Good day, ladies and gentlemen, and welcome to the Standard West Title Explaining Hexcel Third Quarter 2018 Earnings Conference Call. At this time I would now like to introduce your host for today's conference, Patrick Windsorlich, Chief Financial Officer. Sir, you may begin.
Good morning, everyone. Welcome to Hexcel Corporation's 3rd 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 prior 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 call would 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 Kirk Goddard, our Vice President of Investor Relations. The first of the call is to review our third quarter 2018 results detailed in our news release issued yesterday.
Now, let me turn
Our third quarter results demonstrated continued momentum and supports our positive outlook to finish 2018 strongly. As you will have read in last night's release, our 3rd quarter sales were $540,000,000, a 10.4% increase over our third quarter 2017 sales in constant currency. We delivered 3rd quarter operating income of almost $97,000,000, of 17.9%. Our adjusted diluted EPS of $0.80 rose nearly 13 percent above last year's third quarter. Free cash flow for the 1st 9 months was $128,000,000 versus $87,000,000 for the same period last year, representing Now let me share some insight into the key drivers for the quarter.
Starting with commercial aerospace, sales increased 6.1% in constant currency for the quarter compared and the higher shipset content on the Neo and the Max continue to be key growth drivers. Year to date, our commercial aerospace sales are 8.4% higher in constant currency, reflecting solid and continued growth for the A350, 787 777x and the narrow body programs. In recent quarters, we have also seen a resurgence in regional and business aircraft. Sales this quarter in other commercial aerospace were up 15% driven by a number of Bombardier, Embraer and Dassault programs. You'll remember that 2017, sales in this sector were down 6.5%, so we are seeing a strong recovery in this market space.
Turning to Space And Defense. Sales of $90,000,000 reflect an increase of just under 10% in constant currency for the quarter as compared to the third quarter of 2017. Higher sales in military and commercial rotorcraft more than offset the previously announced lower Airbus A400M production rate. Key ongoing programs for Hexcel include the F-thirty 5 Joint Strike Fighter, the V-twenty two Osprey, the UH-sixty Blackhawk and we are beginning to see the ramp up for the CH-53K heavy lift helicopter. As a reminder, Hexcel enjoys strong positions in the space and defense sector, which continues to be a leading adopter of advanced composites.
We benefit from our diverse portfolio of applications that support more than 100 active defense programs. Finally, to our industrial market, which accounts for 13% of our year to date sales, total industrial sales of $77,000,000 in the 3rd quarter represents an increase of more than 38% in constant currency. As a reminder, last year, we reported that sales were challenging in this market and that we expected to see an improvement in 2018 as legacy wind energy blades transitioned to higher composite content blades. As you can see from our results this quarter, I'm pleased to report that The fact that the world continues to adopt clean and affordable wind energy is a tailwind for Hexcel and we're excited to see continued strong demand. During the third quarter, Hexcel performed in line with expectations by almost every measure, and we are proud of our results.
Supported by our key initiative of operational excellence. Despite the headwinds of unfavorable exchange rates, higher than expected AN and wind resin pricing and new tariffs in the U. S, which negatively impacted margins, our team proved yet again they are the strength within delivering another disciplined 1st class performance. As we look to finishing out 2018 strongly and on target to hit our guidance, I want to remind you of HEXO's commitment to driving shareholder value. The first being investing in innovation to end future programs and expand composite penetration Over the last three months, we showcased that commitment by driving innovation and growth.
Let me share some examples. Earlier this month, we celebrated the grand opening of our Rucion plant in France, which will help us meet the growing demand for advanced aerospace composites. Admittedly, getting Rucion ready for business has been somewhat of a headwind over recent quarters, yet we expect it to quickly switch over to a tailwind and produce Remember that Rucion becomes our first plant to produce both pan precursor as well as carbon fiber in an optimized supply chain configuration. This co location of assets has further evidence that from raw materials to fly away parts, Hexcel is committed to being the most vertically integrated advanced composite company in the world. In September, our acoustic cap sound reducing honeycomb completed a successful joint NASA Boeing flight test on a 7 37 Max Test platform.
This solution provides approximately 40% noise reduction compared to the legacy platform. Also in September, Northrop Grumman conducted its 1st ground test of the GEM 63 molar for the Atlas 5 Rock using our carbon fiber, reinforcements and prepreg. And in industrial, the new Lamborghini car was introduced and it includes Hexcel composite materials throughout, including the safety critical monocot the rear spoiler and the roof. As the advanced composites leader, innovation and technology are at the heart of what we do at Hexcel. We continue to invest in significantly in R And T And Manufacturing Innovation to drive the development and adoption of Advanced Material Technologies and continually broaden our technical solutions for our customers.
Our second commitment is exploring M and A opportunities which includes pursuing with vigilance and discipline adjacent technologies that would complement our existing portfolio. We believe that this provides another strategic avenue for us to grow. These investments will be supported by our continued journey from cash investment compared to $87,000,000 in 20 17. We remain committed to achieve greater than $230,000,000 in free cash flow in 2018, which would be a record year for Hexcel. Investment and innovation to win new programs and expand composite penetration, significant growth in free cash flow, and continued stock repurchases and returning cash shareholders through dividends all demonstrate our commitment to creating value for our shareholders.
In summary, we are proud of yet another strong quarter thanks to our team's focus to deliver on our commitments. As a result, we are narrowing our guidance ranges for 2018, We now expect full and adjusted diluted earnings per share of $2.99 to 3.07 We target sales to achieve and us more of the quarter's financial details.
Thank you, Nick. Let me begin with a 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 this impact may not be intuitive. The majority of our revenues are denominated in dollars.
However, our cost base 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 headwind 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. As a result, there is a smoothing impact to currency rate fluctuations.
The continued strength in of the dollar as 2018 progresses is favorable for Hexcel, although the impact is moderated by our hedging program. Consistent with last quarter, we continue to expect a $0.04 to 0.05 dollars headwind to full year earnings per share with about a $0.01 impact falling in the third quarter of 2018. Sales of $540,000,000 in the third quarter 2018 were up 10.4% year over year making another solid quarter for growth. Our adjusted diluted EPS for the third quarter was $0.80, an increase of 12.7% compared to the third quarter of 2017. Now turning to our markets.
Commercial Aerospace represented 69% of total 3rd quarter sales Commercial Aerospace sales of $373,000,000 increased 6.1% compared to the third quarter of 2017. Narrowbody aircraft production rates combined with the transition to the latest generation neo and Max configurations with the largest contributor to the year over year sales growth. Other commercial aerospace continued to strengthen particularly due to continued demand in business jets related to Bombardier, Embraer and Datto programs. Space And Defense represented 17% of sales. For the 3rd quarter, Space And Defense sales totaled $90,000,000 an increase of 9 point craft programs contributed to the sales uptick offsetting the expected declines in the A400M program.
Satellite and launches also grew strongly, reflecting greater activity in the space sector. Industrial comprised just comprised 14% of 3rd quarters of 2018 sales, Industrial sales totaled $77,000,000, increasing 38.2% compared to the same period in 2017. Wind Energy continues to strengthen with the adoption of new generation of blades by our largest wind energy customer which is consistent with our On a consolidated basis, gross margin for the 3rd quarter was 26.5% as compared to 27.6% in third quarter of 2017. Depreciation expense increased year over year due to continued investment in the business to support growth. As Nick briefly mentioned, the third quarter of 2018 was also impacted by headwinds called out after the 2nd quarter, including the cost of acrylonitrile, which is the base raw material for our carbon fiber.
And is indirectly impacted by oil prices. Additional tariffs were imposed quarter that will impact Hexcel though we are actively pursuing methods to try to minimize the impact over time. Last quarter, I called out a resin headwind for our wind energy business due to the temporary pollution control measures enacted by the Chinese authorities. This issue eased some during the third quarter of 2018 and while pricing is still elevated compared to a year ago, the magnitude of the difference is lessening as pricing is moving back down. And we don't expect this headwind to continue into 2019.
Total depreciation expense increased $4,500,000 from the third quarter of 2017 reflecting continued capital investment. As we have previously mentioned, we expect our depreciation expense to be higher year on year by approximately $20,000,000. Our continual focus on disciplined cost control led to approximately a 7% reduction in selling, general and administrative expenses year over year, while sales grew during the same period. Research and technology expenses increased $2,100,000 or approximately 19% year over year as we continue to invest in innovation and prepare for future aircraft platforms and other composite applications will be the driving force behind Hexcel's long term growth objective. For the third quarter, operating income increased 7.4 point $7,400,000 to $96,500,000 or 17.9 percent of sales as compared to $89,100,000 or 18.1% of sales for the third quarter in 2017.
The year over year impact of exchange rates was effectively neutral due to our currency hedging program. The composite material segment represented 80.1% of total sales and generated an operating income margin of 20.6 percent for the third quarter of 2018 as compared to 21.7% margin in the prior year period. The Engineered Product segment, which is comprised of our Structures And Engineered Core Businesses represented 19.9 for the third quarter of 2018 as compared to a 13.1% margin in the third quarter of 2017. The year to date margin is now 13.5%. 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 are as attractive as those as the composite segment.
The effective tax rate for This effective rate was favorably impacted by changes related to the 2017 Tax Cut And Jobs Act or tax reform changes in tax accounting methods, the release of evaluation allowance related to one of our foreign jurisdictions and ongoing business developments that affected our transfer pricing, which will have a favorable impact on our ongoing tax rate. We are now guiding to an underlying effective Free cash flow totaled $128,000,000 year to date compared to $87,000,000 for the comparable prior year period. Working capital was a use of cash during the third quarter, reflecting the growth in revenue in 2018. Strong focus continues in this area And as we have seen in prior years, we expect working capital to be a source of cash in the fourth quarter of 2018. Capital expenditures were $43,000,000 for the third quarter on an accord basis.
In comparison, capital expenditures in the third quarter of 2017 $48,000,000. Year to date, 2018 capital expenditures are in line with our 2018 financial guidance. We repurchased $102,000,000 of common stock during the third quarter, bringing our year to date repurchases to $283,000,000 we have $460,000,000 remaining under our share repurchase program. Facility to gain aerospace qualification early in 2019. And once this is completed, production will ramp quickly.
Roussillon, which was a headwind in the first half of twenty eighteen, is transitioning in the second half and will contribute to margin early in 2019 following aerospace qualifications. In conclusion, I will address our updated 2018 guidance. Whilst there are a number of headwinds that developed during 2018, we are benefiting from continued market growth, operational strength across our business and a lower tax rate. Previous guidance was a range of $2,100,000,000 to $2,200,000,000. We are forecasting full year adjusted diluted earnings per shares to be between $2.99 $3.07.
Previous guidance was a range of $2.96 to $3.10. We continue to forecast generating free cash flow in excess of $230,000,000 for the year. We are forecasting accrual based capital expenditures of $170,000,000 to $190,000,000 which is unchanged. I would like to remind you that our capital expenditures continue to support investment for growth over the next several years both aerospace and industrial applications. Our capital allocation priorities continue to be investing in organic growth followed by targeted and disciplined M and A and we are committed to returning greater than 50% of our net income to shareholders through dividends and stock buybacks.
With that, let me turn the call back to Nick.
Thanks Patrick. HEXL delivered a solid 3rd quarter and continues to be on track to meet our full year guidance. At HEXL, our team consistently demonstrates the ability to deliver on commitments to a strong focus on operational excellence constantly striving to achieve higher levels of productivity and efficiency while leveraging costs as our sales grow. Our focus throughout the remainder of 2018 continues to be driving innovation and operational excellence to achieve strong sustainable financial results. The transition from an investment cycle to a cash generating cycle is clear.
Our disciplined capital deployment priorities remain unchanged and we are delivering on our commitments to our shareholders. Revenue passenger traffic is robust. Backlogs are strong and Hexcel has not been affected by any bottlenecks in our customer supply chain which we expect to continue to and as new programs such as the 777x begin to ramp up and as new engines and nacelles where we have substantial composite content are adopted across next generation program. Our composite ship set for engines in the cells are growing considerably with new narrow body engine and nacelle content increasing threefold and wide body engine and nacelle content going up 50%. Anticipated revenue growth from engines into cells over the next few years is in the high single digits.
We also expect solid growth to continue the CH-53K and medium lift helicopters. And our industrial market provides a multitude of opportunities ranging from wind to automotive and energy electric vehicles to energy storage where advanced composites have a key role to play in solving future light weighting challenges. It should be clear, growth remains a key strategic focus for Hexcel. As we have said before, Advanced Composites are a secular growth story, providing the best strength to weight ratio of any structural materials. The advantages of composite or evident lighter, stronger, greater durability, and there are enormous opportunities in front of us on new more composite intensive applications in Aerospace and beyond.
We're confident in our position as a global leader in advanced composite technology and expect to continue generating sustained long term growth and creating shareholder value. Ashley will now turn it over to you and like take questions.
Questions. And our first question comes from the line of Mike Eisen with KeyBanc. Your line is now open.
Hey guys.
In terms of commercial aerospace, Nick, can you think about 2019? I know don't give specific guidance yet, but it still sounds like there's a lot of momentum in engines, nacelles and such. So when you think about the growth rate heading into 2019 relative to, let's say, 2018, should it mirror 2018? Should it get better? Is it about the same?
A little bit less?
Well, Mike, you're right on your first assumption. It's a little early for us to give specific guidance, but I will say If you look at the fundamentals and if you look at revenue passenger growth, if you look at the backlog, if you look at even order intake, during the Farmboro show this year. You look at the fact that the 787 is ramping to 14 in 2019 and you look at the fact that, 2019, we should see a full year of rate 10 per month, all of which translate into strong growth for us, And then certainly the narrow bodies, which really were the biggest driver in Q3, continuing to ramp up both the chipset content benefit as well as the rates climbing upwards to $63.57 in 2019.
Great. And then for wind, you talked about moving more composites on the blades from the legacy wind blades. This has been a banner year for that. Does that have a lot of legs heading into 2019 2020. Is it sort of all done or do we still have a lot of opportunity there in terms of adding more composites?
Yes. So again, just as a reminder, remember, 2017 was really soft. And we guided back at the end of 2017 that 2018 would be, we expected it to be at or better than 2016 levels. Which it has been. Having said that, our key customers are still ramping up and we expect the growth to continue well into 2019 and beyond.
Great. Thank you.
Thank you.
And our next question comes from the line of Krishna Sinha with Vertical Research Partners. Your line is now open.
Hi,
thanks. Just to talk about the margins real quick. You called out 3 components there that are headwinds. You called them out last quarter, but it sounds like tariffs last quarter you said would be a $2,000,000 to $3,000,000 annual impact. How much do you think it's going to be an impact now that they've increased?
And, in worst case scenario going forward, how much can we expect for that to take out of margins? And then questions for the acrylonitrile price cost issues you're having? And then resin sounds like it's going away, but can you just kind of size that for us as well?
Yes. Hi there. So in relation to the tariffs, we called out a $2,000,000 to $3,000,000 impact sort of following 2nd quarter earnings. What we've seen in the 3rd quarter would push us to probably say $4,000,000 to $5,000,000 what I would say and that's $4,000,000 to $5,000,000 on an annual basis. What I would say is we're working hard to get exemptions on part of that, hopefully just over half fifty-sixty percent of that that we can mitigate and we can avoid as a unique sort of supply chain that we may be able to offset those tariffs.
But obviously, we're watching the tariff space closely. And we'll do what we can to mitigate it. But all else aside, if we can't do anything, it is $4,000,000 to $5,000,000, which after tax and dividing is probably $0.04 to $0.05 of EPS. In relation to AN and the wind energy resins, we haven't and we don't intend to put exact dollar amounts around those. The wind resin the price is easing a little bit and through our contracts, we have an opportunity to sort of rebase as we go into 2019 to overcome that.
So as I said, We don't see that as a headwind in 2019. The acrylonitrile, is the base for our carbon fiber that has gone up as a result indirectly of oil prices. We have some oil closes in a number of our commercial contracts that allow us to move our pricing periodically. So some of that impact will be mitigated What I would say is that just to put a perspective on this AN is sort of right at the front end of our vertical supply chain It's not our biggest raw material. So for example, epoxy resins that go into our films, we have long term contracts on So we're protected from the price of oil, where that would be a bigger impact for us.
And our commercial contracts running through 2030, we have supply contracts also through 2030 that protect us there.
Okay. And just one follow-up. Just bridging the gap here because you got some benefit from tax rate in the quarter, call it $12,000,000 or $13,000,000. And then you've it sounds like the tax rate will level off in the 4th quarter back to sort of 24%, 25%. But that kind of you reiterated the EPS midpoint of your guidance.
And so I'm just trying to figure out what's the gap there that just all acrylonitrile resin and tariffs? Can you just kind of size that for
Well, I mean, you're obviously putting the right pieces together. I mean, so we have the headwinds. We've got the acrylic nitride. We've got the FX. Which we've consistently said against our guidance is about $0.05.
We've got the tariffs, which we've just talked about. We've got the wind resins which continue through this quarter. So those have all been headwinds. And in the 1st part of the year, we had Rucion, the new plant in France, which is now transitioning and will become a tailwind as we go into 2019. So those are headwinds, which the guys operationally, our teams have worked very hard to overcome as much as possible And then with the help of tax, we're getting ourselves to deliver our guided EPS.
The tax rate I would say is 24 percent now our underlying effective tax rate and that's what you'll see in the 4th quarter So the average for the year is 2% or so for the year. And 24% as I sit here today is my best view forward on tax So it's a combination of working hard to overcome the headwinds. A lot of which are going to sort of disappear as we go also any less than as we go into 2019. And with a little bit of help attacks, we're going to deliver our initial forecasted numbers.
Okay. And just one more follow-up then. Can you bridge to the you didn't change your free cash flow guidance. And so does that kind of imply that CapEx will come in towards the lower end of your range in order to kind of help you. You reiterated 170 to 190 of CapEx Do we see a little bit of a CapEx pullback in the fourth quarter in order to kind of help you hit that $230,000,000 or more of free cash flow?
I would expect this to come in in that range and we've obviously delivered it. The midpoint is what it is deliberately. Let me say that.
Thank you. And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Hi, good morning, Nick and Patrick. I'm trying to avoid saying the word acrylonitrile, but I guess it's going to happen.
How do we think about that raw material Are there any raw material other price increases that you're seeing outside of that one and the resin and the timing of when the contracts catch up, Patrick, you seem to suggest it's a step up in a long term commercial contract and how we could think about when they match up?
Yes. Hi, Sheila. So most of our key raw material Materials, certainly our major epoxy multifunctional resins, as I was saying, are covered by long term contracts. So we do a very good job to mitigate that impact. Acrylonitrile floats, it's related to a propylene formula we buy on, which is related to the price of oil ultimately.
And we have had some headwinds for that. Now we're not going to quantify that exactly, but it has been a headwind. It's hard to we have different commercial contracts, as you can imagine, and structure differently, but we have a number of them with clauses, which will allow us to recover some of the oil price movement as a proxy for the AN. And obviously over time that will lessen the impact. So again, we would be more positive as we go into 2019, but the elevated price of oil may well continue.
I mean, that's anyone's guess. But we believe we will continue to do a better and better job in overcoming that impact.
Okay, thanks. And then just on Rousion, as it comes online, and you receive aerospace qualification, what's the cadence of capacity that's coming online and how do we think about just capacity utilization in that facility next year?
The line so as we've said, the line should be qualified towards the end of this year and we would expect it to ramp up with the aerospace qualifications dying in 2019, it will get to capacity very quickly. Once it's qualified, the facility is running it will fill. We need that capacity as Nick said. We will have rate 10 on the A350 next year and in part it will support that and it will support other Safran And Aerospace programs. So that capacity will fill quickly starting in 20 team.
Great. Thank you. Thank you. And our next question comes from the line of Robert Spingarn with Credit Suisse. Your line is now open.
Good morning. Nick, thanks for the color on the growth that you had a little while ago. I wanted to dig into that a little bit further. I guess a lot of people are focused on this. But based on your current book of business, most of your commercial aero programs achieve mature rate next year.
So is it fair to conclude that that part of the business plateaus on a revenue basis in H2 2019, perhaps with the exception of what you talked about on the engines in the cells and the 777x?
Yes. So Rob, there's still going to be continued growth on the narrow bodies. They're going to continue to ramp up. The 777x will be starting, at the end of the century and going into 2020. So given the other engine in the cell programs, we still see good growth going forward.
We haven't changed our long term guidance that we provided. And we continue to work on new opportunities and applications including the finalizing our shipset content on the 777x, which we're getting very close to being able to do. And I hope to do that by the end of the year. The other thing is really getting a full year of full rate on the 787 at 14 and the A350 at 10, that's going to provide continued growth as well.
Well, understanding, yes, that won't hit until 2020, but I wanted your comment on narrow bodies continuing to grow. Are you talking about the possibility that Boeing And Airbus go above the current targets?
Going above the targets that they've said, the $63.57 are the latest that they've communicated. And we're not going to go beyond that, but we're certainly doing trades to ramp up above that.
Okay. And then have you been able to quantify? You said 777x you'd give us more information soon, but can we get some sense of what content is relative to the 777?
It's going to be higher and in my term significantly higher. So, we're happy with that. Again, we've got a couple of other packages that we're working on And rather than to get ahead of those, I want those to get, awarded and then we'll communicate.
Okay. And then just on the 4th quarter, the way the guidance reads Patrick is you could be down $30,000,000 or up $30,000,000 in sales. Is that all simply timing? And, if it is, what is it the timing on? And then my last question is on the wind growth of 50% this year.
You talked about the easier comp, but how do we think about that 50% in terms of volume versus pricing and content? Thanks.
Okay. A couple of questions there. So, and we always get some movement in our sales and our sales mix. And then you've obviously got a little bit of FX, which can move our number about and We obviously tightened the range. Perhaps we didn't tighten it enough for you.
But, we
Well, it's up and down, which is sequentially, which is the cure?
Yes. So we see 2170 obviously is the midpoint of what we said. You can obviously do the math, which where we're kind of guiding to for that. It's just above where we guided to at the beginning of the year. And you can get some pull ins pull out I mean, we have a complex supply chain that we're putting material into, and we think that's a reasonable range.
We're obviously aiming for midpoint. In terms of wind energy, in terms of wind energy, the growth it's good at good margins. I mean, obviously, we've talked about the wind energy resin headwind which has been a headwind this year. So our margins are a little bit depressed because of that, but it's saying going into 2019, we see continued growth in wind Energy. And without those headwinds, it should be a strong market space for us.
Thank you. And our next question comes from the line of Guatman Kana with Cowen and Company. Your line is now open.
Yes, thank you. I have two questions. First, I was wondering if you could comment on how downstream yields have changed if at all among your many customers on the A350 or any other programs? Or should we are the revenue per ships that disclosures you've given in the past still, tracking to what you're seeing?
Yes. Hi, got them. I would say they're close. I mean, I mean, we look at this, I think if we're Spain before, where we continually roll as we roll our strategic plan, we dig into the supply chains, which is can be complex for us because we ship to multiple OEMs, multiple subcontractors of the OEMs and many delivery locations themselves. And so we are continually trying to assess those shipsets on the planes.
And we stand by what we've put out today So we're certainly in those ballpark closed just below just above. We will revise them periodically. In terms of the efficiency and yields of our customers, as rates go up, certainly as you go through a growth curve or a learning curve for the new platforms, we would expect our customers to improve. And what I would remind you is the ship sets that we put out attempt to be at the final full build rate rate. Now the early planes, the first 15, 10 planes take far more material, the buy to fly ratio is much higher.
But we build that really into what we put out. So at the moment, the A350 is getting close to 10. We don't expect to see a lot of movement there. The 787 rate 14, sort of rate 1214 has been at that elevated level for some time. We don't expect to see a lot of movement.
So any new program, we do go through a curve. But as I say, the shift set value we put out, we're trying to estimate that final position from the beginning. So we try to avoid adjusting the ship sets as much as possible.
I appreciate it. And my follow-up question was, given the CapEx number, it was down obviously year over year in 2018, what does that, portend for D And A next year? Does, how much does D And A rise?
So we saw or we will see about a $20,000,000 step up this year, we will see an increase next year. It won't be as large as that. I haven't sized it exactly yet. In fact, we're still rolling that up, but it will be less than 20, but more than 10. I would safely say it will be in that range.
Thank you very much.
Thank you. And our next question comes from the line of Ron Epstein with Bank of America.
Hello. Good morning. Just a
couple of quick ones. As you transition more into this cash generative mode, and you think about deploying that cash, particularly as we go into 2019 2020, that sort of thing, how are you thinking about that?
Well, we've been pretty consistent. First, we're looking at internal organic opportunities to position our materials for the next generation aircraft engines in the sails or wind turbine blades. So organically investing and investing in capital and capacity to meet that demand. 2nd, looking at technology plays, in and around our core space, around advanced materials, material science, composites that would help us offer a broader and even better solution to our customers for those next generation programs. And or to gain incremental, chipset content in Aerospace or industrial markets.
And then lastly, it's just returning value to shareholders through dividends and stock buyback while maintaining a debt leverage that we're comfortable with. And we've shared we kind of like 1.5 to 2 range and all the way up to 2.5 if required.
Okay. And then I think
in your commentary, if I understood it, that there's still maybe some packages on 777x that you could win. If you were to, would that require investment, or can you do that in your current capital?
No. Those packages, we have assets available today.
Okay, okay. And then finally, when you think about the potential for the middle of the market airplane, Do you see that as requiring? I mean, I guess this is really premature, but I'll ask anyway. Do you see that as requiring good CapEx from you guys? Or does it really just kind of depend on on what you win and how it plays out?
Well, that's exactly right, Ron. If we're successful in what we're going after, I would be delighted to come and share with you that we're going to have an incremental CapEx spend to beat that demand, which would be very profitable growth, a great return on invested capital. So again, we're working on engines and nacelles. We're working on secondary structures. We're working on primary structures.
And clearly, it's too early to declare, but time will tell after the program gets launched and after we continue to demonstrate our capability with respect to technology, with our various customers.
Thank you. And our next question comes from the line of John McNulty with BMO Capital Markets. Your line is now open.
Thanks for taking my question. When you think about the M and A opportunities out there on the technology platforms you're looking for, I guess, are you seeing from your perspective is are the targets or the number of targets out there increasing given kind of what's been going on in the markets and also with rates going up? Because I guess I would understand that a lot of these are smaller private companies that may have to work on funding through debt. So I guess how should we be thinking about that whether it's a target rich environment for you or not right now?
Yes, John. Well, you know our space fairly well and I'm not going to say there's 100 of targets out there. But the fact that scale is becoming a factor There are some private opportunities that are presenting themselves. There are some technologies that fit very well that we continue to look at. Obviously, some of them are actionable, some of them are not and some of them may become actionable.
So The fact that there's some dynamics within the M and A, that too can create opportunities for possibly non core components of bigger breakups or bigger acquisitions. That may afford an opportunity for us to add that into our advanced science portfolio.
Okay, great. I appreciate the color. And then I guess one last question on the raw material front. It sounds like you can make up at least some of the issues around acrylonitrile, with crude related escalation price causes or what have you with some of your contracts. Can you work around the rest of the impact?
Because it doesn't sound like you're going to make it all up there. Like can you either reformulate, improve efficiency? I assume the reformulation part's a little bit difficult. So I guess how do you If oil stays here and accrual stays here, how do you actually catch up entirely on it or can you?
Yes. So for future programs that are not qualified, we have opportunities to do formulation. And as you could imagine we're working that aggressively to help mitigate future costs and actually to drive more productivity into the business. We're also working hedging strategy on AN, which we've initiated this year, which will help provide some stability And then on the resin systems, again, as Patrick mentioned, we do have contract protection, long term contracts that mitigate a good portion of that impact.
Got it. Thanks very much for the color.
Thank you, John.
Thank you. And our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open.
Hey, good morning everyone.
Good morning.
Nick, in your prepared remarks, you specified anticipating revenue growth from engines and nacelles over the next few years in the high single digits. And, I guess I was also surprised by that specification because I would expect that to be one of the faster growing pieces of your aerospace business And you have an outstanding multi year upper single digit target for your entire aerospace business. So, I mean, should I read that as you're expecting the aggregate to be slower than engines in the cells or is the aerospace X engine in the cell? Does that have as much growth opportunity and you were just kind of highlighting that today?
Well, no, we hadn't provided a ton of clarity around how strongly our position is on engines and the cells. With fan blades, cases, and the nacelle materials. And the fact that there are always derivative programs, even after planes are launched, There are many more derivatives than there are new aircraft launches. So if you look at our strategic plan, which we just rolled up for the board, engines and the cells and the opportunities we have in the near mid and long term, are certainly very strong. And I don't want to get into updating our longer term guidance.
It too is strong and I'm not going to differentiate which is stronger or what the overriding commercial aerospace growth rate is. But engines in themselves is a strategic target for us. We've invested in that. Our investment in Morocco was another area where we are parlaying and the site is doing quite well. So it was just to give you a little more color around the areas we're focused on to continue to drive growth beyond 2020 and until the next new programs are launched.
I see. Okay. And then Patrick, Do you expect your segment operating margin to be up year over year in 2019?
Well, if we take away a number of the headwinds and we believe we've got strong continuing growth opportunities, then the that is yes. I mean, what I would certainly composite materials, engineered products tends to bounce around a little bit and we're sort of in that 12% to 14% year to date. I think we're 13.5%. But certainly for composites, yes. And we would look to maintain what I would say is a pretty good Engineered Products performance.
So overall, definitely yes.
Thank you. And our next question comes from the of Christopher Capch with Loop Capital Markets. Your line is now open.
Yeah, good morning. I had a follow-up question on the Rishi on facility. And Just generally are there any has there been any surprises thus far in your efforts to qualify that integrated production facility And then assuming the timeline remains intact, is there any way to quantify the anticipated margin benefit for 2019 I'm just wondering if we should be thinking about as that is qualified in ramps? Are we talking about just a better absorption of those fixed costs or is there any knock on benefits maybe in the form of like better product mix or maybe even optimizing your global manufacturing footprint?
So I'll give you a little overview. We just had the Grand opening at Russion. It was an incredible event, with quite a few customers and French dignitaries and global suppliers and partners attending. The plant looks absolutely fantastic. It is state of the art.
It was fully running as we toured the site. And I'm very excited with progress we've made. So have there been any surprises? It's a big project, $250,000,000 investment It was a little later than we expected. There were a little more headwinds than we expected.
Having said that, it is the 1st colocated site which will translate into a optimized supply chain, which will afford us opportunity to drive even more productivity our proximity to our customers and shipping materials directly to Safran and Airbus and others versus bringing materials from the states or in some cases going from Europe to the States back to Europe, it's clearly an opportunity to improve our the site is running very well. We're going through the qualification process, which is just a matter of doing various lots, running them through the test cycles, working with our customers to get the approvals on multiple levels of fiber technology. And then turning equipment on and letting it run. With respect to the tailwind, we're really not going to get in and calibrate you, but I can just tell you We're totally excited to put that behind us. The team is motivated and we think 2019 is going to be a very, very strong year on the carbon fiber front.
And Patrick, can you add?
The only thing I would say, Christopher, is as we've said before, our carbon fiber assets, major investments and carbon fiber drives good strong margins and we would expect to see those typical good strong margins come out of that facility as they do our other ones. So it will be a normal carbon fiber margin benefit to the overall mix of the company.
Okay. That's helpful. Good stuff. And just on the just as a follow-up there, the step up in D And A that you experienced this year and that you called out for 2019, how much of that is tied to the Rucion integrated facility? Thank you.
Well, without wishing to be too precise, I mean, it was a 2 $50,000,000 investment we called out, we depreciate those sort of assets over about 20 years. So you can see certainly a chunk of that plant is going to come into next year, yes.
Comes from the line of Myles Walton with UBS. Your line is now open.
Thanks. I was just curious, were you at rate 10 on the A350 in third Hey,
Myles, you need to speak up. We can't hear you.
Sure. Thanks. So were you at rate 10 on the 350 in third quarter or is that more of a 4th quarter impact, just looking at the composite materials, commercial aerospace sales declined sequentially?
Well, it's hard to well, I mean, yes, I mean, okay, that's a third quarter European closed down. 3rd quarter can be a little bit funny. In terms of the A350 specifically, we know Airbus are aiming to get to rate 10 by the end of the year. We're supplying all that material We've obviously seen the ramp up in the year. We deliver, as we've said to over in the past, to over 40 different addresses it's very difficult for us to say exactly we're at rate 8 or 9 or 10 and even higher potentially on if there's a mix issue somewhere or a catch up, I should say.
So we're in that range. We know we're giving them the materials they need to get to to rate 10 by the end of the year. We're not seeing anything massive between Q3 and Q4, if that's your question. In terms of the A350. But we know it's going to keep going up.
And obviously, if it's rate 10 all of 2019, then they've got to fill their supply chain ready for that. Side.
Thank you. And our last question comes from the line of David Strauss with Barclays. Your line is now open.
Hey, good morning guys. Matt on for David. Just real quick on buybacks. I guess you guys have been buyback a fair amount of stock. Should we expect that pace of buybacks to kind of continue and how willing are you guys to sort of lever up to more buybacks?
Yes, I mean, on cap all deployment priorities remain the same sort of organic growth M and A. We're paying dividends and we'll do buyback, as I think Nick said earlier in our reiterate, we want to maintain our disciplined leverage position between 1.52, we're at the sort of top end of that range we're not going to give specifics out on as and when we're going to buy back stock. We're going to look at it from multiple perspective, we certainly believe in the value of the stock. We're going to potentially be opportunistic at times, but we believe in the long run growth in Hexcel. And so we will continue to do it.
I would think as part of our return to shareholders for the foreseeable future.
Okay, thanks. And then I guess just to confirm, the 24 percent tax rate for Q4, is that the right level to think about for
2019? It's the best thing I can say now. We will reaffirm what that will be. We will provide guidance with our earnings in January for 2019. And at that point, we will firm up what the tax rate for 2019 is, but 24% is the best number I could give today.
Thanks David.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.
No closing remarks. Thanks everyone for participating today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.