Good day, ladies and gentlemen, and welcome to the Q1 twenty eighteen Hexcel Corporation Earnings Conference Call. At this time, all participants
As
a reminder, this conference call is being recorded. I'd now like to turn the call over to Patrick Winterich, the Chief Financial Officer. Sir, you may begin.
Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2018 earnings conference call. Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward looking statements today. Such factors are detailed in the company's SEC filings and last night's news release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded operation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission.
Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our first quarter 2018 results, detailed in our news release issued yesterday. Now let me turn the call over to Nick.
Thanks Patrick. Good morning, everyone, and thank you for joining us
today. 2018 is off to
a strong start as we delivered quarterly revenue of $540,000,000, an increase of 12.8% year over year with solid growth across our three markets. This represents year over year to $0.68. Positive free cash flow generation of $3,000,000 in the first quarter of 2018 is particularly noteworthy as the business typically requires cash investment during previously communicated transition to a cash generation cycle. And then Patrick will provide financial details for the quarter. As usual, year over year comparisons will be expressed in constant currency.
Beginning with commercial aerospace, macro trends remain strong, including air traffic, continued order flow for commercial aircraft globally, and increasing production rates by our 2 largest customers. We continue to benefit from the ramping A320neo and 737max production levels with sales for all three of these programs up strongly in the 1st quarter of 2018 compared to the prior year period. Legacy programs are down about 23% year over year, a little less than expected due to the slightly slower transition from the A320 legacy aircraft to the A320neo. We believe the previously highlighted supply chain adjustments for the wide body legacy programs are now generally behind us. We're encouraged by the trend of increasing build rates for many of our commercial key programs and I want to take a moment to reiterate some of them.
For wide body aircraft, the A350 is increasing to 10 planes per month in 2018 and the 7 87 is increasing to 14 per month early in 2019. For narrow body aircraft, the 7 37 MAX is increasing to 52 per month with public comments that the rate may be increased further, while the A320 production rate was recently raised to 63 per year per month by mid-twenty 19. The regional business jet market continues to strengthen with year over year growth in excess of 30%, particularly strong growth is occurring in business jets, and it represents a number of different platforms. Which continues a trend that began late last year. Lastly, I would also note that there have been some well publicized supply chain constraints in the commercial aerospace sector as a whole, particularly with narrow body platforms.
These issues have not impacted Hexcel. We continue to meet all OEM production timing expectations and have not been asked to delay shipments for any commercial aerospace programs. Turning to Space And Defense. Sales were strong year over year, driven primarily by the F-thirty 5 Joint Strike Fighter, followed by general strength in military rotorcraft for both U. S.
And European programs. The A400M program weakened to some degree year over year, although we expect a greater impact in subsequent quarters as the production rate adjusts downward. Overall, we are encouraged with the favorable trends in general defense spending around the globe, and we would expect to see a positive impact on our revenues in the medium term. As a reminder, civil helicopters are reported in our space and defense sector and sales in the first quarter were the strongest we've seen over the past 2 years. Civil helicopter remains less than 10% of total space and defense.
Finally, turning to industrial. Wind Energy sales strengthened in the 1st quarter a transition to new generation blades by our largest wind energy customer, Vestas begins. Wind Energy represented about 45% of total industrial sales for the quarter. We continue to expect higher wind energy sales in the second quarter of 2018 and remained strong through the year. Automotive And Other Industrial markets also posted solid growth though they are both smaller markets than wind energy.
Growth in both of these market sectors was broad based across our customer spectrum. Before I turn the call over to Patrick, I would like to provide updates on our expansions specifically Morocco in France and our recently announced initiative with Artima. Our Hexcel leadership team was honored to be joined by high ranking Moroccan government officials at the dedication of our Casablanca Engineered Corps facility last month. We are staffed and operating, and we are thrilled by the high caliber of talent we have been able to recruit at this facility. The Casablanca plant is supporting growth for a number of customers for both engine and aerostructure applications.
Our new facility in Roussillon, France continues to progress. We have begun initial production of carbon fiber following extensive cross training and we are in the process of qualifying the carbon fiber line for aerospace applications. Construction of the pan lines should be completed this summer, and that line will then undergo aerospace qualifications. As a reminder, the root scion capacity will be used to support the A350 program and other growth in Europe. During the first quarter, I was also delighted to announce our partnership with our Kima to develop carbon fiber reinforced thermoplastic tapes.
This partnership will enable us to further strengthen our technology portfolio to complement our existing broad range of advanced composite materials. Enhancing our product range will provide additional secular penetration opportunities for Hexcel and once again confirms our position as a leader in the Advanced Material Market Space. In summary, our first quarter results were strong, positioning us well for the remainder of the year. We delivered record quarterly sales combined with earnings growth and positive free cash flow. Our growth is supported across a number of different platforms customers and applications.
We remain committed to our 3 key strategic priorities of driving innovation and growth, enhancing operational excellence and achieving disciplined deployment of capital, including the return of at least 50% of our net income to stockholders through dividends and share repurchases. We remain optimistic for the year and as Patrick will discuss we are reaffirming our 2018 financial guidance. With that, I will now turn it over to Patrick to provide more color on the numbers.
Thank you, Nick. I'm going to begin with a review of our markets. As usual, I will discuss year over year parisons 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 is a mix of dollars, euros, and the British pound. As we have a significant manufacturing presence in Europe. As a result, when the dollar weakens against the euro and the British pound, As it has been doing for over a year now, our sales translate higher, but our costs also translate higher acting as a headwind to margins. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we utilize a disciplined hedging strategy that layers in hedges over a 10 quarter horizon.
As a result, there is a smoothing impact on currency changes. And specifically, in this instance, the impact of the weaker dollar will become more of a headwind in the second half of twenty eighteen, where we could see a headwind to EPS in the order of a nickel. Sales of $540,100,000 in the first quarter of 2018 were up 10.2% year over year. This level of sales represents a 1st quarter record for Hexcel. Our adjusted EPS for the first quarter was $0.68, an increase of 13 recognition Accounting Standard ASC 606, the sales in the first quarter was a decrease to revenue of $2,900,000 and a reduction to EPS of approximately reduction in certain inventory types associated with commercial contracts containing termination for convenience clauses, We have used the modified retrospective approach for adoption of the standard, and the majority of the impact was in the commercial aerospace market with a nominal impact to Space And Defense.
As I said last quarter, we do not think the ongoing impact of this standard will be material to our finance statements, and we believe the impact could vary up or down quarter to quarter by $0.02 per share. Turning to our markets, Commercial Aerospace represented 71% of total first quarter 2018 sales. Commercial Aerospace sales of $382,700,000 increased 9.4% compared to the first quarter of 2017. Commercial Aerospace sales from benefited from the A350 wide body ramp increases in narrow body aircraft production rates and an increase in business jet demand. Space And Defense represented 17% of 1st quarter sales.
Space And Defense sales for the first quarter were 90 point $1,000,000, increasing 13.6 percent from the same period in 2017. Increasing production of the F-thirty 5 Joint Strike Fighter Program and year over year growth in military rotorcraft demand drove the sales growth. As noted by Nick, we also saw a stronger sales performance for civil helicopters, though it remains a small part of our space and defense sector revenue. The impact of production decreases in the A400M program were felt this quarter with a double digit reduction over 2017. Which is a headwind we expect to continue throughout the year.
Industrial revenue comprised 12% for first quarter 2018 sales. For the first quarter of 2018, industrial sales totaled $67,300,000, reflecting a 10.3% increase compared to the first quarter of 2017. Wind Energy was a strong contributor to the quarter, combined with strength in both automotive and other industrial. As previously mentioned, we expect to see even stronger growth in wind energy throughout the year. Consolidated results.
On a consolidated basis, gross margin for the first quarter was 26.4%, as compared to 28% in the first quarter of 2017. The year over year decrease in gross margin performance was primarily a result of higher depreciation expense, startup costs associated with Rucion France Facility and a weak mix $5,400,000 from the prior year period, reflecting increased capital expenditures The depreciation expense will continue to trend higher in 2018, and we now expect the year on year increase to be in the region of $20,000,000, note that we are not yet fully depreciating the Roussillon site once it happened, which will happen once it is commissioned, and operational later this year. SG and A increased 2.6% in constant currency from the prior year, reflecting growth in the business particularly the addition of our new sites in France and Morocco. Research And Technology expenses increased 3.7 sense in constant currency year over year, consistent with our prior disclosure that we will continue to invest in innovation. Our R and T investments both advance and protect our competitive leadership position as we enhance our existing solutions continued to improve processes internally and for our customers and develop new solutions for existing and new programs.
For the first quarter, operating income increased 4.8 percent to $82,400,000 or 15.3 percent of sales, as compared to $78,600,000 or 16.4 percent of sales for the first quarter of 2017. Operating income benefited by approximately 20 basis points from exchange rates due to our currency hedging program, as our currency hedges offset the impact of the weakening dollar. The Composite Materials segment represented 82.3 percent of total sales and generated a 19.6% operating income margin for the first quarter of 2018 as compared to a 20.2% margin in the prior year period. Dollars of total sales for the first quarter of 2018. Engineered Products generated a 10.4% operating income margin for the first quarter as compared to a 14.2% margin in the first quarter of 2017.
The quarter was impacted by a weak mix of tooling sales related to the 777x program. We expect the Engineered Product segment margin to return to a normal 12% to 14% range for the remainder of the year. As a reminder, the return on invested capital for this segment is very attractive, While margins are lower than the composite materials segment, Engineered Products utilizes a much lower level of capital. The effective tax rate for rate was favorably impacted in the current period by share based compensation, which typically has the greatest impact in the first quarter of our fiscal year. We still expect the underlying effective rate for the year to be 25%, which is consistent with our 2018 guidance.
Free cash flow for the quarter was a positive $3,100,000 compared to a use of $31,300,000 for the prior year quarter. This reinforces our recent messaging that we are entering a period of cash generation from a period of capital investment. Cancer expenditures were $45,300,000 for the first quarter on an accrual basis, which is consistent with our 2018 financial guidance. In comparison, capital expenditures were more than double the prior year period, Sorry. Capital expenditures in the prior year periods were more than double at $92,900,000.
We repurchased $30,100,000 of common stock during the first quarter of 2018 and had $212,500,000 remaining under our share repurchase program. First quarter 2018 interest expense was $8,000,000, and we expect quarterly interest expense around this level or slightly higher for the remaining quarters in 2018. Finally, our quarter 12018 earnings release reiterate the guidance we provided during our full year 2017 earnings call. As a review. We continue to expect consolidated sales of $2,100,000,000 to $2,200,000,000 or 9% growth at the midpoint.
By market, we continue to anticipate commercial aerospace growth in the high single digits, sales to remain relatively flat in Space And Defense where we see strong growth in certain programs offset by the A400M and double digit growth in industrial, driven primarily by wind energy sales. The 2018 EPS For 2018, we expect EPS of $2.96 to $3.10 with an effective tax rate of 25 percent. We continue to forecast capital expenditures in the range of $170,000,000 to $190,000,000, Free cash flow is forecasted to be greater than $230,000,000. I would also like to reiterate that we anticipate returning to shareholders through dividends and stock buyback greater than 50% of our net income. With that, let me turn the call back to Nick.
Thanks, Patrick. Industry trends are favorable across our markets. We've started the year strong with solid results including positive free cash flow generation, and our team remains focused on innovation and operational excellence. The market outlook for our products appears robust in our investment in capacity and Leading Edge Technology including our latest additions in Morocco and France positions us well to take full advantage of the commercial opportunity in front of us and create significant value for our shareholders. Applications and customer solutions to position us for the next generation of aircraft and industrial applications.
Excel continues to be a world leader in advanced composite materials and we are excited as we look ahead to the rest of 2018 and beyond. Jimmy, we will now be happy to take questions.
Understood.
You. Our first question comes from Rob Spingarn with Credit Suisse.
A couple of things. First just on the margins. You spoke about some of the reasons why you didn't have why the margins didn't pace with the sales growth. But is there any more you can speak to other than things like, currency and it sounds like the new facility start up Is it volume at the new facilities? Is it growing pains?
Was there anything else in there?
I'll take a shot at first. Basically, it was really 3 factors. It was 1, the depreciation step up of $5 plus 1,000,000. 2nd, it was a
startup of the new,
of the new facilities, mainly Rousion, but keep in mind, we're still growing in Morocco, and there was a slight impact in Q1 as we, transfer product and grow in that site. And then lastly, we did have some mix especially in Engineered Products, which, which impacted us this quarter. So nothing operationally, business is performing very well. Just a little bit on the timing.
Okay. And then just one on cash flow. You've talked in the past about your long term guidance for free cash flow, especially as you enter this cash harvest period. But with 200 $30,000,000 for this year and looking back at the front end of this guidance period, it suggests that you might be somewhat flattish in the years forward and your CapEx seems to have stabilized in that. I think you said roughly 180 So, Nick, what is the right way of Patrick?
What's the right way to think about cash conversion as your top line continues to accelerate here?
Well, so, there's a few questions in there. So generally, we see, and we guided with respect to the longer term growth outlook and continued profitability and driving margin expansion. So would expect the profitability to grow with the exactly to next year. It's a little early. We gave a rough range.
Hopefully, we'll have programs to talk about that will require incremental capital, as we secure those programs. But right now, we see free cash flow growth through the period looking out
on an annual basis?
Yes. I mean, for us to deliver the $1,000,000,000 over the 5 period we previously talked out of 2016 through 2020, 2019 2020, you've got to be pretty strong free cash flow. Which we still stand by.
Okay. But you don't have any conversion number you want to put to that or kind of growth number?
No. No. I mean, we haven't guided to those numbers. We've just put out the $1,000,000,000 in that 5 year period. I mean, I mean, you can
thinking back into it to some extent, but I wanted to get an idea of slope.
It's going to be fairly sharp in 'eighteen, 'nineteen 20 to deliver those numbers.
Thank you. Our next question comes from Noah Poponak with Goldman Sachs.
Morning. No.
Nick, you mentioned, seeing no impact from the production bottleneck challenges on, on 737 that have been in the press. Could you just elaborate on that, what it is that's you know, allowing for there to be challenges discussed in the marketplace, but for it simultaneously not to be impacting anybody in the supply chain.
Yes. So let me, let me give you my view overall on the narrow value it made no mistake. And we communicated that we have, 40% to 50% incremental volume on the Max and the Neo versus legacy. So anything that impacts the transition certainly impacts us. What we were referring to is, the severe ramp rate for the LEAP engine and the gear turbo fan and some of the growing pains with respect to some bumps on the gear turbo fan and and some production delays with the, with the LEAP.
There's some bumps in there, but from the pull of our materials, it's been very consistent. And we have not been asked to delay or push back, which gives us confidence that the problems are being worked. And our customers have line of sight on how they're going to deliver to their commitments for 2018 and beyond.
And is that equally true in the, in the structures outside of the engine, that you deliver to as it is for structures around the engine?
Yeah. It it it would be no different for us. We may have a little bit, you know, we we communicate that Our lead time from final assembly line is roughly 6 months. Some of those parts are earlier, some are a little longer, but the average is roughly 6 months. But we see the pull and we do not see any, deferrals in structures, materials, or components.
Okay.
And, another follow-up on the margin question, was there anything on the pricing side that changed in the quarter?
Pricing was where we expected it to be Noah. It was really all about the headwinds that Nick called out and I described the depreciation, the new size start up costs and a bit of mix in Engineered Products.
Okay. Just wanted to check on that. Okay. Thanks so much. Thanks
Noah.
Thank you. And our next question comes from John McNulty with BMO Capital Markets. Your line is now open.
Yes, thanks for taking my question. Question on Rucion, in terms of the headwinds that you're dealing with in 2018, I guess, Can you try to quantify that or put some numbers around it? And more importantly, I guess as we look to 'nineteen, how much of those headwinds reverse or excuse me, headwinds reverse and become tailwinds?
So just a little bit on the Rucion site. Remember, this is a very large site, investment in the range of $250,000,000. And you really need to think of it as a co located, 2 lines. One being the precursor or, as we call, pan, The other being the carbon fiber. The carbon fiber line has been up and running, has run industrial product, and is being qualified for aerospace as we speak.
So that line is basically turned over to operations. The pan line is now being finalized and should start the qualification process mid year. Now, as that line comes up and we start flowing pan and carbon fiber through, The headwinds will start to diminish, up through the end of the year. We really don't want to get into specifics, but I would expect us to have a pretty big tailwind going into 2019.
Great. Thanks very much. And then just a question on space and defense. I mean, it sounds like despite what we're pretty surprisingly large numbers in the quarter, you think they pretty much reversed. And I get the the M400 is winding down and maybe it took a little longer, but it but maybe it falls a little bit harder in the back half.
But I guess where else do you see things slowing up or seizing up, or is it really just the M400? Because it does seem like you came out a lot stronger than we would have thought or expected in the first quarter.
Yes. Well, we're definitely happy with the first quarter. We're happy with the fact that civil rotorcraft, turned the corner and granted it's not a huge part of the space and defense. It's a, it's a welcomed Turn of events. Remember, we're on a lot of programs, 100 plus and it can be very lumpy quarter to quarter depending on our customer order patterns and and the delivery rate.
So Although we're very optimistic, I really want to see another quarter before we think about moving the midpoint, but I wouldn't be surprised if it trends up a little bit. To answer your question, John, really, the only item we're seeing a headwind on right now is the A400M. And we do expect that to come down, more sharply throughout the year than it did in Q1.
Great. Thanks very much for the color. Appreciate it.
Thank you, John.
Thank you. And our next question comes from Gautam Khanna with Cowen and Company. Your line is now open.
Yes. Thanks, guys. Hypothetically, if the 350 were to go above 10 a month to say 13 a month, how much incremental capital would you have to put in the ground to, to support it?
So those are hypothetical situations that we certainly hope come to fruition. With $4,800,000 per ship set. That's a good problem to have. Clearly, not a problem. Gautam, I don't really want to get into, distinguishing relative capital investment because you could back into what our capital costs are and, and, and it's competitive information we really don't want to share.
I would tell you this. We are intimately, involved with Airbus, very close with them on their current needs, and what they're looking at as potential down the road. As you know, they're communicating 10 per month by the end of this year. And we were certainly, in line to support that with the Rucian facility coming up. We also, if you recall, we announced our additional CapEx investment indicator, which will drive incremental pan and carbon fiber.
That will be a co located site, which again will give us some, bandwidth to support additional growth in programs, including JSF, LEAP narrow bodies, and potential upswings in the A350 if they come to fruition.
Got it. So you're you actually have some flexibility within the existing footprint to accommodate higher volumes within all the incremental, if that were
to happen? By definition, given that most of our trail of sole source, we can't be short. So by definition, we have to be a little long. Now, we manage that very tightly and and you know, whether we could do one plane of this model per month or or a couple of another, we look at that in our total CapEx model. And we balance it against declines.
The A380 is coming down still, and the, A400 M is coming down. So we make sure our assets are fully, fully utilized. Remember, they're fungible and, we optimize our footprint and our capital utilization that way.
Okay. And just switching up a different topic acquisition pipeline, you've done a couple technology tuck ins, in the quarter, one of your, you know, Tory ended up announcing an acquisition of another company. I just wondered, is there anything of size out there that would be of interest to you? I'm not asking for specifics, but I'm just curious in terms of M and A. Is that a real opportunity to kind of significantly bolster bolster the company, or is it all gonna be kind of r and d by another name type acquisitions?
Yeah. So as far as attractive and being targets, we, like, we focus on the technology and positioning us in our portfolio to grow and increase secular penetration. To move the needle on the top line significantly, Both opportunities are limited. You pretty much see what's out there in our space. We're certainly the market leader but having said that, I would tell you there are very interesting technologies around the edges and within our portfolio that we're looking at and we're very excited about.
Thank you guys. Thank you.
Thank you. And our next question comes from Greg Konrad with Jefferies. Your line
is
I mean, you mentioned the 10 a month rate, kind of where are you versus Airbus's plan today?
So we basically are in the 9 per month, shipping rate. And certainly, we're ramping up and would expect to be in the 10 per month range, probably mid year. July, August timeframe.
Thanks. And then, I mean, you touched on it briefly in your opening remarks, but I mean, it seems like throughout the supply chain, we saw a number of announcements around thermoplastics rather either on the M and A side or also just strategic partnerships. And I think you announced one in the quarter also. I mean, how do you view the opportunity and maybe your positioning in the market?
Well, we've been a player and a key contributor in thermoplastics for many years. Our fiber is the benchmark in the thermoplastic Aerospace Industry. So We know this space very well. There are technologies evolving that provide more opportunities for secular penetration on parts many of them being in secondary structures, but other opportunities with, near net shapes and compression molding so we're excited to add this to our portfolio. We think it's a great addition to help make sure we have a fully rounded out portfolio to serve our customers.
And we see it as a great opportunity to continue the secular penetration. Thank you, Greg.
Thank you. And our next question comes from Mike Sison with KeyBanc. Your line is now open.
Hey, guys. Nice quarter.
Thanks, Mike.
In terms of the JSF,
you know, I think the Lockheed's outlook for 90 this year versus 66 last year. Is your sales in line with that type of growth?
Yes. No, we would agree with that, Mike, yes. So this year, 2018 2019, we expect the rates to increase in those numbers you just mentioned sound sensible.
And the growth you'll see in the JSF will be similar every quarter? Is it pretty even?
We'll manage spending can always be a little bit lumpy. I mean, if you remember, we supply the carbon fiber. So we supply that through and then that gets converted and sold on to Lockheed. It's normally fairly steady, Mike. I mean, going to be perfectly balanced, but we would expect it to be fairly steady growth.
Then the just a quick follow-up on the partnership at Arkema, the carbon fiber reinforce plastic tapes, what applications do you think that would, would, would, would apply to and you know, how big is this opportunity longer term?
Well, the collaboration with our team and and just a little bit on our chemo. They've been a partner of ours and we buy materials from them for a long time. It's really a collaboration to enhance and develop technologies in some cases that do not exist today. So we are developing and intend to develop materials that process faster can be made into more, near net shapes, out of autoclave with, minimal storage constraints, I even need to freeze. So like we're, you know, it's early in the development here, but we're very optimistic that this could be a nice growth opportunity for us going forward.
Great. Thank
you. You're welcome.
Thank you. And our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.
Yeah. Good morning. I had a follow-up on the margin.
Hello, Chris. We can't hear you.
Sorry about that. Can you hear me now?
I can hear you. Thanks.
Yeah. So follow-up on the the margin progression and focused on what you described as startup costs. I'm just trying to get a little bit more color on that. Are you talking about basically, unabsorbed overhead costs associated with the the new facility or just some inefficiencies associated with ramping And then, you did mention you're running fiber. So presumably, you're selling that fiber into the industrial markets before it's qualified.
So I'm wondering if there's also a mix effect that's dragging on results. And when would you expect that to inflect? When do you when will when will you have this fiber qualified as aerospace grade.
So so go next.
So,
Chris, it is absorption. I mean, the fact of the matter is we have, lots of people being trained, working the line, commissioning the line on the Pan side, we have people from the U. S. That are experts in this, the expertise historically, resided in Decatur, Alabama. So We're transferring a lot of that knowledge and training, and there's a lot of people working to get that line qualified up and running.
So as we mentioned in our remarks, we do expect this to start to inflect in the second half of the year. And to your point on Carbon fiber, we are running some carbon fiber on the fiber lines for industrial and some of that material will go into the market and be sold.
Is there any way you can quantify what the anticipated benefit is in the gross margin once this influx once you have the the fiber qualified as aerospace grade in the 2nd half?
I'm not so indirectly, what I will say, so year, if you remember, in 2017, we called out about a $10,000,000 headwinds for the year as a combination of Rucion and Morocco startup costs. By far in a way that the lion's share of that relates to, to, to, to Rucion in France. So this year, we've probably got about half of that and that's going to impact in the first half of twenty eighteen. So the best thing I can advise is sort of take that $45,000,000 and adjust in the second half of the year by that, when once the line should become, as Nick says, productive and we start to generate income.
Got it. Makes sense. And just to follow-up on the discussion around the narrow bodies, to the extent that there's constraints and I guess teething things associated with the engines for the for the Max and Neo platforms. And the fact that you guys haven't seen any, delays in in or haven't been asked to to defer any shipments. Is that, or should we just assume that what's happening is that they just continue to to keep rate on the sort of the legacy platforms which you keep shipping to and that your step up in mix in terms of content per ship set is still on the come.
Does that make sense?
I think that's right. And I think we called it out in one of our commentary a little while ago where the transition between the A320 legacy and the A320neo is a little bit slower than we expected. But the underlying build rate, as you rightly say, is going up. And so we are supplying basically the quantity of materials we expected slightly reduced by the slower transition to the A320nea.
That's helpful. Thank you.
Thank you.
Thank you. And our next question comes from Richard Safran with Buckingham Research. Your line is now open.
Hi. Good morning, everyone. How are you?
Good morning, Richard.
There was something I wanted to ask you guys about last quarter. It was additive manufacturing. You noted that with the OPM acquisition, you're now the world leader in, Additively produced part. So, I understand right now it's of modest size, but what I'm trying to look at here is the, you know, acceptance rate, how quickly you think printed parts are going to progress? You know, we've seen some rapid progress with metal, so I'm trying to find out if printed parts are going to be a meaningful share gain story for you.
As you start to replace conventionally produced parts?
Yes. So just to clarify, I think what we said was we're the world's leader on aerospace, composite, thermoplastic, additive manufactured parts. And that's based on our qualification with Boeing. And our shipments through their space and defense programs. So I we are very excited about the technology We have tremendous pull and interest, both from, the space and defense sector as well as commercial.
If you look at the benefits of making your net shape and of complex parts that traditionally may have been made out of metal, metal joining of multiple parts, very expensive This offers an opportunity and a technology that can simplify those designs, and, and, and provide parts in a very, short cycle time. So again, it's really starting up. We're teaching the market on its capability We have a great team in Hartford. We have multiple machines running as we speak. And again, it's going to take some time for it to really, demonstrate its capability and its productiveness in the commercial market.
Okay. Thanks for that. My second question is, and it I missed part of the earlier part of the call. So if I missed, if you said this, I apologize. You know, Patrick, I was, a little surprised given the, performance in 1Q that, you maintained the guide.
You know, I heard the remarks at the outset here. Just wondered if you have any comment about how you might be thinking about your guide right now given the 1Q performance?
Yes. I mean, really just to sort of echo, Nick, We were obviously very pleased with the sales in the first quarter. It was a record quarter of sales for us across our market spectrum. We saw good growth almost everywhere we look. And yes, we are standing by our guidance.
We believe it's a little bit too early in the year to adjust But obviously perhaps we see strength and we would see that we're going to be above our midpoints and pushing the range a little bit. So we see ourselves moving in that direction, which is a great way to start the year.
Yes. And I would just add, remember, again, we need to see another quarter on space and defense since it does tend to be lumpy. And I'd remind you, sequentially, it is actually down below fourth quarter of 2017. So Again, we're still excited on the space and defense side. We're also watching closely, the wind energy ramp.
Which is incredibly steep for the balance of the year. So maybe being a little bit conservative, we wanna see a little bit more before we before we adjust our
Thank you. And our next question comes from Drew Lipke with Stephens. Your line is now open.
Yeah, good morning. Thanks for taking the question.
Good morning, Drew.
I was curious, can you maybe quantify the expected depreciation step up in the back half of 'eighteen? From the France facility coming online?
Well, it's included. So I think I called out almost sort of an amendment to our previous indication that we're now expecting about $20,000,000 step up between 20172018, with the Rucion impact will just obviously be that the latter 2 courses of the year is included in that. But it's a little bit more complicated than just looking at Rousion because we've had a number of assets sort of getting layered in over time. I I actually think the 5,000,000 step is is is gonna be similar each quarter, to be honest, true.
Okay. That's helpful. So step up from the $14,000,000 previously?
Yes. So the $14,000,000 is now $20,000,000, which is roughly $5,000,000 a quarter.
That includes Rucion.
Okay. And then you talked about the wind ramp. And as we look at the composite materials segment there, Should we expect any kind of negative mix impact through the year, just as wind does ramp?
I don't think I don't think our wind sector is significant enough to really dilute our overall margins, perhaps very, very slightly But again, if you look at different metrics, if you look at our ROIC, etcetera, it's probably going to be a boost, because of the low relative below level of capital employed. It's not our own carbon fiber. So it's very positive to ourselves. It's good to our margins, but I don't think it's going to be large enough as great as it is to actually dilute the overall margin, Drew.
Okay. And then just last one for me. On the 787 and the expected step up in kind of back half of 'eighteen for you guys. Do you expect to see any kind of impact from the Trent 1000 issues? You know, it does sound like we're maybe seeing a buildup of gliders there as engines go to address AOG concerns?
Nothing that we're hearing yet. Through. I mean, obviously, the engine, stories are out there. We obviously still understand that Boeing intend to go to sort of rate 2019, early 2019, March or April 14, sorry, early 2019, So we'll move up from 12 to 14 at that point and we should see an increase. We're still expecting an increase around quarter 4 this year.
We haven't heard anything to the contrary
Great. Great quarter guys. Thanks.
Thanks, Drew.
Thank you. And our next question comes from Ken Herbert with Canaccord. Your line is now
I just wanted to ask a question on the, on the potential opportunity around the midsized aircraft, the middle of the market aircraft, and and not
so much on sort of timing or how
do you do that perhaps. But more importantly, I think for your standpoint is that we could excel Can you just talk about maybe where you're investing? Because I know you're obviously investing to position yourself and possibly pushing your capabilities forward, but relation to that program, how you view sort of tiers you're investing and maybe your level of activity today that you're focused on and And how do you see that evolving here as you, if you look to perhaps take some share with that particular customer and push the value proposition forward?
So, Ken, I mean, we work week in, week out month in, month out with our major customers on technology developments and a lot of the time is generic rather than specific. And obviously, the midsized aircraft is not has not been formally approved yet, as you know. So there's a lot of speculation. But so we're working on a spectrum of technologies. We continue to enhance our portfolio as Nick has talked about several times today.
And we're pursuing all the applications we can. And as you would expect us to, to get as much material on that plane as possible. Now Boeing, not wishing to temper anything, but Boeing has sort of talked about plane is really being an opportunity for them to fine tune shop floor processing and their in house sort of efficient and productivity. So how much new technology they're actually going to introduce, is is yet to be seen. But clearly, we are as I say, we continue to work with them in a sort of called generic way across the air structure and across the engine platforms to make sure that HEXO is positioned as strongly as possible.
Okay. Do you believe you will see a significant increase or or a step up in carbon fiber content opportunity on that program, say certainly relevant to current generation, but I guess very specifically, Do you believe or get a sense that you've had an opportunity to compete on not only the wing but fuselage as well or how do you view that opportunity shaping up for you?
I mean, as it stands today, clearly, we have an opportunity. I mean, we're in the race with everyone else. I mean, it's not a replacement. It's a new aircraft. We, as I say, we are promoting our technologies.
How far going go with new technologies, as I say, has yet to be seen, but where they do, absolutely, we're in that range.
Okay. And just finally, that's helpful.
We can't hear you at the moment. You're actually breaking up.
Yeah. Hi. Can you hear me okay?
Can hear you now? Yes.
Yeah. Sorry about that. Just to follow-up, up on, on the wind. Is the acceleration you're looking for? Can you, I guess, as I read the commentary and listen to your comments today, it sounds like we should be looking for an acceleration in the wind growth going through the year as you as your customer obviously ships more and as you obviously transition from a mix standpoint to the better products, I guess,
is that a fair way to look at it?
Yeah. Absolutely. So they're making their transition now. We we were very sort of pleased to see that quarter 1 was where we expected, but the real growth, the real ramp is going to start in the second quarter. Yes.
Okay. That's great. Thank you very much.
Thank you. Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is now open.
Hey, good afternoon guys. Good morning.
I've been on a lot
of conversation on the call about technology, so on and so forth. So just kind of going down that same vein. When you look at your R and D expense under your organic, technology development, Can you give any color around what areas you're looking at? I mean, is cold cure a place to go? Is ceramic nature a place for you guys to go?
I mean, when we think about different channels of technology and potential growth that you could do, what do you think about?
So I I'd say when you look at our R and T, it's it's mixed. It's, focused on certainly some blue sky technology that is not in production today, related to both materials and process enhancements. Out of autoclave, fast or snap cures, different resin formulations to provide value add to the materials. We also focus on technology around processing. To help throughput efficiency and overall, competitiveness of the materials to enhance secular penetration and deliver on what our customers are looking for.
Composite matrix and ceramic matrix. That's really not in our wheelhouse today. And I could say it's something we're not looking at today. We've got enough carbon fiber and prepreg and engineered product and acoustic cap and and sound heat. Materials and products that we're working on to drive incremental growth.
Thanks, Ronald.
Thank you. And our next question comes from Hunter Keay with Wolfe Research. Your line is now open.
Good morning, guys. This is Will for Hunter. In your Q, you indicated that this trend drove much of the 30% growth in other commercial Was this broad based or was this driven by certain BizJet OEs?
Well, it was heavily influenced by BizJet. Bombardier, Dassault Embraer, we're all very strong. If you look at the Gulfstream G500 and the Bombardier Global 7000, Those were very strong platforms. And we did see an uptick in the regional segment there, with HR on the turbo prop. So It was fairly broad based, and we're certainly excited to see that growth come through.
Great, great. And then on margins, is this still possible for you to hit incremental operating margins of 25% this year with the mix of startup headwinds or is this something that's more of a 2019 event?
So we we're working all the
time to grow our margin intensity and performance, we've talked about certain headwinds this morning, which we continue to work through, summer timing and some sort of sales mixes we described. We're confident that we're going to return to a more normal margin range for the rest of the year. So we know we've mentioned 25% and and we we we strive to work towards that. It's more challenging at times, but as I say, improving our margins productivity yield efficiencies is a mantra day in, day out, and we still pushing in that direction, and we will continue to push this year next year and even into 2020 to keep growing our margins.
Great. Thanks again guys.
Thank you, Will.
Thank you. And our last question in the Q and A section is from Myles Walton with UBS. Hey, I just had a couple
of clarifications I could. So on the depreciation, taking up to $20,000,000 growth versus the $14,000,000. It doesn't sound like the sales outlooks really changed. So are you just bringing on facilities faster or in a different way? And then also on SG and A, I think it was supposed to fall sequentially in the next three quarters.
Is that still the case?
Yes. So on the depreciation miles, really down to timing, understanding exactly the timing of when assets are coming on, and there is a bit of FX in there as well. So it's kind of a combination of the 2 that pushes, as far as we've we've now gone to 20. And in terms of SG And A, yes, the first quarter is always the heaviest quarter for us because of the the stock the compensation benefit payments, stock related payments in quarter 1. And so we would expect that to step down for the remainder of the year, which is typical for Hexcel over several years.
Is that step down still about 8,000,000?
Give or take, yes, that's the right magnitude miles, yes.
Thank you.
And we have one final question from David Strauss with Barclays. Your line is now open.
Good morning. Sorry if I missed this on, on currency, can you tell us where you are from a hedging standpoint this year? And as we look into, into 2019,
Yes. So just probably to repeat what I've said in the past, we we hedge out ten quarters on sort of a on a declining basis. As I look at the rest of 2018, I'm probably about 75 percent hedged, as I look as we look out to 2019, that's probably near the 50% range and then a couple of quarters out into 2020. We're right down to sort of 10%, 15% range. So we're pretty solidly hedged for the remainder 2018 and unless there are significant currency movements, as we described, we expect to see a bit of a headwind compared to what was assumed in our guidance
Okay. And then, last one from me. Any update on 777x where things stand for you guys there? And any idea of what your ships at content could end up looking like?
We're still working, perhaps we're all a little bit frustrated, but the packages haven't all been awarded and sealed yet. So it's still going to be around the end of this year before we're going to confirm what our new 777x chipset value actually is other than it is above the 777 ship set.
Thank you. And that does conclude our Q and A portion of the call and the call in general. We thank you for listening and this concludes your program. You may all disconnect. Everyone, have a great day.