Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Second Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. Thank you.
Patrick Winterlet, Chief Financial Officer, you may begin your conference.
Good morning, everyone. Welcome to Hexcel Corporation Second Quarter 2019 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 power expressed permission.
Your participation on this call constitutes your consent for that request. With me today are Nick Stanage, our Chairman, CEO and President and Kirk Goddard, our Vice President of Investor Relations. The purpose of the call is to review our second quarter 2019 results detailed in our news release issued yesterday. Now let me turn the call over to Nick.
Thanks, Patrick. Good morning, everyone. Thank you for joining forward in the second quarter. We were pleased enhanced cash flow and increasing operating income. Earnings per share for the second quarter was an all time high reflecting strong margin leverage and our objective Sales in the quarter of $609,000,000 were up 11.2% year over year and more than 12% in constant currency.
Diluted EPS was $0.94, an increase of 25% over the second quarter of 2018. We delivered 2nd quarter operating income of $115,000,000, up 19% year over year which resulted in an operating Turning to our 3 primary markets. Commercial Aerospace sales in Q2 were $416,000,000 an increase of 8.6 percent in constant currency as compared to Q2 2018, driven primarily by the A320neo Boeing 787 and A350 programs. Last quarter, we reported that we had seen very little impact from the Boeing 737 MAX rate reduction. As we anticipated, we did experience softer MAX sales in the second quarter than forecast in our initial plan.
Demand fell to a level between the announced Boeing monthly build rate of 42 and the higher paid that max demand will continue in this general range recognizing the uncertainty as time passes before reentry into service. Based on overall market strength and our growing positions, our commercial aerospace sales continued to grow quarter over quarter thanks in part to sales and other programs, including those I mentioned earlier. Despite the uncertainty surrounding the 7 37 MAX program, and a reentry date that is not yet confirmed. We remain confident in the program's long term viability and expect an eventual ramp up in recovery. With that perspective and the solid performance across the broader commercial aerospace market, where we continue to expect a high for double digit year over percent versus last year's second quarter as the market for business and regional jets continues to be favorable.
Turning to Space And Defense, we experienced a strong quarter with sales of almost $112,000,000 reflecting an increase of about These results include sales from ARC Technologies, which we acquired in January 2019 and contributed to the strong year over year increase. Other growth in Space And Defense continues to be robust and was driven primarily by the F-thirty 5 Joint Strike Fighter supported by other fixed wing programs. Finally, industrial sales were about $81,000,000 for the 2nd quarter which is an increase of 12% or 17.3% in constant currency. We continue to benefit from strong demand in wind energy with wind sales up 44.3 percent in constant currency as the industry adopts more composite materials to enable longer blades on larger and more efficient turbines. Before I turn it back to Patrick I'd like to share a few highlights from the quarter.
First, I'd like to thank those of you who joined us for our Investor Day in Salt Lake City in May. It was a pleasure to reconnect with so many of you and meet some new faces as we shared our direction on innovation, growth, operational excellence and our projections for returning value to shareholders. Several Hexcel Leaders shared their business and market outlook and opportunities with you and the tour of the Salt Lake City site clearly highlighted our recent investments in world leading composite facilities and equipment demonstrating technology, scale and barriers to entry. During the second quarter, we celebrated the official opening of a new joint venture laboratory materials testing facility in Shanghai, and we also opened a new sales office in India cementing our long term commitment We are encouraged by the expanding aerospace market in Asia Pacific and are focused on maximizing the opportunities in this key market space. Finally, we had another great Paris Air Show with many exciting and positive interactions with our key customers.
As always, it is thrilling to see all the aircraft on display knowing that Hexcel has extensive and growing product content. Aircraft order backlogs remain near all time highs, reflecting the demand for next generation fuel efficient aircraft that have lower long term maintenance costs and allow for improved cabin comfort for passengers. The demand for advanced composites and secular penetration opportunities continue to grow and Hexcel is strongly positioned to win in this space. In summary, we continue to demonstrate robust growth positive cash generation and strong returns on investment. When you couple market growth and composites growth with our industry leading positions and capability to continuously improve and innovate, we are confident that Hexcel will continue to deliver exceptional shareholder value.
We recognize the uncertainties concerning the 7 37 MAX yet we remain confident in our ability to respond to changing market needs and deliver on the future. As you have seen in our earnings release yesterday, we maintained our guidance to $3.43 to $3.53, reflecting our confidence to deliver strong earnings performance. Now, I'll turn the call over to Patrick to discuss more of the quarter's financial details.
Thank you, Nick. I will provide a review of our markets and as usual, these year over year comparisons are in constant currency. As a reminder, currency movements influence our reported results and some of this pounds as we have a significant manufacturing presence in Europe. As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, but our costs also translate lower resulting in a net tailwind to margins. Accordingly, we prefer a strong dollar to a weak dollar.
In terms of currency hedging, we employ a disciplined hedging strategy that layers in hedges over a 10 quarter horizon leading to a smoothing impact on currency rate fluctuations. Commercial Aerospace represented almost 69 sales. Commercial Aerospace sales of $417,000,000 increased 8.6% compared to the second quarter of 2018, driven both by narrow body and wide body production rates increases as well as the favorable narrow body mix shift to latest generation platforms. Space And Defense represented 18% of sales. For the 2nd quarter, Space And Defense sales totaled $112,000,000 an increase of 23.4% compared to the same period in 2018.
The F-thirty 5 program remains a strong contributor to growth, and the second quarter results also benefited from growth in other fixed wing programs. Recall that Hexcel's Advanced Materials are on more than 100 Different Space And Defense platforms. Industrial comprised 13% of 2nd quarter sales Industrial revenues totaled $81,000,000, increasing 17.3% compared to the prior year period. The strength was driven by wind energy sales, which increased 44% year over year. We continue to forecast wind energy sales growth throughout 2019, although the year over year growth will lessen as the current growth phase became more pronounced during the second half of twenty eighteen.
On a consolidated basis, gross margin for the second quarter was 27.7%, compared to 26.4% in the second quarter of 2018. We continue to focus on operational excellence, which combined with leveraging higher sales levels and the absence of some headwinds experienced last year drove the year over year improvements. Total depreciation expense increased $4,200,000 in the second quarter of 2019 compared to the prior year period, reflecting our continued capital investment administrative expenses increased 14.5 percent year over year in constant currency, supporting higher level sales and growth including our technologies as well as strengthening our foundation to pursue new sales opportunities. Research and technology expenses increased $1,200,000 or 12.2 percent year over year in constant currency as we continue to invest in technology, product and process innovation to support future new programs and to continuously improve our asset utilization. Operating income increased 19.3% or $18,700,000 year over year.
The operating income margin expanded to 18.9% of total sales for the 2nd quarter 2019 compared to 17.6 percent of total sales for the second quarter of 2018. The year over year impact of exchange rates was favorable by approximately 40 basis points. The Composite Materials segment represented 79% of total sales and generated an operating income margin of 22.5%. For the second quarter of 2019 as compared to a 20% The Engineered Products segment, which is comprised of our Structures and Engineered Core Businesses, represented 21% of total sales, and generated an operating income margin of 13% for the second quarter of 2019 compared to 15.6% in the second quarter of 2018. You may recall the second quarter of 2018 had a particularly strong sales mix after a weaker first quarter of 2018.
Year to date 2019, we are delivering margins in line with our targets. While the operating margin is lower than the composite materials margin, Engineered Products requires a much lower level of investment generating strong returns on invested capital. As Nick commented, in relation to the 7 37 MAX, we have seen some impact as it expected in the second quarter. As previously communicated, most of the impact will be seen in our Engineered Product segment where we have less flexibility to refocus program specific capacity compared to the Composite Materials segment. As a result, there was a modest sales impact to Engineered Products during the second quarter of 2019 from the Max program, although the impact was mitigated as Engineered Product sales grew year over year from other programs and the acquisition of ARC Technologies.
The tax rate for of 24% for the second half of twenty nineteen. Net cash from operations was $111,300,000 in the quarter, and is now $157,200,000 year to date. Working capital represented a use of $4,300,000 in the second quarter of 2019. Capital expenditures and on accrual basis were $50,200,000 in the second quarter of 2019, compared to $44,800,000 in the second quarter of 2018. Free cash flow is now $57,900,000 year to date compared to $55,300,000 in the same period in 2018.
EBITDA leverage of between 1.52 times. At the end of the second quarter of 2019, our leverage ratio was just below 2 times. This represents a sequential decrease from the first quarter of 2019 as we focused on repaying a portion of the debt used for financing the January 2019 acquisition of ARC Technologies. We did not repurchase any common stock during the second quarter of 2019, we have $374,000,000 remaining under our share purchase reprogram. During the second quarter of 2019, we entered into a new credit agreement for $1,000,000,000 with the bank's indication group that increased our level of liquidity, reflecting our recent growth and extended the maturity to June 24 from June 21.
Pricing is lower, which will result in lower interest charges going forward, and our new agreement includes covenants that are more flexible reflecting our investment grade credit rating. Our capital allocation priorities continue to be investing in organic growth, followed by targeted and disciplined M and A and we remain committed to returning greater than 50% of our net income to shareholders through dividends and stock buybacks. In terms of returning cash to shareholders, yes today, we announced a 13% increase in our quarterly dividend to $0.17 quarter from the previous $0.15 quarter. Before turning the call back to Nick, I would like to review the 2019 guidance included in the earnings release issued yesterday. Despite the timing uncertainty around the 7 37 MAX return to service, we are maintaining our revenue guidance.
We continue to expect consolidated sales of $2,375,000,000 to 2 $475,000,000. By markets, we continue to forecast high single digit growth in commercial aerospace and double digit growth in both space and defense and the industrial markets. We are now forecasting adjusted diluted EPS within the range of $3.43 to 3.53 which represents a $0.03 increase to our midpoint compared to our prior guidance of $3.38 to $3.52. This reflects the strong earnings in the first half of twenty nineteen along with our expectation of continued strong operational performance. While still recognizing uncertainty related to the MAX.
Capital expenditures are expected to be in the range of $170,000,000 to $190,000,000 Free cash flow is forecast to exceed $250,000,000. With that, let me turn
Thanks, Patrick. With the first half of twenty nineteen behind us, we are confident in our ability to deliver another strong year of sales and earnings growth and have revised our EPS guidance accordingly. XL continues to benefit from our broad technology portfolio and leadership position in markets with long term growth and secular penetration. We are delivering on commitments to customers through innovation, operational excellence, and to grow and continuously improve to achieve sustainable financial Melissa, that will wrap it up. So we'll turn it over to you now for questions.
Thank you. Your first question comes from the line of Myles Walton from UBS. Your line is open.
Hi, good morning.
Good morning, Bob.
Wondering if you could maybe comment a little bit on I know you said that the 7 37 MAX pull you're seeing is somewhere between the kind of Tier 1 levels that Boeing has provided funding for as well as the final assembly levels. Do you see any movement going on in that at this point, either today or in your future, pull forecasts, or do you see that largely as as a stable element from last quarter transitioning to this quarter?
Yes. So again, as we mentioned last quarter. We didn't see any impact in Q1. We think Q2 responded very quickly to the 4252 mix. And based on what's been communicated miles, we we don't foresee a change in that going forward.
At the same time, in our guidance, we took the opportunity to build in a little bit of conservatism on the revenue and that's basically why we held where we did. So overall, until entry to services defined, or there's more news, we're really holding where we are.
Okay. And I
guess that goes to, it looks like the area of most conservatism or or, reserve, I guess, might be in the, like, composite materials margin run rate implied for the second half of the year. Is there anything again, aside from, some level of conservatism, is there anything in the mix that, hurts you in the second half of the year from a margin perspective run rate in Centimeters?
You know, we don't see anything today. We certainly, with a strong sales continuing expect to leverage that and continue to deliver strong margin. So, we're certainly glad that many of the headwinds we experienced last year are behind us. We've got a little bit of tariffs, which are built in. We don't foresee a change in that, but we're monitoring it closely.
Okay. And then the
last one, just the interest expense you mentioned, Patrick, what is the expectation for interest expense for the year?
So this year, we'll see a small net gain because we've obviously had to finance the refinancing, so to speak, as we sort of pay off the old and enter the new. But going forward, we've got about a 25 basis point advantage.
Okay, all right. Thanks guys.
Thanks, Miles.
Your next question comes from the line of Robert Stallard from Vertical Research. Your line is open.
Thanks so much. Good morning.
Good morning.
Couple of quick questions. First of all, on the Airbus front, At the Paris Air Show, Airbus gave a little bit more clarity on their A320neo plans beyond 2021, expecting the rate to move a bit higher. How would you characterize HEXL's capitalization to deal with the rate moving beyond 63 a month?
So, Robert, you said A350, I assume you meant the A320? Yes. Yes. Well, I think Airbus and the engine guys have been, talking about that for quite some time. Clearly, a path to 63 is in the works, and I know there's further studies to go above and beyond that 65 and even potentially beyond that.
But, they haven't been officially announced yet. Certainly, we're in a great position to support that growth and looking forward to it.
But, in terms of additional CapEx, would this just be, you know, a steady sort of percentage of sales relative to what you're seeing at the moment?
Yeah, it wouldn't drive big CapEx and it's rolled into, assets that either are, under construction as we speak, such as the carbon fiber line and pan line indicator that come online later next year and will be qualified early 2021. So really I don't see anything incremental for those programs.
Okay. And then as a as a follow-up, unfortunate follow-up, I was wondering what your view is, on the risk of a, no deal Brexit on your business and whether that could have any implications for 2019 or 2020?
Yes. So, seeing the results in the election, I think there's uncertainty there where Brexit is going to ultimately end up with the deadline looming, end of October, I believe. We have been working with our customers. We've been working, very closely with Airbus Safran, and the other European customers to protect ourselves in the event that there's a disruption. We'll continue to do that.
Right now, I, I'm hopeful, and, and, optimistic that the disruption will be minimal and managed through the supply chain. Okay.
Have you put any sort of specific contingency into the guidance for that?
So, Rob, what I'd say is we're obviously looking. I mean, the biggest thing we will do is build a little bit of of inventory, around specific supply chains between the UK and mainland Europe. But but it's not we don't believe is going to be overly significant, other than perhaps a little bit of working capital.
Your next question comes from the line of John McNulty from BMO Capital Markets. Your line is open.
This is Colton Bina on for John. First of all, congratulations on a strong quarter and what seemed like a slightly difficult environment. So on the industrial front, we expected the growth to moderate some, but admittedly it dropped off a little more than we expected, especially given the 44% growth in wind. Can you speak about some of the puts and takes that got you there?
So I'll start and Patrick can comment In wind, if you remember, second quarter of last year, our growth started. So, the comparables are going to get more and more complicated as the hybrid blade, the new blades come into production and ramp up the full scale. So, not totally unexpected for our percentage growth to slow down during the course of this year. Still within and pretty much right on where our forecast was. In the automotive side, we see some lumpiness there where programs come in and out.
And there was a little bit more of a drop there in Q2, but we'd expect to recover going forward. And then in, recreation and winter sports, again, that can be very lumpy, and that came in just a little bit. Below where we had expected.
Okay. Thanks. That's helpful. And then changing course a little bit for the follow-up. So this quarter was the first time in seven quarters.
I believe that you didn't buy back stock. Can you talk some about what drove that decision Does it have anything to do with a more robust M and A pipeline you're seeing?
No. It's basically a few simple facts. 1, we we, have told you and and continue to target our leverage ratio in the 1a half to 2 range. We clearly focus on organic investment in key Technologies followed by M And A and then returned to shareholders, which we have again committed 50 percent, net income returned to shareholders. So you look at the arc deal we did, the debt that we took on, the balance of the organic opportunities we're looking at.
And really that's, that's what has driven us to where we are today.
Okay. Thanks a ton for taking my questions.
You're welcome.
Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.
Hi, thank you and good morning. Just maybe on the last topic, how do we think about ARC and how that progressing along, whether it's timeline for revenue synergies or integrating new technologies into the workflow?
So, we just had our strategic review, our internal strategic review last week where we do 3 days. We have our global team in. AARP obviously was a piece of that. And I have to say, I am, very excited with not only the progress on the integration, but the opportunities and the synergies identified between the teams. We've had the ARC team visit multiple composite fiber locations.
Similarly, we've had some of our technology leaders visit ARC so that we could understand the potential opportunities between the two technologies, to see how they can further advance our portfolio. So I'm I'm very excited. I'm, excited to see that Arc's performance through this year is projected to be stronger than what we had in our business case for acquisition, I'm excited to see that their strategic growth plan was bigger than what I expected. And I'm just delighted with the fix and I, want to go find a few more of those.
Got it. I'm happy you're happy, Nick. And then just on commercial aerospace, how do we think about the growth trajectory for that end market given, where wide body production rates currently? And how do we think about maybe the NMA and the absence of an NMA or a new narrow body in the near term? So just the outlook for commercial aero?
So, with respect to our mid term guidance, we're still, feeling confident in the to 9% growth. Obviously, this year, we're seeing the 1st year of the A350 at rate. Next year, we'll see the 1st full year of 77 at rate with narrow bodies, continuing to grow, in transition from legacy to the neo and the Max versions when the Max turns back around. So engines and the cells and incremental growth there continues to be strong. To your point on wide body rates, obviously that's a watch item for everyone.
There's strong demand backlog that's been there. But to maintain the rates for a long period of time, clearly the order intake is going to have to increase. Both for 787 and the A350. So, we're aligned with our customers. We're helping them as we can.
And we're confident that those backorders will continue to grow over time sustaining the current build rates And with respect to the NMA, I can just comment that we continue to work with Boeing and the Tier 1s on new technology to position for that opportunity when it gets announced and launched.
Thank you. Your next question comes from the line of Gautam Khanna from Cowen and Company. Your line is open.
Was wondering if you could help us, kind of square the content on the 7 37 MAX you have. With the folks that are still at 52, the Spirit and CSM, maybe what percentage of your reported 37 max content relates to those guys. And then that will give us a sense for what the snapback could be once we get the all clear on the 3.7. Any way to frame that for us?
Well, I don't want to get into who we're shipping to customers specifically dollar wise or percentage wise on the max. I can say, think of it this way, rough order. Think of our engineered product type support for the max to be about half. And the balance is going to be fibermatrixcore, other assets that are easily redeployable based on demand today, whereas engineered products, it's not impossible. It just takes a little more time.
Okay. That's helpful. And on the fiber side, I would presume that 70%, 80% of it is spirit slash CFM, right, the Albany International, etcetera. I mean
Yes, the vast majority of the fiber goes towards the blade through Albany. Blaise in cases.
Yes. Got it. Okay. So it's fairly de minimis as to what's come down. Okay, that's helpful.
And then, the other thing, just if you can speak to, the, M and A pipeline? I mean, arc, you know, you got arc. Is there is there much out there that's needle moving or is it more these technology tuck ins that you're looking at? Within the pipeline?
Well, again, it's hard for us to comment, in detail, but Again, following our strap review, we've identified technologies that we really like, things similar to ARC. Things that we, are evaluating and looking at. So I, I think there are plenty of opportunities for us to evaluate. So plan is not going to change. I think our team does a fantastic job in due diligence and understanding the fit.
We're really not going to deviate from who we are, get out of our core space. But having said that, I think our pipeline is it's actually grown.
Your next question comes from the line of Robert Spingarn from Credit Suisse. Your line is open.
Hi, good morning. I may have missed it, but Patrick, how did our contribute to revenues in the quarter? I just wanna get a sense of what the underlying organic growth was in, defense and space.
Weekly, what we said, obviously, when we acquired it, it was just over $50,000,000 of revenue. And I think across the year is what I'll say.
Okay. Would you say that it's growing, typically of the of the rest of the business, or is it expanding at a higher or lower rate?
Yes. No, I mean, it's growing typically. I think that's a fair way to put it.
Okay. And then I wanted to ask you on incremental margins. You know, you had a good incremental margin, number of 30% this quarter. Obviously, wind volumes are, you know, exceptional there. But when I look at it between the two segments, it's kind of fairly variable and volatile.
What's the best way to think about incrementals by the two segments and what the trends going to be going forward.
I think
the most obvious thing for me to say about the year over year trends is really composite materials has stepped up much more strongly because composite materials had the headwinds last year. The wind energy resin and the AN in particular as well as the Roussillon startup costs for 2018. And so that hence taking those away, you see that. Engineered Products is a bit more lumpy. And I tried to sort of say in the earlier narrative, 2018 was a little bit strange in that we had a weak that weaker than normal Q1 in 2018 and a stronger than normal Q2 in the 1st 6 months year over year.
It's fairly similar performance. In that sort of 12 to 14% tunnel I have talked about before. So year over year, it's really the headwinds moving away from fit that I would point to.
Okay. This is on a go forward basis. Once we don't have the noise,
I can tell you, unless he tells me continuously margin expansion, we're not going to really provide a top end range. Okay.
Well, fair enough. Last one, Patrick, also for you, just on as CapEx declined cash taxes going forward, as imagine depreciation would come down somewhat.
On cash taxes. So I mean, so it's 24%. So the average effective tax rate for the year will be a bit lower than that. Given the first two quarters. Our cash tax rate, I would kind of guide you at the moment to between sort of 18% to 20%.
It will always a bit lumpy, but I would kind of point you in that direction.
Thank you very much.
Question comes from the line of Paretosh Misra from Berenberg.
Great, thanks. Just going back to the wind business, I was wondering if you could talk about the margins there. Is that a higher margin business relative to the rest of the segment?
No, if anything, our industrial businesses tend to be a little bit lower in margin, than our composite businesses or the rest the composite business, the industrial sector, but we have a much lower level of invested capital. We don't have the carbon fiber assets, for example, to support. And so we can generate good return slightly lower margins.
Got it. Fair enough. But is that in line with the rest of the industrial or is it higher than the getting
to a bit of a mixed bag, but, yeah, yes, you could say it's more typical for industrial, a little bit lower than the, commercial Aerospace And Space And Defense market.
Got it. And then just a second follow-up. On the raw materials side, can you just talk about what are you seeing and what are your expectations for that rest of the year?
Well, it will occur
the 9th trial year over year certainly through the first two quarters has been lower, price this year than last year, although that, that's combined with the fact we're now hedging and we're kind of smoothing it out. We're still seeing a year over year improvement. Our resins, as you know, a lot of those are part of long term contracts which are bank to bank with our long term commercial contracts. So we're kind of we mitigate risk there. And other than that, I don't think there's anything too dramatic at this point in time to actually point out.
Your next question comes from the line of David Strauss from Barclays.
Good morning.
I wanted to ask about Decatur, timeline for getting ARO qualified there. And what kind of headwind are you seeing in your numbers this year from getting that capacity expansion qualified?
So, David, we expect both the carbon fiber and pan lines, to come up second half of, 2020, then it will start the qualification process, getting fully qualified in early 2021. We're on schedule. We actually have been expediting that a bit, to support some demand we're seeing. Having said that, we've replicated these lines indicator on the pan side. So with respect to the headwind, small fraction, and it's built into our guidance.
With respect to carbon fiber, it's the first carbon fiber line we've put in Decatur. We have them in Spain and we have them in Salt Lake City. But again, we're replicating existing technology, with a lot of the team that is in Salt Lake City. So I would expect, we would expect, those headwinds be relatively immaterial as well.
Okay. I wanted to ask about free cash flow. So you gave this $1,800,000,000 forecast out through 'twenty three. You previously had this $1,000,000,000 forecast, I think, through 'twenty. So if you're taking those 2, it implies it's somewhere $1,200,000,000, $1,300,000,000 in the 'twenty one through 'twenty three period.
How should we expect that to proceed? Is it a linear ramp or what does that look like during that period?
Yes. I mean, again, we're confident on the 16 through 2020, the $1,000,000,000 we're on core for that. And we called out the longer term 2019 through $23,000,000,000 as you say. In terms of the the ramp or whatever the trajectory towards that, yes, we do foresee steady growth in, obviously, earnings and then cash from operations, and we guided to the CapEx, certainly for the next 3 years, 'nineteen, 'twenty, 'twenty, 'fifteen hundred $550,000,000. So I don't expect any dramatic step changes through that period.
There one year that's suddenly going to be dramatically different. So whether it will be perfectly linear or not, I'm not going to say, but it's going to be a fairly steady growth to that $1,800,000,000.
And Patrick, does working capital kind of grow in line with sales or what do you you've commented all about what you've expected in terms of working capital?
Yes, I mean, that's our objective. We will do our best to obviously manage our days of receivables in our days of holding inventory. But I mean inevitably as we grow, we will see some working cap or growth and we'll manage that as tightly as we can.
Your next question comes from the line of Chris Siegmeyer from KeyBanc Capital Markets. Your line is open.
Just a follow-up on the industrial business. On the wind piece, how would you describe what inning you think we might be in on the investment cycle there? And I know Nick you said that the non wind piece tends to be lumpy as well. And I was just hoping maybe you could give a little bit more color on how you kind of see that piece of the business performing in the second half on a year over year basis?
Again, a couple of data points and I don't want to get too far ahead and we're not quite ready to give guidance on 2020, but if you just look at, Vesta's backlog and how it grew every quarter last year and Q1 backlog and wind is up 12% from where it ended 24 2018. So the demand continues to be very strong. On the flip side, production tax credits which have been winding down those expire at the end of the year unless some new incentive is put in place, which could have some impact. But as of right now, we continue to see strong demand, strong forecast and guidance going forward. And new technology being developed to enable the longer blades, which continue to get more efficient.
Which helps justify the, the new farms. I think there also was an announcement recently where a totally unsubsidized Wind Farm was announced in Denmark. So, you know, really when needs to stand on its own, it needs to be competitive. And I think it's getting very close to that point.
Okay. That's helpful. And then in Space And Defense, can you give us any more detail on maybe some of the other programs that may have been better or worse versus last year and then how rotorcraft performed in the quarter?
So on the fixed wing, we did see a nice program step up in Europe, a nice program step up We also had a handful of other fixed wing programs in the US that, stepped up, which combined was a nice, bump. I can't share the names of those, but we're excited with the path. Rotorcraft was was fairly neutral, maybe a little lumpy and down a little bit on the military, down a little bit. 1 quarter And we've pointed out that that does tend to be lumpy. So it just really didn't drive growth quarter over quarter.
V-twenty two was down in line with the current production build rate. That's
helpful. Thank you. Thank you.
Your next question comes from the line of Chris Kapsch from Loop Capital Markets.
Good morning. I had a quick one just on the depreciation expense. I get it to up, I think, year over year. 2nd quarter, but in the 1st quarter was up $8,900,000. So sequentially, D and A is down $4,700,000, just looking for an explanation and what should we expect those levels to be over the balance of 20.19?
Yes. So we guided to a 20,000,000 step up in depreciation year over year, 2019 over 2018. And I'd basically stand by that roughly $5,000,000 a quarter. It might be a little bit lumpy what we saw in the first quarter and I'm pretty sure we called it out was we had a one time write down of some program tooling in our industrial business. And so that sort of gave a bit of a hike to the first quarter, but I'd almost put that to one side really the underlying rate is roughly a $5,000,000 per quarter step up a little bit lower in the 2nd quarter admittedly.
But I think I would stand by that $20,000,000 year over year increase plus the one time event we had in the first quarter. So maybe 22, 23 now for the full year.
Is the 2nd quarter, was there some benefit on that from FX or guess it would be modest if there was any
inflation in there, but it's not big.
Got it. Following up on the wind discussion, what so have you had any luck transferring your technology to non VESTUS wind energy customers or is that still a work in process?
So that we are demonstrating and developing our new technology, which has proven to be very fiddling time and cure time and even surface finish. So, I'm excited with that. It's really too early to highlight them, point them out, but I think we have made real strong progress in
the PTC see pre buys in past sort of cycles. Is that just, in this case, an EU or is it, North America as well, the PTC experts expiration that you're
referring to?
It's actually only North America, our wind sales around it really affects 1 third, and it's the North America that that is being safe or Asia, China at all.
K from Wolfe Research. Your line is open.
On situation, are you seeing some sense of to invest in new technology for the NMA? Continues to work with, Boeing and their subs on the technology solutions that clearly attention, I suspect most, if not all of that technical solution. No, it's in the regulatory process. So, you know, we continue to work. We do not that efforts have stopped, a launch date or a program announcement.
So
that path.
Okay, great.
Your next question comes from the line of Ken Herbert from Canaccord. Your line is open.
Hi, good morning. I just wanted to follow-up on the ARC Technologies acquisition you did earlier this year. I think you mentioned it's performing, but maybe is there any specific areas you could comment on where you're and anything unique or you call out as part of that relative to your expectations initially?
I don't think there's one clearly a big part and and when I referenced doing better anticipated, that conservatism in building the business case that, we Again, it's really strong growth on lots of programs. Many of which are we we certainly came out broad based growth across their technologies.
Okay. Thank you. And I apologize if I apologize if I missed this, but but, Nick, can you just comment to perhaps more M and A opportunity now here moving forward? And And maybe just what the would be as you look at M And A opportunity?
Again, the highest priority innovation ways where we can enhance our existing portfolio around Advantrails. So I think, I think the arc acquisition was a great these technologies as well as additive manufacturing in our continued pursuits there and recent qualification with both, think of those type of bolt ons that fit within our space that, have solid financials and that wouldn't distract our team.
Your next question comes from the line of Noah Poponaut from Goldman Sachs. Your line is open.
D and A follow-up, just back to that, that effort to solve for the incremental operating margin. Will will annual D and A actually decline at some point beyond 2019 based on the CapEx reduction you've had, or will Greece?
Latter point there. No, I don't see it declining. I do see the rate of increase coming down year over year. Sort of reflecting the lower level of capital with CapEx we've had for 2 or 3 years now. But I don't see the D and A actually clining, for the next foreseeable future anyway.
Pretty big increase in 2020 compared
That's a good point. So what I would highlight there about 2019, so without the ARC acquisition, 2019 would step up. And I think I mentioned that before. So it depends what you call size in 'nineteen without art would have been sixteen 2020 is going to be a small step down from that I would imagine.
Okay.
Got it. And then, on the max, is it possible to just quantify 1,000,000 of dollars revenue impact in the quarter?
We're not going to get into specific dollars. I think we provided lots of color on that. You know our shipset content and I'll let you, you do the math on, your assumptions.
Fair enough. And then, Nick, maybe just more broadly on it. We'd love to get your perspective on which you have really good broad perspective into had some, you know, the OEM and others have talked about you know, being able to maybe clean some of that up in the grounding. So any perspective on the kind of system wide supply chain cleanup? Has it has that happened?
And, you know, with Boeing stating 57, next year, you know, where do you see the supply chain's ability to make that move from summit 42 back to 52 to 57 in a sort of relatively short period of time?
Yeah. So, again, I think everybody recognizes the unprecedented ramp up especially on engines. I mean, if you think of engine and the cell ramp up for the neo and the Max, I don't believe the market's ever seen that type of growth for a new engine. And as we've seen and recognize there were some, the supply chain has had the And in some cases, put in support, the types of rates that Airbus And Boeing are going to. Having said that, there's some inventory building up and one of the things we're working and making sure we stay close to are the potential supply chain as the rates start infinite, Boeing will be thoughtful in their proposed ramp confirmed and regulatory approvals are are in place.
So again, I think, again, going from those are big numbers. So, we certainly are in a very good position to support the back up for Boeing.
Thanks very much.
Thank you for joining us today. This concludes today's conference call. You may now disconnect.