with our customers. The one item for us that's always up-and-down is the acrylic nitro, which is the raw ingredient. But that's to make carbon fiber I should say. But that's actually been fairly stable the last few quarters. And in absolute dollars, it's not that big.

Okay, great. One final clarification. You mentioned on the new Airbus contracts I think you said, Nick, 10% on the sort of non-primary A350 contract is -- was that sort of incremental share gain or content you would want as part of that contract? I just want to make sure I capture that correctly.

Some of that is items that were not included with the original contract, and there are some items in there that are incremental where parts have been converted.

Okay, great. Thank you very much. Nice quarter.

Noah Poponak, Goldman Sachs.

Good morning. This is [Tais Kohai] on for Noah. You reported modestly higher year-on-year sales in helicopters. Could you provide color on commercial and defense platform build compared to the last quarter's? Some companies have different exposures to NG, still refer to the trading business environment, so if you provide any color here, it would be great.

Just to make sure I understand the question, it's regarding helicopters. We are up a little bit year-over-year but, again, if you go back to last year, the first half of the year even for helicopters was strong and the second half was weak. And if you look for the first three quarters of this year, I'll say it's a little bit relatively stable, and we've sort of even for the last four quarters have run kind of at the same level. So, it's a little above the third quarter of last year, much slower than the first half of last year, but it's been about the same level for the last three or four quarters.

And I would just add, if you look at Sikorsky, Airbus or AgustaWestland, none of them stand out. It's pretty much across the board with respect to the movement.

And remember, commercial is probably (multiple speakers)

Do you have any difference from commercial to defense platforms?

Not really. Commercial now is 15% of the total rotorcraft, so this is still mostly about military.

Okay. And then another question. If you exclude the A350, what would the aerospace business growth have been this quarter?

Small. Just to be clear, most of the growth net came from the A350, a little bit from the A320neo, but those are the two primary reasons for the growth.

Okay, perfect. Thank you.

Ron Epstein, Bank of America Merrill Lynch.

It's actually Kristine Liwag calling in for Ron. Nick, I just wanted to get a little bit of a better understanding for the amendment of your Airbus contracts. Can you provide a little bit more color on why the contracts were amended now? Is this something that Airbus approached you to amend, or is this something that you approached Airbus to change?

I'd like to think it was mutual. And you can imagine we are constantly working new programs and new technologies with Airbus. This -- it just is the culmination of years and years of work. And with new programs coming into play the neos and the -1000, it's just a matter of timing. So, you know, a lot of these positions, most of these positions are sole-source and have security of supply. It's good for our customers. It's good for us. It's good for our supply base. And it helps ups optimize our supply chain.

So if you're asking why did we announce last week, it's a function of when I had an opportunity to go over and sign it with Airbus, which was a few days before that. Nothing other than timing and working through very complex and detailed contracts.

And then can you remind us? Are your Boeing contracts similarly structured to your Airbus contracts in that there is a master one and there are different program ones? And also are there any milestones that we should watch in the next few years with regard to your contracts with Boeing?

So, I wouldn't say any of our contracts are the same; they are all unique. And Boeing is no different. So, I don't want to get specifically, but we have multiple contracts with Boeing that we continue to work and we will continue to work.

And are there any contract expirations that we should watch in the near term?

So, the Boeing contracts clearly are shorter in duration than the Airbus ones, but there's nothing -- if you are thinking of milestones, there's no particular milestone that we need to worry about.

Great. Thank you.

With there being no further questions, that concludes today's call. Thank you for your participation. You may now disconnect.