And welcome to the 4th Quarter 2018 HEXO Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I would now like to introduce your host for today's conference, Patrick Winnerlich, Chief Financial Officer Mr. Winnerlich, you may begin.
Thank you. Good morning, everyone. Welcome to Hexcel Corporation fourth 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 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 rebroadcast without our expressed permission. Your participation on this call to choose your consent to 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 fourth quarter full year 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. Today, we're sharing both 4th order and full year 2018 results with you and both set records for Hexcel. We're reporting a solid quarter and full year and we're guiding to a strong Sales, earnings per share We saw an improvement in Our fourth quarter performance is a positive indicator that we are well positioned to deliver strong results in 2019. Now let's turn to some specifics in our full year results, and I'll conclude with our outlook for the market ahead and our guidance for 2019.
Full year 2018 sales were almost $2,200,000,000, up more than 10% year over year. And adjusted diluted EPS was $3.05, an increase of 14% from last year. In addition, 2018 was another record year for free cash flow generation, which came in at $237,000,000. These are solid results given a number of headwinds we encountered during the year. Let me pause here and take a moment to thank our entire Hexcel team I'm very proud of our extraordinary job in every area and especially in staying disciplined when it came to controlling costs, working efficiently, staying focused on innovation and delivering value.
Our objective is now to continue our focus on sustained operational excellence by driving productivity and process improvements that will lead to enhanced margin quality in 2019 beyond. Commercial Aerospace sales in 20.18 of $1,500,000,000 were 8% higher than 2017. We saw continued growth for the Airbus A350 as it increased to rate 10 by the end of the year plus a full year of the Boeing 787 at rate 12. The transition to the Airbus A320neo and the Boeing 737 Max accelerated strongly in 2018, and Hexcel benefited from both the increased ship set values of the Neo and Max compared to the legacy models as well as increased build rates for these narrow body programs. We also saw a large step up in sales volume for other commercial aerospace which includes business and regional Jets.
Bombardier, Dassault and Embraer business Jets all provided a strong increase in year over year revenues. An increase of almost 7% over 2017. Our original guidance for 2018, you'll remember, was for space and defense sales to be stable year over year. As the year progressed, we were pleased to see greater than expected growth across a large number of programs led by the F-thirty 5 Joint Strike Fighter, which more than offset the expected reduction in the A400 down build rate. Military rotorcraft was strong again in 2018, including notably the Blackhawk program, and we also saw a much stronger year for Civil rotorcraft with robust double digit growth over 2017 levels.
Finally, turning to industrial where sales were $294,000,000 in 20 18, almost 30% above 2017 This time last year, I said that we were optimistic for a recovery of wind demand in 2018 and our numbers, yes, that our technology innovations and efforts to reposition our materials for new wind turbine blades has been successful. Winds sales increased 67% year over year as our material was used for blades on a number of new turbines at our key win customer vestas. Before I get into the 2019 guidance, I'd like to mention a couple of milestones that happened toward the end of 2018. First was the grand opening of our Rucion plant in France. Roussillon is the largest capital project in our history in our first Pan production facility in Europe.
The site is now fully operational and producing qualified pan precursor and aerospace grade carbon fiber for Airbus, Safran and other customers. 2nd, we announced our intent to acquire our technologies and then we closed down the transaction earlier this month. ARC is a leader in material science with a technology portfolio complimentary to Hexcel and exceptional customer relationships, particularly in Space And Defense. This acquisition combines 2 great research and technology teams, to further develop next generation products for both Now that the deal has closed, we're focusing and focused on growing the business and partnering with our customers to provide advanced material solutions for next generation programs and applications. All in all, 4th quarter was a strong end of the year and we have great momentum as we head into 20 19.
Now to that end, let me share some insight into the 2019 guidance provided yesterday. Starting with commercial aerospace, with strong end markets and backlogs coupled with robust global passenger and cargo air traffic we have a positive outlook for commercial aerospace. We anticipate high single digit growth in 2019 sales, driven by wide body production rate increases for the composite rich A350 and Boeing 787 programs with 2019 being the 1st full year at rate 10 for the A350 and a large portion of 2019 see the 787 at rate 14. 2nd, the Airbus A320 and Boeing 737 build rates continue to grow. Combined with the expected completion of the transition to the Neo and Max upgrades, we expect to see another year of strong growth for these narrow body programs as well as production rate increases continued strong order intake is expected to contribute to our 2019 growth as it approaches entry into service in 2020.
Although this platform is still at the beginning of its growth story. I'm also pleased to report that the HEXO team has increased our content on the 777x by 50% compared to the legacy version, which brings an expected chipset value of about $1,500,000 to Hexcel. As we look broadly at commercial Aerospace, we expect ongoing composites adoption across all next generation platforms especially in engines and the cells where we have substantial content and opportunities for further secular penetration. As a reminder, our composite ship set for engines in the cells is growing considerably with new narrow body engine in the cell content increasing threefold and wide body content increasing 50% for new and reengine platforms. Space And Defense continues to be a leading adopter of Advanced Composites and Hexcel benefits from our diverse portfolio of patients that support more than 100 active defense programs and we are actively pursuing new programs and applications.
We expect double digit sales growth in Space And Defense in 2019, driven by strong growth in the F-thirty Five program, as it continues to ramp into The ramp up of the CH-53K heavy lift helicopter, which is expected to continue in 2019 and we anticipate this aircraft becoming a major program for Hexcel in the years ahead. And the addition of ARC Technologies acquisition which increases our growth rate Our technologies is expected to add just more than $50,000,000 to our revenue in 2019. Finally, we anticipate double digit strong double digit growth for wind Energy. Industrial represents 13% of total sales and we are pleased with its growth and are continuing to pursue new and expanded opportunities, not only in wind energy, but also in automotive and other industrial subsectors. Our industrial market provides a multitude of opportunities where advanced composites play a key role in solving light weighting challenges.
Now as we turn toward 2019, we have every reason to believe that the discipline we had in 2018 will continue to serve us well. We're proud of our strong performance in 2018, while overcoming a number of unanticipated headwinds. We remain optimistic for robust growth and continued secular penetration as I've outlined. And as a result, the guidance we are issuing 2019 reflects another strong and record year for Hexcel. As you saw in the earnings release yesterday, Sales are forecast to be between $2,375,000,000 Adjusted diluted earnings per share is expected to be between $3.38 $3.52 We expect free cash flow to remain in the $170,000,000 to $190,000,000 range for expanded capacities to support continued growth Many of you will be invited to outlining our growth expectations, factoring locations for the day and to let you hear directly from our business presidents and other Hexcel Leaders.
Now, let me turn the call over
4th quarter 2018 sales totaled $561,000,000, an increase of 10.2% year over year. Full year 2018 sales were $2,189,000,000, a 10.3% increase over 2017. Our adjusted diluted EPS for the fourth quarter was $0.82, an increase of 17.1% compared to the fourth quarter of 2017 full year adjusted EPS was compared to $2.68 in 2017. Free cash flow for the fourth quarter was $109,000,000 resulting in full year 2018 free cash flow of $237,000,000 compared to $151,000,000 in 2017. A 57% improvement year over year.
I will now provide in currency. As a reminder, currency movements influence our reported results and some of this impact may not be intuitive. The majority of our sales are denominated in dollars. However, our cost base is a mix of dollars, euros and British pounds, as we have a significant manufacturing presence in Europe. As a result, when the dollar weakens against the euro and the British pound, our sales translate higher, but our costs also translate higher resulting in a net headwind to margins.
Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategy layers in hedges over a 10 quarter horizon leading to a smoothing impact to currency rate fluctuations. The dollar weakened in the first half of twenty eighteen, which was a negative for us versus our 2018 guidance, As a result, changes in exchange rates resulted in a $0.05 headwind to our full year earnings per share compared to our original guidance with about $0.02 falling in the fourth quarter of 2018. Now turning to our 4th quarter market performance. Commercial Aerospace represented 69% of total 4th quarter sales Commercial Aerospace sales of $385,000,000 increased 7.1% compared to the fourth quarter of 2017.
Space And Defense represented 17% of our sales. For the 4th quarter, Space And Defense sales totaled $98,000,000 an increase of 1.9% from the same period in 2017. Whilst activity was broad based in the 4th quarter 2018, you will recall that the fourth quarter of 2017 was particularly strong in a number of programs, which influences the year over year comparison. Also as a reminder, we closed on the Arden Technologies acquisition in early January 2019, so ARC is not represented in our 2018 financial results. Going forward, ARC Technology sales will be included fence market and reported in the Engineered Product segment.
Industrial comprise 14% of 4th quarter 2018 sales. Industrial sales totaled $78,000,000, increasing 46 0.7% compared to the prior year period. 4th quarter wind energy sales were an impressive 123% higher than the same period On a consolidated basis, gross margin for the 4th quarter was 26.8% compared to 27.8% in the 4th quarter of 2017. Total depreciation expense increased $4,100,000 from the fourth quarter of 2017, reflecting continued capital investment. We previously called out several headwinds that collectively impacted 2018 and I'd like to provide more color on these, reflecting our confidence that they are substantially behind us as we move into 2019.
First is that our Roussillon startup costs are now behind us as the plant is qualified running 20 fourseven and delivering aerospace qualified pan and carbon fiber. Next, the price of acrylonitrile, which is the base raw material for our carbon fiber reduced during the fourth quarter as it is indirectly impacted by oil prices. We implemented an AN Hedging program during the last quarter of 2018 to smooth the impact of future potential pricing fluctuations and combined with lower pricing at present, we do not foresee acrylonitrile pricing to negatively impact us in 2019. 3rd, wind energy resin pricing showed improvement in the fourth quarter of 2018, Our pricing is now rebased as we go into 2019 and therefore this headwind is behind us. 4th is tariffs is the tariffs that were introduced in 2018 and are now forecasted to be a 2019 annual impact of approximately $4,000,000 to $5,000,000.
We are actively pursuing exemption options to try to minimize this impact and will provide further updates as the year progresses if tariff levels change. And finally, as foreign exchange, which I already addressed for 2018, and rebases for our 2019 guidance. As we enter 2019, we are greater than 75% hedged for both the euro and GBP currencies, therefore minimizing our risk exposure. For the fourth quarter, selling, general and administrative expenses decreased 11% year over year, while sales grew during the same period, as we continue to focus on improved efficiency and managing costs tightly. Research and technology expenses increased $2,300,000 or approximately 18% year over year as we continue to invest in innovation so that we are prepared to meet the future needs of our customers and maintain our market leadership position.
For the fourth quarter, adjusted operating income increased 11% $103,500,000 or 18.4 percent of sales as compared to $93,200,000 or 18.2 percent of sales for the fourth quarter in 2017. For the full year, adjusted operating income was 3.7 $8,900,000 or 17.3 percent compared to $350,600,000 or 17.8 percent for the prior year. This adjusted operating income figure excludes the one time restructuring charge incurred during the fourth quarter of 2018. The year over year impact of exchange rates was effectively neutral due to our currency hedging program. The Composite Materials segment represented 79.7 percent of total sales and generated an operating income margin of 20.9 percent fourth quarter of 2018 as compared to a 22.3% margin in the prior year period.
The Engineered Product segment, which is comprised of our Structures And Engineered Core Businesses, represented 20.3 percent of total sales, and generated an adjusted operating income excluding the restructuring charge as compared to an 11.7% margin in the fourth quarter of 2017. Full year 2018 adjusted operating margin for Engineered Products was 13.9% versus 12.9% in 20 17. While the operating margin is lower than composite materials segment, Engineered Products requires a much lower level of investment, generating returns on invested capital that is attractive as those of the composite segment. The effective tax rate for the fourth quarter of 2018 was 24.2%. For the year, the final effective tax rate was 22%.
Free cash flow totaled $237,000,000 in 2018, representing record cash generation. 2018 free cash flow generation increased $86,000,000 from $151,000,000 of free cash flow generated in 2017. Working capital grew $31,000,000 during 2018, supporting higher sales. Capital expenditures were $179,000,000 in 2018 on an accrual basis in comparison 2017 capital expenditures totaled $284,000,000. We repurchased $75,000,000 of common stock during the fourth quarter, bringing our year to date repurchases to $358,000,000.
We have $385,000,000 remaining under our share repurchase program. Our capital allocation priority continue to be investing in organic growth followed by targeted and disciplined M and A, and we are committed to returning greater than 50 percent of our net income to shareholders through dividends and stock buybacks. In 2018, we returned 150 percent of adjusted net income to shareholders. Finally, I would like to provide a little bit more background to our 2019 guidance provided by Nick. As a reminder, we are forecasting sales in the range adjusted diluted EPS in the range of $3.38 to $3.52 and free cash flow is forecast to exceed $250,000,000.
Capital expenditures are forecast in the range of $170,000,000 to $190,000,000. Additionally, we expect depreciation to increase $4,000,000 related expenses are forecast to be higher in the first quarter of 2019 compared to the following quarters reflecting the timing of recording stock based compensation expense. This will lead to a lower expectations in the following quarters of 2019. Continuing on this seasonality, we expect free cash flow to be stronger gain in the second half of the year. We will continue to invest in researching technology and expect double digit percentage increases.
Our 2019 forecast foreign exchange exposure is presently between 75% 80% hedged we estimate that Guidance is based on an effective tax rate of 24 percent. I also want to highlight that we expect cash taxes increase approximately $30,000,000 compared to 2018, reflecting higher forecast income, reduced capital expenditures, and fewer remaining prior period tax credits. Lastly, please note following this call, there will be an updated investor deck posted to our website which will include the 2019 guidance and supporting information. With that, let me turn the call back to Nick.
Thanks, Patrick. In summary, Q4 2018 were marked by record sales, earnings per share, and free cash flow. Hexcel is benefiting not only from aircraft program ramp ups, continued adoption of advanced composites, and strong demand but also from our internal efforts to work more efficiently, continuously improve our processes develop new and innovative products and position ourselves for growth. Let me say it again, I'm very proud of Our markets are strong with continued long term growth and secular penetration expected. Our focus remains squarely on delivering exceptional performance to achieve great results.
We're confident in our position as a global leader in Advanced Composite Technology as well as Sarah will now turn it over to you and we are ready to take questions.
You. Our first question comes from the line of Ken Herbert with Canaccord Genuity.
Hi, good morning, Patrick and Nick. Good morning. Patrick, I just wanted to first start out on 2019 guidance. If you could, I appreciate the color you gave on the incremental tariff impact. How should we think about but the potential tailwind of gross margins from either France or the AN hedging program, it sounds like clearly the France facility will be a tailwind, but on the AN side, did I interpret your comments correctly to imply that you sort of a flat impact from 2018 into 2019?
Yes. That's probably the best way to look at it. And the fact that we're now hedging AN, we don't anticipate it to be a headwind that we would be talking about going forward. We would certainly minimize the potential for that. So we have essentially a flat position, if you like, built into our guidance and we don't anticipate much movement from that.
On the AN front. And Rucion, yes, very positive news. The plant is now aerospace qualified and producing aerospace grade pan and carbon fiber. And so that will be a significant improvement year over year.
And can you quantify at all what you expect that improvement to me? I mean, it looks like the guidance implies clearly about 50 basis points of gross margin improvement is most of that coming from the Rucion facility?
Well, a part of it's coming from Rucion part of it's obviously coming that the wind energy resin headwind is also behind us. And we've got some nice step up in revenue programs which is driving growth. And underlying all that, we continue to drive efficiencies and productivity throughout the business. So I wouldn't like to attribute the step up just to one thing.
Okay, perfect. Thank you very much. Nice quarter.
Thank you. Thanks Ken.
Thank you. Our next question comes from the line of John McNulty with BMO Capital Markets. Your line is now open.
Taking my question. With regard to wind, it looks like it was, was obviously a huge, huge number both for the quarter and the year. I guess, 1, how should we think about kind of the lumpiness of that in the fourth quarter kind of unusual strength? And then I guess with regard to the repositioning on platforms and the benefit that you got in 2018, has that fully anniversaried itself so that now going forward, it'll more kind of evenly match kind of the overall wind demand or is there still some of that to come in 2019?
I think the outlook Certainly as we look at 2019, John, remains pretty strong. I think we expect to see more growth. I mean, we've highlighted double digit growth our industrial business. And that is driven by wind energy. It can be a little bit lumpy.
I mean, 20 team was a weak year for wind, as you will remember. And the 4th quarter comparison is probably exceptional at 123% up. But we do expect significant growth again into 2019. So we see wind as a positive driver in the industrial sector. In the year ahead.
Great. And then just a quick follow-up on the 777x, certainly a solid increase in you were expecting at least something there. It seems like it's on the certainly on the high end of what we were looking for. Can you give us some color as to like where the bulk of that incremental contact or content is coming from?
Yes, John. Certainly, the GE9X is a very composite intensive engine for us. Both the engine and the nacelle. So the majority of our step up or over 50% of the step up was engine and nacelle related. Having said that, we also gained positions on structures for our matrix or prepreg position.
Great. Thanks very much for the color.
You're welcome.
Thank you. Our next question comes from the line Miles Walton with UBS. Your line is now open.
Maybe start, Patrick, on the financials looking forward, the $4,000,000 to $5,000,000 of tariff impact, that's in the guidance, I imagine. And likewise, $75,000,000 implied share repurchase is also in there as well?
Well, the $4,000,000 to $5,000,000 of tariffs is in there. We didn't really call out a share purchase number. I mean, what I would say on that front is we our objective is to maintain our leverage ratio in the 1.5 to 2 level as we've called out before. You will obviously be aware that we just paid $1,000,000 for ARC Technologies, which went out in January, so that the first quarter of 2019. And within that framework, would still expect to do some stock buyback, although we obviously haven't specified a number.
I was just going
by the 50% return of cash flow. Is that more of a longer term target versus a year commentary?
No, but I mean, we still intend to meet that objective of great than 50%. So
Okay, great. And then the restructuring, can you just comment on, what specifically it was and then how quickly that payoff is in terms of the move to EP for 2019?
Yes. So the restructuring charge relates to our Belgian Engineered Products Plant. It was a one time act to improve productivity and efficiencies to ensure it remains competitive. That plant manages complex engineered core work for the European Aerospace Industry, the charge primarily related to, employment costs, and we would see that payback over the next 2 to 3 years. K.
Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.
Hey, good morning. Thank you for the time. Patrick or Nick, it seems like you have a
Sheila, we cannot hear you Sheila, can you speak up, please?
Yes, sure. It seems like you have several headwinds rolling off in 2019. What are their biggest inhibitors to offer further operating margin leverage as we look forward?
I mean, so the challenge is for us to you. I mean, you're right. So AN, Rucion Wind resin are fundamentally behind us. Tariffs is built into the guidance and we will update as those do or don't change going forward. We are strongly hedged on FX.
So we do our best to try to offset as many of the potential headwinds that we can see. Really, it's up to us now to execute to drive efficiencies, productivity and to leverage the growth we have in a number of key platforms, the 350, the 787 and the narrow bodies, F-thirty Five And Wind Energy, we have the opportunity. And as we have communicated, we will try to push margins as strongly as we can.
And then maybe just one on CapEx, you're guiding flat CapEx year over year. Is there any way to quantify maybe what's maintenance versus expansion and how do we think about potential new requirements of rate increases?
I mean, in terms of maintenance, it's hard to be scientific, as you'll have heard me say many times $60,000,000 to $70,000,000, I would say is maintenance. The rest is growth. We called out in December 17, we were putting in a fiber and pan line indicator. That's a $200,000,000 project. So you can imagine a chunk of the spend in 2019 relates to that project.
Thank you. Our next question comes from the line of Gautam Khanna with Cowen. Your line is now open.
Thanks. Good morning guys.
Good morning. Good morning.
I was wondering if you could quantify how engineered products margins move from the acquisition of ARC? What's sort of the EBIT contribution net of the $4,000,000 of incremental DAW?
Yes. I mean, we're just betting ARC Technologies in, and so we're not going to give too many specifics at current time, it's going to generate sort of just over $50,000,000 in 2019. And we've said it's going to be accretive to EPS. It's within the Engineered Products segment, which has traditionally sort of been in the 12 to 14% margin range. If anything, it will be towards the it will help move that range up rather than down, but it's still a little bit early to call anything specific out.
Okay. That's helpful. And then just in Q4, if you disaggregate incremental margins, and I kind of hate doing this all the time, but if you were to disaggregate in a composite, materials. It was a little bit lower than what it was through the 9 months through Q3. And I was just wondering you mentioned in the prepared remarks, Q4 of last year was kind of a rich mix, but was there anything else kind of one time things that might be fading as we move into next year, that dampened the incrementals at that segment?
No, it was just a mix effects got them that there is nothing particular. We've obviously called out and separated adjusted out the restructuring that was in Engineered Products in any case. From a composite materials, the headwinds we've talked about in 2018 was still there. They're obviously now going away as we go into 2019, which is very positive. But there's nothing particular I would point to other than sort of just a mix as it fell in the 4th quarter.
Our next question comes from the line of Mike Sison with KeyBanc. Your line is now open.
Hey guys, nice quarter there. I think you've mentioned R and D is going to be up double digits in 2019. Any particular areas you're testing in new fiber resins, any new platforms that your R and D is targeting?
Yeah, Mike. Thanks for the question. We, as you saw this year, we invested heavily and similar to our plans going forward. It was broad based. Includes, obviously, next generation fiber, new matrix and resin systems, to enhance the processing of the materials for out of autoclave, faster cure rates.
So there's not one in particular area. And I'd also have to point out that we spend a portion of our internal R and T on process enhancements. To help throughput, to help optimize capital utilization, and to help drive productivity. So it's not one thing really drives it. It's pretty broad based.
Great. And then In terms of ARC, just wanted to revisit, can you maybe talk about the sales synergy there or R and D synergy, really what that business brings to the table for you. And then the type of growth rate you think that, that business should generate over the next couple of years?
Yes. So we're really excited with the acquisition of ARC. The team there is fantastic. Their relationships specifically in the space and defense and a lot of classified programs is fantastic. If you look at what they do is is they add value to composites for either RF, EMI, microwave, developing absorbing materials that allow them to be used in broader applications.
So the fact that ARC is predominantly a U. S. Business gives us an opportunity to expand that technology and look at Europe and the rest of the world as a growth opportunity as well as take advantage of our customer contacts and our product portfolio to add value to our materials to continue to drive even Again, we're as you know, we just closed down the deal. We're integrating, we're sharing best practices and we're really doing a technology review to see where we should prioritize our pursuits.
Great. Thank you.
You're welcome Mike.
Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Your line is now open.
Yes. Hey, good morning guys. It looks like you picked up some share on 777x. Particularly on the structure you've mentioned structure. Was that share your one from Tourette?
I don't want to get into who had it, prior. Again, remember, I mentioned that a big part of the gain was related to the GE9X engine and the nacelle that support that. So, we certainly were successful on some matrix or prepreg opportunities on the structures and secondary structures. But I'll I'll leave it at that.
Is it fair to say it was a share pickup from somebody?
That's fair to say. You know what? I wouldn't assume 100% of it because
there
can be some secular penetration, which we typically see moving from one platform to a new derivative. So, you certainly can't say all of that.
Got you. When you're just kind of changing gears a little bit. It looks like this Boeing Embraer deal is going to close at some point here. They've got a bunch of hurdles behind them. When they do that and the AgMA business or the AgMA segment of Embraer in Portugal will end up being part of Boeing.
And that's their composite centers of center of excellence, as you know, right? Does that present an opportunity for you guys to maybe pick up some more business?
Well, we certainly view it as an opportunity. It may surprise on that. We've had a relationship with Embraer for almost 45 years now. And we're very close to them. We're very engaged.
We have a significant content on the E series as well as the 390. So we've got great positions. I think with the Boeing, involvement that certainly can provide even broader opportunities for us.
Okay. And then finally, maybe just one last question. Kind of down that Boeing vein. When we think about NMA-seven ninety seven, whatever you want to call it, Could you give us some feel for how you're thinking about that as an opportunity? And also probably there's an A320 2 coming down the line or A321XLR, what kind of opportunity in terms of those new products do you have?
Well, again, we've said it before, anytime there's a, an upgrade to an engine a derivative engine or even a derivative aircraft, there's more composite content. For a clean sheet, as an NMA is being discussed, most likely, it's going to be very composite intensive. And that goes for both the structure, the secondary structure as well as engines and nacelles. So, we're working with Boeing. We're working with the engine guys.
We're working with the nacelles guys. We are demonstrating our next generation materials and processes for those applications. And I think for the NMA or for anything new that Airbus may launch. I think we've got a great product portfolio that offers significant advantages going forward. I'm a believer that the composite content expand the ability to make more near net shape.
It just supports the secular penetration to continue.
And then finally, maybe just one last one. If we were to see one to both of those things roll forward, are you capacitized for that or would that require a future investment?
So basically, if we are successful in what we hope to be, it's clearly going to require CapEx in the future. Our CapEx as we're ramping up today is pretty much accounted for. So any step up in a new wing for a program or a new aircraft in addition to the existing platforms would be CapEx incremental addition for us.
Okay, great. Thank you very much.
You're welcome, Ron.
Thank you. Our next question comes from the line of Rob Spingarn with Credit Suisse.
Nick, I wanted to follow-up on Ron's question there on NMA and then a couple other things. But it seems that the time that this is taking for Boeing to make a decision has to do with the business case. And it seems like there's some challenging math on cost versus price. Now you guys have brought some innovation to composites. We think it's a composite airplane.
How do we think about the dynamics of lower cost for composites on these on what would be a very new contemporary platform. Is there a way to think about it in a drop in price per pound, price per installed pound? We know out of autoclave might be part of the solution here. But how do we think about, how meaningful your cost reductions can be here to help Boeing make
Yes. So it's a combination. There's not a simple answer to it because basically we're working all fronts. So for example, we have raw material modifications and options that could lower the material cost for the raw materials that VOEs buy or their subs buy to make parts. That's one element.
A huge part and additional element is related to the processing costs. And again, it depends on which ultimate solution, whether it's out of autoclave, whether it's a prepreg format, will determine how that what the split is with respect to raw material input costs and processing costs. I'd also say you cannot ignore or not take into consideration the lay down rate of the material and how quickly parts can be made and how quickly they can be cured. So it's really broad based It's good for the composites industry because there's opportunity to eliminate scrap and to continue to expand margins. Because we're driving higher value for Airbus, Boeing and others so that they can actually make the product at a lower overall cost.
Is it fair to characterize your area as one of the greatest opportunities to reduce cost relative to something 787?
I don't know that I'd go that far. I think if you look at a relative comparison, we tell you how much the composite content is on an A350, which is very composite intensive. Now you look at that versus an engine or various parts of, mechanicals and systems. I don't I just wouldn't want to go there.
Okay, fair. But that's helpful on that. Patrick, I have one for you on the on the cash conversion, which just quick math suggests that that drops. If you're at $2.50 and I understand you might be higher, the cash conversion of $2.50 drops a little bit in 2019. And you called out the cash tax increase.
Is that everything? Are there other puts and takes that we should be mindful of? If I back out the cash taxing, it actually looks like your conversion would go up. So I
just wanted to understand what
the underlying is there. Yes.
I mean, we see the with the reduced CapEx level, the free cash flow continues to be strong. The cash taxes of about 1,000,000, I mentioned. I would also say that, working capital will go up to some extent as the business grows with receivables and inventory being as managed as tightly as we can in terms of days, but there will be a step up in working capital. And we'll probably have a little bit more interest charge but fundamentals of the business to generate the cash are still strong.
Thank you. Our next question comes from the line of Paretosh Misra with Berenberg. Your line is now open.
Great. Thank you. Actually, most of my questions have been answered, but just to have to follow-up on that, your new facility in France, Indonesia. So your new your guidance for 2019, are you assuming operating at full run rate for the entire year or I don't know which is there any maintenance? And are you fully booked to be to operate at that full run rate?
Thanks.
Yes. So that, that Lucy on-site is running 7 24 on both the pan and the carbon fiber lines. And that material coming off those lines is accounted for. So it's running flat out from the start of the year through the year. You're welcome.
Thank you. Our next question comes from the line of David Strauss with Barclays. Your line is now open.
Good morning. Thanks for taking my question.
Good morning, David.
So I assume it is, but is Is Art included in the guidance that you provided, say, the $50,000,000 in sales and the incremental financing and the accretion that you talked that's all baked into the guidance you already provided?
It is. It is.
Okay.
And then on depreciation. So I know it's stepping up another $20,000,000 here in 'nineteen, Patrick. Does this does this step out continue to step up beyond 2019 as well?
Yes. I mean, as I sort of said, 4 of that 1,000,000 going into 2019 is related to the ARC acquisition. So it would have been 16 without ARC, which would have been a slightly lower step up than we saw this year. But with the capital we've been spending in recent years, we still have some step ups ahead of us, albeit that they will be coming down in magnitude as each year goes forward. At the current level of CapEx.
Okay. And then I want to go to the margin side of things, maybe a little bit differently. So I think a while back, you used to provide an incremental margin target of around 25% incremental. You obviously haven't hit that given some of the headwinds you highlighted. Would you say that that 25 percent incremental margin range is somewhere back in play now given the absence of some of these headwinds
So, I mean, you would have picked up over the last year, we've moved away from giving specific incremental margins. There's very few companies that do that. And we found the performance and timing with headwinds and revenue platform build, it was lumpy. And so we are just continuing to drive our incremental margins as strongly as we can. And we will push them as high as we can without a fixed target.
We're not bounding ourselves and we will hopefully at times go above levels that we've that have previously been targeted. So the outlook is good. Some key programs, as I've said, the 7 7, 350 narrow bodies are all strong going into 2019 year over year growth with the headwinds are going away So it should be a positive incremental margin scenario.
Thank you. Our next question comes from the line of Noah Popnik with Goldman Sachs. Your line is now open.
Hey, good morning, everyone.
Good morning, Noah.
I wanted to ask, do you expect the year over year rate of growth in your commercial aerospace business to be faster or slower in 2020 compared to 2019?
So, no, we're really not going to get into 2020. At this time. We're going to certainly provide more color on our longer term outlook in all market segments when we host our investor day in Q2. As I said, we're very bullish on our positions. We're very bullish on build rates and the overall markets And I'd prefer to hold off and give you that, in Q2.
Okay. Fair enough. Patrick, just going back to the cash flow discussion, you were having a few questions ago. The cash from ops has grown slower than the EBIT and the earnings a few years in a row and you went through some of the moving pieces in that. I guess, as we move out of this year, do those recouple or are there other things we need to be thinking about beyond this year that can keep those decoupled?
Yes. Hi, Narra. Again, without getting to too long a term, I mean, we are seeing a step up this year in cash taxes, which I wouldn't necessarily expect to repeat in the same magnitude. I mean, as the business grows, working capital will continue to grow. We'll obviously manage that as tightly as we can.
Interest will grow a little bit as we maintain leverage and grow debt a little bit. So the outlook should be strong. So the the step up in cash taxes for sure should not be seen as an annual expectation, Noah.
Okay. And in the CapEx, you still have new facility efforts keeping the CapEx a little bit elevated this year compared to where it maybe goes in the future absent new aircraft developments. Is that fair?
So, yeah, we certainly have capital in process. 1 of the big investments is in Decatur, Alabama, where we announced the next tranche of precursor and carbon fiber assets, which are being built as we speak. And those are scheduled to come online in 2020 2019. So that's, as you know, carbon fiber and precursor drive a big a big part of our CapEx spend.
Our next question comes from the line of Krishna Sinha with Vertical Research. Your line is now open.
Hi, thank you. So you elaborated on a lot of your price cost action. You talked about the tariffs and your acrylonitrile about your payback on the restructuring. Are there any is there anything else that we should be focused on on the cost side? I noticed that corporate expense was down quite a bit this quarter.
So just looking at 2019, are there any further cost actions you're going to take that you have kind of outlined right now or or is there anything we should have
No, I mean, it was very much a one time restructuring activity and we called it out. We haven't had a restructuring activity for several years and there's certainly nothing else in the pipeline at the current time. In terms of the headwinds, hopefully, I'll try to put across a number of them are going away, the acrylonitrile, the wind resin, the rucian startup costs are behind us. Clearly, the tariff level we see is based into our guidance. What happens next, we will be vigilant on and responsive too.
And we are trying to achieve an exemption to about 50% to 60% of the existing tariff charge that we're getting. So we will keep you updated on that. But no, I mean, fundamentally, again, top line growth with a number of headwinds moving away, we see a positive margin outlook and there's nothing else in particular I would call out.
Okay. And then I think Nick commented a little bit about the penetration in the engine and the cells business. On the GE and IMAX and some other platforms. Can you just talk kind of bigger picture? What's kind of the overall market opportunity for you guys to take share from competitors, meaning not growth on entirely new platforms like the NMA, but on existing platforms, is there still a lot of room for you guys to just take share in Aerostructures, just by providing a composite alternative or are you kind of reaching the upper end of that limit and really the next leg up in growth is going to be from new platforms like the NMA?
So again, when you're talking about taking share, you have to remember that, many of these parts and materials go into sole source positions, where it's very difficult because of the qualification process the time to qualify as well as the cost to qualify. So taking share from our definition, we're looking at secular penetration replacing metals, providing lightweight solutions and really driving that. For example, I'll give you one that is fairly straightforward and that's engines in the cells as we are and improve our capability to drive our temperatures higher, high temperature alloy metals typically with composite solutions. So it's more about secular penetration in new platforms and not so much about displacing other composites.
This concludes today's question and answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.