Hexcel Corp (HXL) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Hexcel Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Patrick Winterlich, the Chief Financial Officer. Sir, you may begin.

Good morning, everyone. Welcome to Hexcel Corporation's First Quarter 2018 Earnings Conference Call.

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 news release.

A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It 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 Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our first quarter 2018 results detailed in our news release issued yesterday.

Now let me turn the call over to Nick.

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

2018 is off to a strong start, as we delivered quarterly revenue of $540 million, an increase of 12.8% year-over-year, with solid growth across our 3 markets. This represents a record for Hexcel quarterly sales -- first quarter sales.

Adjusted EPS increased 13.3% year-over-year to $0.68. Positive free cash flow generation of $3 million in the first quarter of 2018 is particularly noteworthy, as the business typically requires cash investment during the first quarter of the year. These results reinforce our previously communicated transition to a cash generation cycle.

I will now share some insight into each of our markets, and then Patrick will provide financial details for the quarter. As usual, year-over-year comparisons will be expressed in constant currency.

Beginning with Commercial Aerospace. Macro trends remained strong, including air traffic, continued order flow for commercial aircraft globally, and increasing production rates by our 2 largest customers. We continue to benefit from the ramping of the A350, A320neo and 737MAX production levels, with sales for all 3 of these programs up strongly in the first quarter of 2018 compared to the prior year period.

Legacy programs are down about 23% year-over-year, a little less than expected, due to the slightly slower transition from the A320 legacy aircraft to the A320neo. We believe the previously highlighted supply chain adjustments for the wide-body legacy programs are now generally behind us.

We are encouraged by the trend of increasing build rates for many of our commercial key programs, and I want to take a moment to reiterate some of them.

For wide-body aircraft, the A350 is increasing to 10 planes per month in 2018 and the 787 is increasing to 14 per month early in 2019. For narrowbody aircraft, the 737MAX is increasing to 52 per month, with public comments that the rate may be increased further, while the A320 production rate was recently raised to 63 per year -- per month by mid-2019.

The regional business jet market continues to strengthen, with year-over-year growth in excess of 30%. Particularly strong growth is occurring in business jets, and it represents a number of different platforms, which continues a trend that began late last year.

Lastly, I would also note that there have been some well-publicized supply chain constraints in the Commercial Aerospace sector as a whole, particularly with narrowbody platforms. These issues have not impacted Hexcel. We continue to meet all OEM production timing expectations and have not been asked to delay shipments for any Commercial Aerospace programs.

Turning to Space & Defense. Sales were strong year-over-year, driven primarily by the F-35 Joint Strike Fighter, followed by general strength in military rotorcraft for both U.S. and European programs. The A400M program weakened to some degree year-over-year, although we expect a greater impact in subsequent quarters as the production rate adjusts downward. Overall, we are encouraged with the favorable trends in general defense spending around the globe, and we will expect to see a positive impact on our revenues in the medium term.

As a reminder, civil helicopters are reported in our Space & Defense sector, and sales in the first quarter were the strongest we've seen over the past 2 years. Civil helicopter remains less than 10% of total Space & Defense.

Finally, turning to Industrial. Wind energy sales strengthened in the first quarter, as the transition to new generation blades by our largest wind energy customer, Vestas, begins. Wind energy represented about 45% of total Industrial sales for the quarter. We continue to expect higher wind energy sales in the second quarter of 2018 and remain strong through the year.

Automotive and other industrial markets also posted solid growth, while they are both smaller markets than wind energy. Growth in both of these market sectors was broad-based across our customer spectrum.

Before I turn the call over to Patrick, I would like to provide updates on our expansions, specifically Morocco and France, and our recently announced initiative with Arkema. Our Hexcel leadership team was honored to be joined by high-ranking Moroccan government officials at the dedication of our Casablanca engineered core facility last month. We are staffed and operating, and we are thrilled by the high-caliber of talent we have been able to recruit at this facility. The Casablanca plant is supporting growth for a number of customers for both engine and aero structure operations.

Our new facility in Roussillon, France, continues to progress. We have begun initial production of carbon fiber, following extensive cross-training. And we are in the process of qualifying the carbon fiber line for aerospace applications. Construction of the PAN line should be completed this summer, and that line will then undergo aerospace qualifications. As a reminder, the Roussillon capacity will be used to support the A350 program and other growth in Europe.

During the first quarter, I was also delighted to announce our partnership with Arkema to develop carbon fiber-reinforced thermoplastic tapes. This partnership will enable us to further strengthen our technology portfolio to complement our existing broad range of advanced composite materials. Enhancing our product range will provide additional secular penetration opportunities for Hexcel, and once again, confirms our position as a leader in the advanced material market space.

In summary, our first quarter results were strong, positioning us well for the remainder of the year. We delivered record quarterly sales, combined with earnings growth and positive free cash flow. Our growth is supported across a number of different platforms, customers and applications.

We remain committed to our 3 key strategic priorities of: driving innovation and growth, enhancing operational excellence and achieving disciplined deployment of capital, including the return of at least 50% of our net income to stockholders through dividends and share repurchases.

We remain optimistic for the year. And as Patrick will discuss, we are reaffirming our 2018 financial guidance.

With that, I will now turn it over to Patrick to provide more color on the numbers.

Thank you, Nick.

I'm going to begin with the review of our markets. As usual, I will discuss year-over-year comparisons in constant currency. As a reminder, currency movements influence our reported results and some of its impacts may not be intuitive. The majority of our revenues is denominated in dollars. However, our cost base is a mix of dollars, euros and the British pound, as we have a significant manufacturing presence in Europe. As a result, when the dollar weakens against the euro and the British pound, as it has been during for over a year now, our sales translate higher, but our costs also translate higher, acting as a headwind to margins. Accordingly, we prefer a strong dollar to a weak dollar.

In terms of currency hedging, we utilize a disciplined hedging strategy that layers in hedges over a 10-quarter horizon. As a result, there is a smoothing impact on currency changes. And specifically, in this instance, the impacts of the weaker dollar will become more of a headwind in the second half of 2018, where we could see a headwind to EPS in the order of $0.05.

Sales of $540.1 million in the first quarter of 2018 were up 10.2% year-over-year. This level of sales represents a first quarter record for Hexcel. Our adjusted EPS for the first quarter was $0.68, an increase of 13.3% compared to the first quarter of 2017.

The impact of the new revenue recognition accounting standard, ASC 606, to sales in the first quarter was a decrease to revenue of $2.9 million and a reduction to EPS of approximately of $0.005. The reduction in recognized revenue reflects a reduction in certain inventory types associated with commercial contracts containing termination for convenience clauses. We have used the modified retrospective approach for adoption of the standard, and the majority of the impact was in the Commercial Aerospace market, with a nominal impact to Space & Defense.

As I said last quarter, we do not think the ongoing effect of this standard will be material to our financial statements. And we believe the impact could vary up or down quarter to quarter by $0.01 or $0.02 per share.

Turning to our markets.

Commercial Aerospace represented 71% of total first quarter 2018 sales. Commercial Aerospace sales of $382.7 million increased 9.4% compared to the first quarter of 2017. Commercial Aerospace sales benefited from the A350 wide-body ramp, increases in narrowbody aircraft production rates and an increase in business jet demand.

Space & Defense represented 17% of first quarter sales. Space & Defense sales for the first quarter were $90.1 million, increasing 13.6% from the same period in 2017. Increasing production of the F-35 Joint Strike Fighter program and year-over-year growth in military rotorcraft demand drove the sales growth.

As noted by Nick, we also saw a stronger sales performance to several helicopters, though it remained a small part of our Space & Defense sector revenue. The impact of production decreases in the A400M program were felt this quarter, with a double-digit reduction over 2017, which is a headwind we expect to continue throughout the year.

Industrial revenue comprised 12% of first quarter 2018 sales. For the first quarter of 2018, Industrial sales totaled $67.3 million, reflecting a 10.3% increase compared to the first quarter of 2017. Wind energy was a strong contributor to the quarter, combined with strength in both automotive and other industrial. As previously mentioned, we expect to see even stronger growth in wind energy throughout the year.

Consolidated results. On a consolidated basis, gross margin for the first quarter was 26.4% as compared to 28% in the first quarter of 2017. The year-over-year decrease in gross margin performance was primarily a result of higher depreciation expense, start-up costs associated with the Roussillon, France facility and a weak mix of business in our engineered products segment related to tooling.

Total depreciation expense increased $5.4 million from the prior year period, reflecting increased capital expenditures in recent years. The depreciation expense will continue to trend higher in 2018, and we now expect the year-on-year increase to be in the region of $20 million. Note that we are not yet fully depreciating the Roussillon site. Once it happens -- which will happen once it is commissioned and operational later this year.

SG&A increased 2.6% in constant currency from the prior year, reflecting growth in the business, particularly the addition of our new sites in France and Morocco.

Research and technology expenses increased 3.7% in constant currency year-over-year, consistent with our prior disclosure that we will continue to invest in innovation. Our R&T investments both advance and protect our composite leadership position as we enhance our existing solutions, continue to improve processes internally and for our customers, and develop new solutions for existing and new programs.

For the first quarter, operating income increased 4.8% to $82.4 million or 15.3% of sales as compared to $78.6 million or 16.4% of sales for the first quarter of 2017. Operating income benefited by approximately 20 basis points from exchange rates due to our currency hedging program, as our currency hedges offset the impact of the weakening dollar.

The composite materials segment represented 82.3% of total sales and generated a 19.6% operating income margin for the first quarter of 2018 as compared to a 20.2% margin in the prior year period.

The engineered products segment, which is comprised of our structured and engineered core businesses, represented 17.7% of total sales for the first quarter of 2018. Engineered products generated a 10.4% operating income margin for the first quarter as compared to a 14.2% margin in the first quarter of 2017. The quarter was impacted by a weak mix of tooling sales related to the 777X program. We expect the engineered products segment margin to return to a normal 12% to 14% range for the remainder of the year. As a reminder, the return on invested capital for this segment is very attractive. While margins are lower than the composite materials segment, engineered products utilizes a much lower level of capital.

The effective tax rate for the first quarter of 2018 was 18.9%. This effective rate was favorably impacted in the current period by share-based compensation, which typically has the greatest impact in the first quarter of our fiscal year. We still expect the underlying effective rate for the year to be 25%, which is consistent with our 2018 guidance.

Free cash flow for the quarter was a positive $3.1 million compared to a use of $31.3 million for the prior year quarter. This reinforces our recent messaging that we are entering a period of cash generation from a period of capital investment.

Capital expenditures were $45.3 million for the first quarter on an accrual basis, which is consistent with our 2018 financial guidance. In comparison, capital expenditures were more than double the prior year period -- sorry, capital expenditures in the prior year period were more than double at $92.9 million.

We repurchased $30.1 million of common stock during the first quarter of 2018 and have $212.5 million remaining under our share repurchase program.

First quarter 2018 interest expense was $8 million, and we expect quarterly interest expense around this level or slightly higher for the remaining quarters in 2018.

Finally, our quarter 1 2018 earnings release reiterates the guidance we provided during our full year 2017 earnings call. As a review, we continue to expect consolidated sales of $2.1 billion to $2.2 billion or 9% growth at the midpoint. By market, we continue to anticipate Commercial Aerospace growth in the high single digits, sales to remain relatively flat in Space & Defense, where we see strong growth in certain programs, offset by the A400M, and double-digit growth in Industrial, driven primarily by wind energy sales.

For 2018 EPS -- for 2018, we expect EPS of $2.96 to $3.10, with an effective tax rate of 25%. We continue to forecast capital expenditures in the range of $170 million to $190 million. Free cash flow is forecasted to be greater than $230 million. I would also like to reiterate that we anticipate returning to shareholders through dividends and stock buyback greater than 50% of our net income.

With that, let me turn the call back to Nick.

Thanks, Patrick. Industry trends are favorable across our markets. We started the year strong with solid results, including positive free cash flow generation. And our team remains focused on innovation and operational excellence. The market outlook for our products appear robust. And our investment in capacity and leading edge technology, including our latest additions in Morocco and France, positions us well to take full advantage of the commercial opportunity in front of us and create significant value for our shareholders.

Our R&T team continues to develop industry-leading applications and customer solutions to position us for the next generation of aircraft and industrial applications. Hexcel continues to be a world leader in advanced composite materials, and we are excited as we look ahead to the rest of 2018 and beyond.

Jimmy, we will now be happy to take questions.

(Operator Instructions) Our first question comes from Rob Spingarn with Crédit Suisse.

A couple of things. First, just on the margins. You spoke about some of the reasons why you didn't have -- or why the margins didn't really pace with the sales growth. But is there anymore you can speak to other than things like currency, and it sounds like the new facility start-ups? Is it volume at the new facilities? Is it growing pains? Was there anything else in there?

Well, I'll take a shot at it first. Basically, it's really 3 factors. It was, one, the depreciation step-up of $5-plus million. Second, it was a start-up of the new facilities, mainly Roussillon. But keep in mind, we're still growing in Morocco, and there was a slight impact in Q1 as we transfer product and grow in that site. And then lastly, we did have some mix, especially in engineered products, which impacted us this quarter. So nothing operationally. Business is performing very well. Just a little bit on the timing.

Okay. And then just one on cash flow. You've talked in the past about your long-term guidance for free cash flow, especially as you enter this cash harvest period. But with $230 million for this year, and looking back at the front end of this guidance period, it suggests that you might be somewhat flattish in the years forward. And your CapEx seems to have stabilized in that I think you said roughly $180 million. So Nick, what is the right way -- or Patrick, what's the right way to think about cash conversion as your top line continues to accelerate here?

Well, so there's a few questions in there. So generally, we see and we guided with respect to the longer-term growth outlook and continued profitability in driving margin expansion. So I would expect the profitability to grow with the sales. On the CapEx, CapEx, we really haven't guided exactly to next year. It's a little early. We gave a rough range. Hopefully, we'll have programs to talk about that will require incremental capital as we secure those programs. But right now, we see free cash flow growth through the period looking out.

On an annual basis?

Yes. I mean, for us to deliver the $1 billion over the 5-year period we previously talked out of 2016 through 2020, 2019 and 2020 have got to be pretty strong free cash flow, which we still stand by.

Okay. But you don't have any conversion number you want to put to that or kind of growth number?

No. No, I mean we haven't guided to those numbers. We've just put out the $1 billion in that 5-year period. I mean, you can ...

Lean back into it to some extent, but I want to get an idea of slope.

It's -- well, it's going to be fairly sharp in '18, '19 and '20 to deliver those numbers.

Our next question comes from Noah Poponak with Goldman Sachs.

Nick, you mentioned seeing no impact from the production bottleneck, challenges on 737, that have been in the press. Could you just elaborate on that? What it is that's allowing for there to be challenges discussed in the marketplace, but for simultaneously not to be impacting anybody in the supply chain?

Yes. So let me give you my view, overall, on the narrowbody. So make no mistake, and we communicated that we have a 40% to 50% incremental volume on the Max and the NEO versus legacy. So anything that impacts the transition certainly impacts us. What we were referring to is the severe ramp rate for the LEAP engine and the geared turbofan and some of the growing pains with respect to some bumps on the geared turbofan and some production delays with the LEAP. There are some bumps in there, but from the poll of our materials, it's been very consistent. And we have not been asked to delay or push back, which gives us confidence that the problems are being worked, and our customers have line of sight on how they're going to deliver to their commitments for 2018 and beyond.

And is that equally true in the structures outside of the engine that you deliver to as it is for structures around the engine?

Yes. It would be no different for us. We may have a little bit -- we communicate that our lead time from final assembly line is roughly 6 months. Some of those parts are earlier, some are a little longer, but the average is roughly 6 months. But we see the poll, and we do not see any deferrals in structures, materials or components.

Okay. And another follow-up on the margin question. Was there anything on the pricing side that changed in the quarter?

Pricing was where we expected it to be, Noah. It was really all about the headwinds that Nick has called out, and I described the depreciation, the new site, the start-up costs and a bit of mix in engineered products.

And the next question comes from John McNulty with BMO Capital Markets.

A question on Roussillon in terms of the headwinds that you're dealing with in 2018, I guess, can you try to quantify that or put some numbers around it? And more importantly, I guess as we look to '19, how much of those headwinds or -- excuse me, headwinds reverse and become tailwinds?

So just a little bit on the Roussillon site. Remember, this is a very large site. Investment in the range of $250 million. And you really need to think of it as a colocated 2 lines, one being the precursor or as we call PAN, the other being the carbon fiber. The carbon fiber line has been up and running, has run industrial product and is being qualified for aerospace as we speak. So that line is basically turned over to operations. The PAN line is now being finalized and should start the qualification process midyear. Now as that line comes up, and we start flowing PAN and carbon fiber through, the headwinds will start to diminish up through the end of the year. We really don't want to get into specifics, but I would expect us to have a pretty big tailwind going into '19.

Great. And then just a question on Space & Defense. I mean it sounds like despite what were pretty surprisingly large numbers in the quarter, you think they pretty much reversed, and I get the M400 is winding down and maybe it took a little longer, but it -- but maybe it falls a little bit harder in the back half. But I guess, where else do you see things slowing up or seizing up? Or is it really just the M400? Because it does seem like you came out a lot stronger than we would have thought or expected in the first quarter.

Yes. Well, we're definitely happy with the first quarter. We're happy with the fact that civil rotorcraft turned the corner, and granted, it's not a huge part of the Space & Defense, it's a welcome turn of events. Remember, we're on a lot of programs, 100-plus, and it can be very lumpy quarter to quarter depending on our customer order patterns and the delivery rate. So although we're very optimistic, I really want to see another quarter before we think about moving the midpoint, but I wouldn't be surprised if it trends up a little bit. To answer your question, John, really, the only item we're seeing headwind on right now is the A400M, and we do expect that to come down more sharply throughout the year than it did in Q1.

And the next question comes from Gautam Khanna with Cowen & Company.

Hypothetically, if the 350 were to go above 10 a month, let's say 13 a month, how much incremental capital would you have to put in the ground to support it?

So those are hypothetical situations that we certainly hope come to fruition. With $4.8 million per shipset, that's a good problem to have, clearly, not a problem. Gautam, I don't really want to get into distinguishing relative capital investment because you could back into what our capital costs are. And it's competitive information, we really don't want to share. I would tell you this. We are intimately involved with Airbus, very close with them on their current needs and what they're looking at as potential down the road. As you know, they're communicating 10 per month by the end of this year, and we are certainly in line to support that, with the Roussillon facility coming up. We also, if you recall, we announced our additional CapEx investment indicator, which will drive incremental PAN and carbon fiber. That will be a colocated site, which again will give us some bandwidth to support additional growth in programs, including JSF, LEAP, narrowbodies, and potential upswings in the A350, if they come to fruition.

Got it. So you actually have some flexibility within the existing footprint to accommodate higher volumes, would it all be incremental, if that were to happen?

Yes. So by definition, given that most of our material is sole-sourced, we can't be short. So by definition, we have to be a little long. Now we manage that very tightly. And whether we could do one plane of this model per month or a couple of another, we look at that in our total CapEx model. And we balance it against declines. So the A380 is coming down still and the A400M is coming down. So we make sure our assets are fully utilized. Remember, they're fungible. And we optimize our footprint and our capital utilization that way.

Okay. And just switching up on a different topic. Acquisition pipeline, you've done a couple technology tuck-ins in the quarter. One of your Toray ended up locked in an acquisition of another company. I just wondered, is there anything of size out there that would be of interest to you? I'm not asking for specifics, but I'm just curious in terms of M&A, is that a real opportunity to kind of significantly bolster the company? Or is it all going to be kind of R&D by another name-type acquisitions?

Yes. So as far as being attractive and being targets, we like, we focus on the technology and positioning us in our portfolio to grow and increase secular penetration. To move the needle on the topline significantly, both opportunities are limited. You pretty much see what's out there in our space. We're certainly the market leader. But having said that, I would tell you there are very interesting technologies around the edges and within our portfolio that we're looking at and we're very excited about.

And our next question comes from Greg Konrad with Jefferies.

You mentioned the 10 a month rate. Kind of where are you versus the Airbus' plan today?

So we basically are in the 9 per month shipping rate. And certainly, we're ramping up and would expect to be in the 10 per month range probably midyear, July, August time frame.

And then, I mean, you touched on it briefly in your opening remarks. But I mean, it seems like throughout the supply chain, we saw a number of announcements around thermoplastics rather either on the M&A side or also just strategic partnerships. And I think you announced one in the quarter also. I mean how do you view the opportunity and maybe your positioning in the market?

Well, we've been a player and a key contributor in thermoplastics for many years. Our fiber is the benchmark in the thermoplastic aerospace industry. So we know this space very well. There are technologies evolving that provide more opportunities for secular penetration on parts. Many of them being in secondary structures, but other opportunities with near-net shapes and compression molding. So we are excited to add this to our portfolio. We think it's a great addition to help make sure we have a fully rounded out portfolio to serve our customers. And we see it as a great opportunity to continue the secular penetration.

And our next question comes from Mike Sison with KeyBanc.

In terms of the JSF, I think the Lockheed's outlook for 90 this year versus 66 last year. Is your sales in line with that type of growth?

Yes. No. We will agree with that, Mike, yes. So this year, 2018 and 2019, we expect the rates to increase, and those numbers you just mentioned sound sensible.

And the growth you'll see in the JSF will be similar every quarter? Is it pretty even?

Well, military spending can always be a little bit lumpy. I mean, if you remember, we supply the carbon fiber, so we supply that through and then that gets converted and sold on to Lockheed. It's normally fairly steady, Mike. I mean it's not going to be perfectly balanced, but we would expect it to be fairly steady growth.

Then just a quick follow-up on the partnership at Arkema, the carbon fiber-reinforced thermoplastic tapes. What applications do you think that would apply to? And how big is this opportunity longer term?

Well, the collaboration with Arkema, and just a little bit on Arkema. They've been a partner of ours, and we buy materials from them for a long time. It's really a collaboration to enhance and develop technologies in some cases that do not exist today. So we are developing and intend to develop materials that process faster, can be made into more near-net shapes out of autoclave, with minimal storage constraints, i.e. the need to freeze. So Mike, we're -- it's early in the development here, but we're very optimistic that this could be a nice growth opportunity for us going forward.

And our next question comes from Chris Kapsch with Loop Capital Markets.

I had a follow-up on the margins.

Chris, we can't hear you.

Sorry about that, can you hear me now?

I can hear you, thanks.

Yes. So a follow-up on the margin progression and focused on what you described as start-up costs. I'm just trying to get a little bit more color on that. Are you talking about basically unabsorbed overhead costs associated with the new facility or just some inefficiencies associated with ramping? And then, you did mention you're running fiber, so presumably, you're selling that fiber into the industrial markets before it's qualified. So I'm wondering if there's also a mix effect that's dragging on results. And when would you expect that to inflect? When do you -- when will you have this fiber qualified as aerospace grade?

So -- go on, Nick.

So, Chris, it is absorption. I mean, fact of the matter is, we have lots of people being trained, working the line, commissioning the line on the PAN side. We have people from the U.S. that are experts in this. The expertise historically resided in Decatur, Alabama. So we're transferring a lot of that knowledge in training, and there's a lot of people working to get that line qualified up and running. So as we mentioned in our remarks, we do expect this to start to inflect in the second half of the year. And to your point on carbon fiber, we are running some carbon fiber on the fiber lines for industrial, and some of that material will go into the market and will be sold.

Is there any way you can quantify what the anticipated benefit is in the gross margin once this inflects, once you have the fiber qualified as aerospace grade in the second half?

I'm not so -- indirectly, what I will say, so last year, if you remember, in 2017, we called out about a $10 million headwind for the year as a combination of Roussillon and Morocco start-up costs. By far, in a way, that the lion's share of that relates to Roussillon in France. So this year, we probably got about half of that, and that's going to impact in the first half of 2018. So the best thing I can advise is sort of take that $4 million, $5 million and adjust in the second half of the year by that when once the lines should become, as Nick says, productive and we start to generate income.

Got it. It makes sense. And just to follow up on the discussion around the narrowbodies. To the extent that there's constraints in, I guess, teething pains associated with the engines for the Max and NEO platforms. And the fact that you guys haven't seen any delays in -- or haven't been asked to defer any shipments, as that -- or we just assume that what's happening is that they just continue to keep rate on the sort of the legacy platform which you keep shipping to, and that your step-up in mix in terms of content per shipset is still on to come? Does that makes sense?

I think that's right. And I think we called it out in one of our commentaries a little while ago where the transition between the A320 legacy and the A320neo is a little bit slower than we expected. But the underlying build rate, as you rightly say, is going up, and so we are supplying basically the quantity of materials we expected, slightly reduced by the slower transition to the A320neo.

And our next question comes from Richard Safran with Buckingham Research.

There was something I wanted to ask you guys about last quarter, it was on additive manufacturing. You noted that, with the OPM acquisition, you're now the world leader in additively produced parts. So I understand, right now, it's a modest size, but what I'm trying to look at here is the acceptance rate. How quickly you think printed parts are going to progress? We've seen some rapid progress with metals, so I'm trying to find out if printed parts are going to be a meaningful share gain story for you as you start to replace conventionally produced parts.

Yes. So just to clarify, I think what we said was we're the world's leader on aerospace composite thermoplastic, additive manufactured parts. And that's based on our qualification with Boeing and our shipments through their space and defense programs. So I -- we are very excited about the technology. We have tremendous pool and interest both from the Space & Defense sector, as well as commercial. If you look at the benefits of making near-net shape and of complex parts that traditionally may have been made out of metal, metal joining of multiple parts are very expensive, this offers an opportunity and a technology that can simplify those designs and provide parts in a very short cycle time. So again, it's really starting up. We're teaching the market on its capability. We have a great team in Hartford. We have multiple machines running as we speak. And again, it's going to take some time for it to really demonstrate its capability and its productiveness in the commercial market.

Okay. And my second question was -- and I missed part of the earlier part of the call, so if I missed -- if you said this, I apologize. Patrick, I was a little surprised given the performance in 1Q that you maintained the guide. I heard the remarks at the outset here. Just wondered if you have any comment about how you might be thinking about your guide right now given the 1Q performance.

Yes. I mean really just to sort of echo Nick. We were obviously very pleased with the sales in the first quarter. It was a record quarter of sales for us. Across our market spectrum, we saw good growth almost everywhere we look. And yes, we are standing by our guidance. We believe it's a little bit too early in the year to adjust, but obviously, perhaps, we see strength, and we would see that we're going to be above our midpoint and pushing the range a little bit. So we see ourselves moving in that direction, which is a great way to start the year.

Yes. And I would just add. Remember, again, we need to see another quarter on Space & Defense, since it does tend to be lumpy. And I'd remind you, sequentially, it is actually down below fourth quarter of 2017. So again, we're still excited on the Space & Defense side. We're also watching closely the wind energy ramp, which is incredibly steep for the balance of the year. So maybe being a little bit conservative, we want to see a little bit more before we adjust our guidance.

And our next question comes from Drew Lipke with Stephens.

I was curious, can you maybe quantify the expected depreciation step-up in the back half of '18 from the France facility coming online?

Well, it's included. So I think I called out almost sort of an amendment swap previous indication that we're now expecting about $20 million step-up between '17 and 2018. The Roussillon impact, which was just obviously be the very active 2 quarters of the year was included in that. But it's a little bit more complicated than just looking at Roussillon because we've had a number of actives sort of getting layered in over time. I actually think the $5 million step is going to be similar each quarter, to be honest, Drew.

Okay, that's helpful. So step-up from the $14 million previously?

Yes. So the $14 million is now $20 million, which is roughly $5 million a quarter.

That includes Roussillon.

And includes Roussillon.

Okay. And then you talked about the wind ramp, and as we look at the composite materials segment there, should we expect any kind of negative mix impact through the year just as wind does ramp?

I don't think our wind sector is significant enough to really dilute our overall margins. Perhaps, very, very slightly. But again, if you look at different metrics, if you look at our ROIC, et cetera, it's probably going to be a boost, because of the low -- relatively low level of capital employed, it's not our own carbon fiber. So it's very positive to ourselves, it's good to our margins, but I don't think it's going to be large enough. It's great that it is as it is to actually dilute the overall margin, Drew.

Okay. And then just last one from me. On the 787 and the expected step-up in kind of back half of '18 for you, guys. Do you expect to see any kind of impact from the Trent l000 issues? It does sound like we're maybe seeing a buildup of gliders there as engines go to address AOG concerns?

Yes. Nothing that we're hearing yet, Drew. I mean, obviously, the engine stories around there, we obviously still understand that Boeing intent to go to sort of late '19, early 2019, March...

Late 14.

Late 14, sorry, early 2019. So we'll move up from 12 to 14 at that point. And we should see an increase, we're still expecting an increase around quarter 4 this year. We haven't heard anything to the contrary.

And our next question comes from Ken Herbert with Canaccord.

I just wanted to ask a question on the potential opportunity around the midsized aircraft or middle-of-the-market aircraft, and not so much around sort of timing or how do you view that. Perhaps, but more importantly, I think for your standpoint as I look at Hexcel, can you just talk about maybe where are you investing? Because I know you're obviously investing to position yourself in constantly pushing your capabilities forward. But in relation to that program, how do you view sort of key areas you're investing and maybe your level of activity today that you're focused on, and how you see that evolving here as you look to perhaps take some share with that particular customer and push the value proposition forward?

So Ken, I mean, we work, week in, week out, month in, month out with our major customers on technology developments. And a lot of the time, it's generic rather than specific. And obviously, the midsized aircraft is not -- has not been formally approved yet. As you know, there is a lot of speculation. But so we're working on a spectrum of technologies. We continue to enhance our portfolio, as Nick has talked about several times today. And we are pursuing all the applications we can. And as you would expect us to, to get as much material on that plane as possible. Now Boeing, not wishing to temper anything, but Boeing has sort of talked about that plane as really being an opportunity for them to fine-tune shop floor processing and their in-house sort of efficiencies and productivity. So how much new technology they're actually going to introduce is yet to be seen. But clearly, we are, as I say, we continue to work with them in a so-called generic way across the air structure and across the engine platforms to make sure that Hexcel is positioned as strongly as possible.

Okay. Do you believe you will see a significant increase or a step-up in carbon fiber content opportunity on that program? It certainly runs with the current generation. But I guess, very specifically, do you believe or get a sense that you got an opportunity to compete on not only the wing, but fuselage as well? Or how do you view that opportunity shaping up for you?

I mean as it stands today, clearly, we have an opportunity. I mean we were in the race with everyone else. I mean, it's not a replacement. It's a new aircraft. We -- as we say, we are promoting our technologies. How far Boeing go with new technologies, as I say, has yet to be seen. But where they do, absolutely, we're in that race.

Okay. And just finally -- that's helpful, just (inaudible) when you alluded to you, do you expect a step-up in (inaudible) the first quarter...

Ken, we can't hear you at the moment. You're actually breaking up.

Yes. Can you hear me okay?

We can hear you now, yes.

Yes. Sorry about that. Just to follow-up on wind. Is the acceleration you're looking for, can you -- I guess, as I read the commentary and listen to your comments today, it sounds like we should be looking for an acceleration in the wind growth going through the year as you -- as your customer obviously ships more, as you obviously transition from a mix standpoint to the better products, I guess. Is that a fair way to look at it?

Yes, absolutely. So they're making that transition now, we were very sort of pleased to see that quarter 1 was where we expected. But the real growth, the real ramp is going to start in the second quarter, yes.

And our next question comes from Ronald Epstein with Bank of America Merrill Lynch.

There's been a lot of conversation on the call about some technology so on and so forth. So just kind of going down that same vein. When you look at your R&D expense and your organic technology development, can you give any color on what areas you're looking at? I mean is called cold cure a place to go? Is ceramic matrix a place for you guys to go? I mean, when we think about different channels of technology and potential growth that you could do, what do you think about?

So I'd say when you look at R&T, it's mixed. It's focused on certainly some blue sky technology that is not in production today. Related to both materials and process enhancements, out of autoclave, fast or snap cures, different resin formulations to provide value add to the materials. We also focus on technology around processing to help throughput, efficiency and overall competitiveness of the materials to enhance secular penetration and deliver on what our customers are looking for. Composite matrix and ceramic matrix, that's really not in our wheelhouse today. And I could say it's something we're not looking at today. We've got enough carbon fiber and prepreg and engineered product and Acousti-CAP and sound, heat materials and products that we're working on to drive incremental growth.

And our next question comes from Hunter Keay with Wolfe Research.

This is Will for Hunter. In your Q, you indicate that bizjet drove much of the 30% growth in other commercial, was this broad-based or was this driven by certain bizjet OEs?

Well, it was heavily influenced by bizjet. Bombardier, Dassault, Embraer were all very strong. If you look at the Gulfstream G500 and the Bombardier Global 7000, those were very strong platforms. And we did see an uptick in the regional segment there with ATR on the turboprop, so it was fairly broad-based, and we're certainly excited to see that growth come through.

Great, great. And then on margins, is it still possible for you to hit incremental operating margins of 25% this year with the mix of start-up headwinds, or is this something that's more of a 2019 event?

So we're working all the time to grow our margin intensity and performance. We talked about certain headwinds this morning, which we continued to work through, some are timing and some are sort of sales mix as we described. We're confident that we're going to return to a more normal margin range for the rest of the year. So we know we've mentioned 25%, and we strive to work towards that. It's more challenging at times, but as I say, improving our margins, productivity yield, efficiencies is a mantra day in, day out, and we're still pushing in that direction. And we will continue to push this year and next year and even into 2020 to keep growing our margins.

And our last question in the Q&A section is from Myles Walton with UBS.

I just had a couple of clarifications, if I could. So on the depreciation ticking up to $20 million growth versus the $14 million, it doesn't sound like the sales outlook's really changed. So are you just bringing on facilities faster or in a different way? And then also, on SG&A, I think it was supposed to fall sequentially in the next 3 quarters. Is that still the case?

Yes. So on the depreciation, Myles, really down to timing, understanding exactly the timing of when assets are coming on. And there is a bit of FX in there as well. So it's kind of a combination of the 2 that pushes as far as we've now gone to $20 million. And in terms of SG&A, yes, the first quarter is always the heaviest quarter for us because of the stock, the compensation benefit payments, stock-related payments in quarter 1, and so we would expect that to step down for the remainder of the year, which is typical for Hexcel over several years.

And is that step-down still about $8 million?

Give or take, yes, that's the right magnitude, Myles, yes.

And we have one final question from David Strauss of Barclays.

Sorry if I missed this. On currency, can you just tell us where you are from a hedging standpoint this year and as we look into '19?

Yes. So I'll just probably -- to repeat what I've said in the past, we hedge out 10 quarters on sort of on a declining basis. As I look at the rest of 2018, I'm probably about 75% hedged. As I look -- as we look out to 2019, that's probably narrowed to 50% range. And then a couple of quarters out into 2020, we're right down to sort of 10%, 15% range. So we're pretty solidly hedged for the remainder of 2018. And unless there are significant currency movements, as we described, we expect to see a bit of a headwind compared to what was assumed in our guidance in the back half of 2018.

Okay. And then last one for me, any update on 777X? Where things stand for you guys there? And any idea of what your shipset content could end up looking like?

We're still working. Perhaps, we're all a little bit frustrated, but the packages haven't all been awarded and sealed yet, so it's still going to be around the end of this year before we're going to confirm what our new 777X shipset value actually is, other than it is above the 777 shipset.

Thank you. And that does conclude our Q&A portion of the call and the call in general. We thank you for listening, and this concludes your program. You may all disconnect. Everyone, have a great day.