Good day, ladies and gentlemen, and welcome to the Hexcel twenty seventeen Investor Day Conference. At this time, all participants are in a listen only mode. I would now like to turn the call over to Mr. Nick Stanage, Chairman, CEO and President. Sir, you may begin.
Thank you.
Okay. Good morning, everyone. Welcome to our twenty seventeen investor briefing, and I want to thank everyone for taking time today to join us. We've got an exciting update to share with you. I want to remind you, we're also webcasting this.
So at the end, when we turn it over to Q and A, we've got a microphone we'll route around to make sure the questions are heard by all. Paul? Everyone's familiar with our safe harbor provision. Just to give you an overview, I'm going to refresh your memory on Hexcel and our markets and provide a little update on some of the exciting things that's going on. And then I'm going to touch on innovation, some technology we've been working on as well as our plants and operations.
And then Patrick is going to follow-up with capital deployment and 2018 guidance. And then I'll wrap up with our outlook before we turn it over to questions. So to start, I want to point out a couple of changes. First, in the upper right, you see Gail Lehman. Gail replaced our General Counsel, who retired last year after a very long career with Hexcel, Ira Krakauer.
I'd also like to point out that we have Rob Hennemuth here today with us, our HR leader. And not shown on the chart, I think many of you have met Kay Deazey, our Vice President of Communications. And I'd also like to introduce you to Kurt Goddard. Kurt, stand up a minute. So Kurt is in the back of the room.
He's joined Hexcel this week. He is our Vice President of Investor Relations. So if you don't know Kurt, shake hands, get a business card. I suspect many of you will be talking with Kurt over the coming months and years. So and Patrick will follow me, which most of you have here.
We pride ourselves on innovation. We pride ourselves on reinventing our materials. Again, as a reminder, we're an advanced technology composites company. Think of it as material sciences. Think of it as the solutions to help our customers build products, build platforms for end life solutions, driving weight, driving cost, driving long term value.
And in our market, very high barriers to entry. Once we're in, once we're qualified, once the product is flying or wind turbines are spinning, the materials tend not to be changed. We focus where we can provide a sustainable competitive advantage. And that, in partnership with our customers and our intimacy with our customers, position us for the long term growth. Bottom line is we're focused on innovation.
We're focused on customer satisfaction to drive shareholder value. So why invest in Hexcel? We're a leader in attractive markets. I'll point those out in a minute. Unrivaled product portfolio.
Nobody in the industry can match what we do or how we do it or where we do it. We invest in long term growth potential markets with good visibility. We have a culture of innovation. That's product chemistry innovation. That's processing innovation.
And it's internal how we serve our customer innovation to drive cost out drive and that's how we continue to help our customers achieve their objectives with cost outs, their objectives with respect to new efficiencies and how they go to market and then ultimately increasing shareholder value in the long term. And as an example, we've maintained an ROIC in the top quartile of our peers even as we've invested through a heavy aerospace investment cycle. We consistently have increased our dividend since we introduced it or reintroduced it in 2015. And we've returned about 75% of our net income to shareholders since 2014. So clearly, proven execution, strong earnings growth and exceptional operating cash generation.
So touching on our industries. Again, technology is the driver. Technology is being our largest piece. Composite content is growing in all of our industries. Secular penetration, cost effective, lower weight, more durable, provides a better long term solution for our customers.
Space and defense makes up about 17% and then Industrial follows up with 11%. I want to spend a couple of minutes and just give you flavor on the portfolio and the breadth of our portfolio. So remember, we're vertically integrated. So starting at the left, we produce our own carbon fiber. We bring in the raw materials.
We make the precursor. We convert it to carbon fiber for high strength, high modulus, intermediate modulus, basically the high performing structural carbon fiber materials. We are the world's leader in reinforcement manufacturing for the aerospace industry with positions in Europe and The U. S. Carbon prepregs, kind of the heart of our business.
We do unidirectional. We do prepregging in fabrics. These are materials for primary structures, wings, fuselage, materials for Gen X fan blades, fan cases. We have honeycomb core. It's a structural lightweight material used for engine nacelle, noise abatement is needed, used where heat diffusion or heat resistance is required.
We also do glass prepregging heavily for the wind industry, heavy for secondary structures, heavy for fairing assemblies. We make parts that go on engines. What you see a picture of there is for an engine to sell honeycomb core. So we have a full spectrum from raw material inputs all the way to finished parts, and nobody in the industry comes close to having this breadth of product portfolio. Just a snapshot on our historical performance, sales, adjusted EPS and cash from ops.
You'll see from 2016 or from 2012 to 2016, sales up 27%, earnings per share up 65% and cash from operations up over 70%. So clearly, we're focused on leveraging our top line sales to the bottom line and leveraging our top line sales to cash. Last but not least, shareholder return. 2011 end of year up to December 8, one hundred and fifty 7% return. Cash flow accelerating, margins expanding, discipline in how we're managing our capital in growing markets.
Great investment. Getting into a little more details in our market, starting with commercial aerospace, which again makes up about 72% of the business. You see a strong CAGR over 8%, growing composite secular penetration. I'm going show you a chart. Many of you have seen it.
It's kind of the evolution in history of commercial aerospace secular penetration. Strong global demand, big backlog locations. Big great visibility, great position to be in. Here's our secular penetration chart. Again, it's always interesting to look, if you look at the 80s and the old A310s, if anyone remember those, and 767s, just about 5% composites, growing with the three thirty up to 10%, fifteen % the three eighty above 20%, up to the 787% and the A350 over 50%.
Our customers are getting smarter. Our customers understand how to use composites more efficiently, more effectively, and we're providing more innovative solutions. So the entitlement, the secular penetration is going to continue. It's going to continue in primary structures, the next new wing, the next new fuselage, the next new engine fan blade or fan case, the next new all new airplane. We're positioned to grow.
Just an update and a confirmation on our shipset content. You've seen this before. A320 legacy to the Neo went from 300 to four fifty. Now we're in the midst of ramping from 50 to 55 per month next year with a 60 per month expected in 2020. And just to point out, the numbers in the 2020 value are our customer stated rates.
July, ramping from 47 to 52 per month on its way to 57 declared by Boeing. Shipset content grew from 300 to 400 ks. You've seen those numbers unchanged. A330, legacy 900 ks ramping just over $1,000,000,000 growing to $81,000,000 in 2020, and that's pretty flat on a build rate of seven. Boeing seven 70 seven, million per ship set on the legacy.
As you know, Boeing is working on the seven seventy seven, plan to fly, enter production at the end of this decade, 2020 time frame. The new platform, we're confident. We know what we've secured. It's over $1,000,000 And then the $7.87, dollars 1 point 4 million per shipset. And as I'm sure you're aware, it's going to ramp from 12,000,000 to $14,000,000 We're going to see most of that start to hit us in the second half of twenty eighteen as Boeing goes into the $14,000,000 rate in 2019.
A350, dollars 4,800,000.0 per shipset, our largest commercial program ramping to 10 per month at the end of next year. So we're in the 9 range, getting ready to move up to 10. So I just want to give you a little flavor. And again, these are charts that you've probably seen from Airbus and Boeing. And I wanted to point out the middle class is growing.
Middle class is getting wealthier and they wanna fly. And global passenger traffic, as you've seen, is over seven percent this year, actually 7.5%, projected to be up again 6% next year. This compares to a historical increase of 5%. So people are flying. Seats are filled.
The left hand chart shows you Airbus' twenty year forecast at 35,000 plus aircraft. The right hand chart, defined a little bit differently, is Boeing's twenty year at 41,000. The bottom line is there's a huge backlog of aircraft driven heavily by the narrow bodies. On the right, you can kind of see the evolution of the backlog. This backlog is worth more than $10,000,000,000 to HEXL.
It's about nine years at today's current build rate, And you can see the makeup, again, driven heavily by the narrow bodies. Switching gears to Space and Defense, 17% of Hexcel, good consistent performance. Aerospace is the early adopters, obviously a place where we introduce technology. We're well positioned on more than 100 programs. Our carbon fiber is the benchmark.
It's the industry standard. Rotorcraft make up about 50% of this market. And I would remind you, we lumped in the commercial rotorcraft into that segment. And again, great positions on key programs, JSF, A400M, D22 making up very big programs for us going forward. CH-fifty three ks, certainly a new program that's going to add to our top line going forward.
If you look at the Space and Defense outlook, going through 2020, JSF continues to ramp on the fixed wing. KC-forty six tanker and the three ninety transport are starting to ramp in 2018 and growing. And then there's some tailwind on spending, a lot of speculation, a lot of tailwind, a lot of positive on budgets and what's going to be spent. So if anything, we see some tailwind overall on the defense budgets, not only in The U. S.
But in Europe. Rotorcraft, I mentioned CH-fifty three ks, great program for us. It starts ramping in 2019. We've been shipping over the last few years. We continue to ship.
It will be difficult for us going forward. And we're actually seeing some recovery on the civil rotorcraft. As you know, it's been in a trough for the last few years, driven primarily by oil and gas, but we're seeing some growth and some tailwind coming there as well. And then space, lots of smaller programs with great customers like SpaceX, NASA, the government for UAVs, for satellites, for drones, for launchers. It's a whole array of space and defense where we can be early adopters for our advanced solutions.
Industrial, last segment makes up just over 10% of our total business. The growth segments that we're focusing on are wind and automotive. Wind make up just about half of this business, and we're expecting a very big ramp up in 2018, at or above 2016 levels as we position for new blades that are going into production. And automotive is accelerating. If you look at wind, turbine efficiencies improve as blades get longer.
As blades get longer, they need to be stiffer. The way the turbine manufacturers are making them stiffer are with carbon fiber composites and reinforcement. So we're working many opportunities to add carbon fiber pultruded elements. We're focused on the Vestas business globally. Automotive, lightweighting, electrification is driving penetration.
We're seeing great growth in this segment. We're focused on early adopters, I. E, the premium automakers are the leaders. And through automation and our various material opportunities with quick cures, with very efficient low cost resin systems and fiber systems. We're finding niche opportunities and applications where we're growing significantly in this area as well.
And then industrial specialty, have with our customers. In the lower right, just to remind you, we extended our long term contracts with Airbus. We did that towards the end of twenty sixteen for our primary business and our A350 business. We also were selected we announced in October of this year our multiyear Vestas agreement, sole source position for blades on their new blades that are being introduced as we speak. And then last but not least, we've extended and completed our United Technologies contract for prepregs going up through 02/1930.
So very strong customer positions and growing. Switching gears. And again, just to remind you, why composites? Why carbon fiber? I just want to remind you, it's 5x stronger than aluminum.
It's 30% lighter than aluminum. It's tougher, stiffer, more durable. If you look and you you read some of the publications on aircraft maintenance, there's a significant maintenance reduction with composites. As I mentioned, our customers are getting smarter. They're getting more efficient.
We're able to introduce composite in more places than we used to because of the technology that we're innovating, because of the technology that we're organically developing and the technology that we're acquiring. R and T. R and T is a huge focus for us. We have centers of excellence around the world. They're positioned strategically to support our customers, to support our various product types and technology.
We have a broad and expanding portfolio of IP, both in patents and in trade secrets. We have multiple collaborations with universities, with corporations, with consortiums. We do this around our core competency, composites, advanced materials, material science. And then last but not least, we have several PhD programs to focus on developing talent and developing composite technology and solutions for us going forward. Starting on the left hand side, what you see here is an infused wing.
It's for a next generation advanced wing, out of autoclave wing. We're developing new materials. We're developing new resin systems. We're developing new processes to make the composite even more efficient and more producible to expand the opportunities for it going forward. The Hexto IM5 fiber, we continue to invest heavily in advancing our carbon fiber.
It is the core of what we do. IM5 provides a unique mix of mechanical performance, mechanical structure at a cost effective position. Additive manufacturing. You see inlet guide vanes here. Additive manufacturing is a great opportunity.
OPM, which we'll touch on, we provide the carbon fiber for the filled material. Great position with thermoplastics to grow. Wind turbine, poly speed, polytruded laminates, that's in essence carbon forms to make blades stiffer so that they can make them longer. Have new processing materials, new quick cure resins to enhance the producibility and the caustic hybrid parts and help take significant weight out while maintaining the mechanical properties required for very stringent applications. Formax.
We acquired Formax in 2016. It gives us a technology we did not have with respect to three d weaving. That enhances our weaving position. Recycling. Recycling is on everyone's mind.
Carbon conversions is an investment we made in May of twenty sixteen to focus on the reuse of materials and more importantly, reintroducing those materials into both aerospace and industrial markets. Safran, we just announced our acquisition of Safran, which enhances our aerospace and our industrial position. It's a great new business located in France right next door to the Safran facility. And then last but not least, we just announced a week or so ago our agreement to acquire Oxford Performance Materials, the leader in three d printed parts, qualified materials, qualified with Boeing, flying today on various space and commercial applications. Switching gears a little bit to how we serve our customers with our 20 plus plants positioned around the world.
We're vertically integrated. I pointed that out in our portfolio of our supply chain is set up for efficiency. If you look at where our customers are, whether you're talking about Vestas, whether you're talking about Boeing, whether you're talking about Airbus, we have our facilities, we have our R and T positioned near them to drive intimacy and responsiveness. We have state of the art equipment. We're really starting to take advantage of big data and what it offers to drive productivity, to drive efficiency, to drive more cost effective solutions.
And then the research and technology that feeds back through our production helps us develop the next generation of manufacturing processes, again, to deliver what our customers are looking for. We believe and we've seen our manufacturing footprint, our vertical integration is clearly a differentiator, and it's clearly another barrier to entry. In precursor line, the carbon fiber facility is complete. It has run. Our precursor line is being wrapped up.
It will be finished up in the next three to four months. That will give us our second location to make precursor and our third location to make carbon fiber. It's a great project. Will help us serve Airbus, Safran and our other European customers. Center of the page is our engineering core plant in Morocco.
This plant was wrapped up earlier this year. We're shipping production product from the site. We're winning new business. We're transitioning various programs we have. It's doing very well.
On the right is our latest announcement. It's an R and T center addition in Les Ave, France. Construction is underway and it's to help facilitate our development with carbon fibers, weaving, reinforcements, prepregging for advanced solutions, including auto autoclave and fast layup processes. And last but not least, I wanted to point out the state of Alabama will make an announcement, I believe, tomorrow or sometime this week on an expansion that we're making, again, on the next generation precursor in carbon fiber. It's on the order of about $200,000,000 and we're making that investment to support growth beyond 2020 because we see that requirement in front of us today.
Remember, precursor carbon fiber assets take two point five to three years to put in place from the time you break ground. Operational excellence. We spend a lot of time focused on safety, quality, on time delivery, productivity, focused on velocity, eliminating scrap, eliminating waste. Our mindset is perfect quality, on time every time, with the lowest, most efficient processing possible. This is not a step you make and you're done.
It's a continuous journey. We've made great progress in 2017. We have great plans and initiatives in place to drive more productivity in 2018 and beyond. And with that, I'm going to turn it over to Patrick to talk about disciplined allocation and cash.
Hello, and good morning, everyone. I think I've met a lot of you over the last several months. But if I haven't, hello, I'm Patrick Wintelich. I've been with Hexcel about nineteen years, and I'm delighted to be here this morning to present you some information about our capital deployment and to provide some guidance for 2018. So the standard message we provide, you'll have heard it before, is invest in long term future programs.
We continue to invest strongly in R and D. We are an innovation. We are a technology driven company. It's vital that we continue to do that. And we invest in platforms and operations and production plants to keep driving us forward.
M and A opportunities. Again, Nick alluded to three or four that we've done recently. We're very disciplined. We remain extremely vigilant looking for opportunities. We have a good pipeline in our sites, but we're only going to act if it really works for us and it benefits the company.
And then return to stockholders. Number three, shareholders sorry, share buybacks and dividends. Just a little bit to leverage of 2.5. Effectively, we're operating under two. We were 1.8 as of ninethirty.
And under two is really where we've been and we probably will be for a while. Dividends, as Nick also pointed out, since we started them in 2015, we've increased them by 25% over the last two years. Again, Nick called out 70 five percent $29,000,000 has been share buyback, share repurchase. And lastly, on this slide, we a couple of years ago, we were upgraded by Moody's and S and P to investment grade. It is very much our intention to keep hold of those gradings, and we work to do so.
So sources and use of cash. As Nick pointed out, we have generated a lot of cash from operations over the last five years, dollars one point seven billion. We've actually deployed $2,300,000,000 so there's an extra 600,000,000 there, and I'll come to that in a minute around our debt management. But that value creation, that two point is invest in long term growth platforms. Dollars 118,000,000 in investments, so Formax, Structile, the investment in CCI, the investments in OPM, which we're now going to acquire per our announcement.
And then $740,000,000 has been returned directly via dividends and share buyback. Debt leverage. So as I said, we've increased our debt about $600,000,000 over the period 2012 to 2017, so the difference between the $1,700,000,000 and the $2,300,000,000 on the previous page. If we look back, our leverage was under 1,000,000,000 and we felt rightly all the way through 2017. We plan to maintain that ratio.
And so as our EBITDA grows, you can understand our debt will therefore grow, but we're going to maintain the same controlled leverage point. Capital expenditure. So if I look at 2016, we spent $320,000,000 That was our peak year as put in plants across the world. Carbon fiber plants, as Nick was talking about, but continuous mix resin, prepregs, engineered core. We've really enhanced our manufacturing portfolio.
This year, as you'll be aware, we're targeting $280,000,000 We still expect to come in at that level. And we're now guiding for 2018 to be around $180,000,000 so in the range of our program. We can see programs, as Nick alluded to, 2020 and beyond, which will provide future growth, and we have line of sight to that, and we obviously want to participate. So we're moving from the investment cycle to the cash generation cycle. Return on invested capital is a key metric for Hexcel.
We've put in a lot of investments, and clearly, need to drive a return. Throughout the period, we are a long way above our weighted average cost of capital, which is about 9%. We've performed thirty months still to report online and be productive. But as they come through, we are very confident to see ROIC grow. And not only can we see 14%, we can see well above that moving to 15%.
And so share buyback in 2015. Returning to shareholders and growing that return is a priority for Hexcel, and as I said, $740,000,000 since 2013. So just to summarize, we want to drive through operational excellence, operational performance, our earnings per share growth. We're going to drive up our return on invested capital. All the investments we've made, we're going to return back to 14% and higher.
Whilst we do that, we're going to maintain our balance sheet discipline, our debt to EBITDA leverage. We're going keep it very controlled. We're going to protect our investment grade standing. And all that will lead to stronger shareholder returns through dividends and share buybacks. Growing free cash flow, managing our debt appropriately, we're going to drive our shareholder return.
So I now have three or four slides on 2018 outlook. Commercial Aerospace, we see high single digit growth into 2018. Airbus and Boeing are going to represent about 88% of our total Commercial Aerospace sales. The key growth A350, as Nick said, will move up to rate 10 around the middle of twenty eighteen for us. The narrow bodies ramp and continue to grow as well as we have more content on the neo and the MAX.
However, we do face some headwinds. It's unfortunately not just a one way street. The wide bodies, the July transition, as Nick alluded to, the A330 transition and the A380 coming down. However, on other commercial aerospace, we see double digit growth. We see a very strong step up between 2017 and 2018.
Space and Defense, we see the outlook as stable. Things moving in different directions, but solid and stable for us. Rotorcraft continues to be a very solid area for Hexcel. And Industrial. We've called out several times this year that wind has been a very difficult process for us this year.
As Vestas, our key wind customer, has transitioned between some older style blades with less of our composite content. And in 2018, we know they're moving to blades. And we recently announced the contract that Nick mentioned to position us very strongly for 2018. So we see very solid growth both through wind and automotive in our industrial sector for 2018. Grew strongly, though new wind energy blades are very positive, and other commercial aerospace sees a good step up going into 2018.
The headwinds, legacy widebodies continue to slip, go down, and we face the transition time period, which isn't always perfect. We'll be sort of up and running come quarter two, but before we get to that point, we are going to be carrying the labor costs and the cost of that without any output or productivity. And then we have a large depreciation step up of $14,000,000 which I'll confirm on a later slide, but $14,000,000 step up. And just very recently announced this week, we are going to acquire OPM. OPM is really still at the development phase of the business, but we will manage those costs in the integration going forward.
It's very exciting technology and it's going to provide or it's going to be a real enhancement to our portfolio going forward. So the numbers. We're guiding from $2,100,000,000 to $2,200,000,000 of sales in 2018, and that's going to deliver an EPS in the range of $2.8 to 2.94 Our cash from operations continues to grow and we're calling out $420,000,000 as our target. Capital expenditure, as I mentioned, is going to be in the range of $170,000,000 to $190,000,000 and therefore we should generate free cash flow of over $230,000,000 so a significant step up over 2017. Strong sales growth and growing free cash flow.
So if you sort of look out, you put in the 2018 guidance that I just provided, 2017 has been a tougher challenge year for us, but we see a strong return to long term onward growth. Record $16,000,000 between 2017 and 2018. Obviously, had to assume a tax rate in this, and I have completely avoided tax reform in anything I've tried to do. I'm not trying to guess what's going to come out of the conference between the House and the Senate, so I've just used 29% in my EPS guidance. Just to step off the slide for a second, so tax reform is going to drive a number of things, which I'm not going to predict.
But just directionally, we have a DTL. As of ninethirty, you may have already seen it, we have a deferred tax liability of $130,000,000 or so on our balance sheet. So if the reform is not 2018, that one time boost will fall into 2018. But just for you directionally, through quarter one, give you much more flavor of what that's going to mean for Hexcel. The last thing I will call out is the transition repatriation tax.
So we have quite substantial overseas earnings. Again, it depends exactly how that's applied, but that will be an offset to the DTL revaluation when it takes place. However, what I will leave you with is that both for the onetime tax adjustments, we are going to see a net positive. And as we go longer term on our tax reform, we're going to see a net positive for HECSR. Q1 cash usage will be the same as normal.
We do see a seasonal effect as we go into a new year, and we're likely to see some working capital use in the first quarter. SG and A is normally higher. And in relation to FX exposure, the biggest exposure we have is the euro dollar, but we do still have some GBP dollar exposure. We are hedged slightly lower than we have been in previous years, really around the weakening dollar of late, but we have a 5% movement. It's worth $4,800,000 just for your guidance.
The last thing I want to mention before Nick comes back is on the revenue recognition, Standard six zero six. It's not going to be of a huge impact. I'm not going to call out a number today. But as a growing company, you might expect that we're going to be pulling in more revenue than pushing out as we adjust quarter on quarter, but we do not expect to have a material impact on our GAAP earnings. So with that, I'm going to hand you back to Nick.
Thank you very much.
Thank you, Patrick. Okay. Update on our outlook up through 2020. First chart, this basically brings it together on the investment cycle that is tapering off. So on the left, can see our CapEx ramping down to the 180 that Patrick mentioned.
You can see our free cash flow and how it has historically performed based on our internal investment up to $2.30 plus in 2018. And the bottom line is we're on track to deliver $1,000,000,000 of free cash flow from the period 2016 to 2020, unchanged from our guidance last year. If you look at our sales outlook, commercial aerospace, we see a CAGR of 6% to 9%. And I'd point out these are estimates from 2017 end of year estimate to 2020. Space and defense, 3% to 5% CAGR and industrial, 15% plus.
And you've seen that increase from our last year guidance driven by a couple of things. One, stronger positions in wind and auto as well as the rebaselining, the reset in 2017. So overall for Hexcel, seven percent to 10% CAGR into 2020. Just to give you a little more color on the walk from where we are today, again, guidance is just under $2,000,000,000 for 2017. That's what we used, up to a midpoint of $2,550,000,000 So that compares to the guidance we provided last year of $2,700,000,000 The movers, specifically commercial aero, making up the bulk of it, and that's driven by the A330neo ramp rate is slower than what we had last year.
A380 is softer, we've adjusted for. We pulled out the change of shipset value for the A350, which was 200,000 per shipset times the number shipped for the year. Those three elements, along with a little bit of conservatism, a little bit of hedging on our part to better center our plan on commercial aerospace, make up $120,000,000 Space and defense, we've centered our assumption on a few blade models, make up about $35,000,000 And then on the upside, we pick up structural and we pick up OPM from last year, both of which we expect to be strong growth markets for us, adding $30 plus million going forward. So that's the walk from today or our estimate at the end of the year up through 2020, '7 percent to 10% CAGR. So just to bring it together, we're investing in innovation to position us for next new programs, to advance and increase our penetration, our secular penetration in every market we serve, commercial, space and defense, industrial.
We're being very disciplined on M and A. If you want to get a flavor for what we have in mind, look at what we've done. They've been bolt ons, focused on technology, enhancing our portfolio, positioning in our core space, allowing us to grow faster and bigger than 50% of our net earnings. We intend to continue our growing trend on dividends, and we will significantly increase our free cash flow as you've seen from the prior charts. So long term growth, strong execution, strong financial performance drive shareholder value.
Earnings per share and cash generation. We remain and continue to drive and innovate to be the proven leader, a great investment in attractive industries. We have growing positions. We have customer intimacy that is best in class. Our innovation, the technology and breadth of portfolio and our vertical integration are differentiators.
Our capital management and our discipline on capital management is evidenced by record setting cash generation that will continue for years to come. So strong performance and growth expected as long as we can see. So with that, I'm going to open it up to questions. Again, we have a microphone. I'm going to ask Kay to bring the microphone to you if you have a question so that the folks that are participating on the phone can hear.
And Patrick?
I'm going
to start here in the back. Christian Sinha from Vertical Research. Just going back to Vestas and the industrial business, you mentioned earlier that it had a tough year this year. Am I to understand that the growth, the 15% CAGR that you're talking about with that business is all due to the increase in the composite, I guess, composition of the new fan blades? So is it all shipset increase as opposed to delivery increases?
Well, it's a combination of our shipset content for the new blades. The blades are bigger. And there's also Vessus has a big backlog, and I suspect I haven't looked at the numbers, but I suspect they're scheduled blade shipments.
I just wanted to be clear versus the same as before, which is a recovery in 2018.
We expected our sales based on the positions we've won, based on now the contract that we can talk about that we've signed with Vestas, we see 2018 being very strong. We see Vestas' backlog over $10,000,000,000 So we feel very good about that. I would mention that the production tax credit, the investment tax credits, what's being talked about in the Senate and the House could negatively impact 2019 and 2020 for wind in The U. S. Market.
I would also tell you, if you look at the global wind energy market, about 17% of that is U. S.-driven, and that's per the MEG industry guidelines. Our content with Vestas is a little higher than that. So to help size it, think about those numbers.
One more follow-up on maybe for Patrick on cash generation. Your guidance through 2020 is the same, and it would roughly imply flattish free cash flow and CapEx on growing earnings. If that's the case, what sort of factors may drive any variations from that?
Yes. So I mean we're guiding to roughly €180,000,000 CapEx per year. But I mean besides that, we see growing cash from operations and therefore growing free cash flow. So we definitely see net growing free cash flow even with the stable CapEx that I called out.
Sheila Kahyaoglu from Jefferies. I guess as you think about your long term outlook, where do you think you have the most conservatism embedded in the long term outlook? And what are the biggest risks?
So if I reflect on 2020 right now, again, you see the commercial backlog. Pick a number. And let's say the backlog is overstated by 25%. You're on a nine year base at current build rates. So the visibility is very good.
Our positions are very good. The planes are performing exceptionally well. People are traveling. My area of risk right now would be on tax reform related to production tax credit wind. If I was going to handicap it, there are some legacy programs that probably provide a little headwind.
We pointed out A400M. Out in 2020, V22 may be a little bit of a headwind, but it's still a great program for us. And then it's about execution, and we're responsible for that. I think we demonstrate we perform very well, and we're going to continue to perform even better. That's how I'd handicap it.
And just one more on defense, if I can. If you think about the defense outlook of 3% to 5% for 2018, is it just A400M driven that's the major headwind? Is there anything else?
So the 3% to 5% CAGR was long term 2020. Next year, we're seeing Space and Defense basically stable.
Rob Spingarn, Credit Suisse. So Nick, high level question. When you think about content shipset content for carbon fiber as a percentage of aircraft value unit value, where are we and what's the target? What's the most you can get on an airplane in the future?
So I'm not smart enough to answer the question in carbon fiber, where is the content. I think about it composites by weight. And if you look at the A350s at 53% and the 77s at 50%. And it's no surprise, our customers historically, as they're learning how to use composites, have maybe overdesigned certain components, maybe a little more weight in them than they could have. And they're also learning how to lay down the materials with automated tape layup machines and automated fiber layup machines where it's fully automated now, whereas it's transformed from being somewhat manual in a lot of cases.
Where do I see it going? I see the potential as we expand the processing capability, the lay down rate above 60%. Now that would require engine and content. And I would remind you, our engine and nacelle business is roughly 20%, twenty % plus of our commercial aerospace. We've got great positions, which I believe our customers have demonstrated to themselves in the marketplace that, that's what they want for weight, for durability, for life cycle and for maintenance costs.
So is it 60? We had Boeing's R and T leader in, and he cited a number that he thought it could go higher. John Tracy thought it could go higher. Now it's an evolution. You have to develop new materials.
You have to develop ways to lay it down faster and cure it out of autoclave. But I don't think we've even approached the plateau of entitlement.
One more. You talked about you mentioned three d additive manufacturing earlier.
I'm sorry?
Additive manufacturing. Yes. You mentioned that in one of the earlier slides. Could you talk a little bit in more detail about what Hexcel can do there?
Well, that's the Oxford Performance Materials, that's what they are. They're an additive manufacturer. They print three d parts. And we've invested in them. We owned about 16% of them.
We've made investments over the last couple of years. We love the technology. It is a thermoplastic technology. Remember, the majority of our primary materials are thermal sat. Thermoplastic afford opportunities where you can weld parts and eliminate fasteners.
So the Oxford Performance Material additive manufacturing brings to us, obviously, additive manufacturing. They have a proprietary technology that uses PEKK, thermoplastic resin system with our fiber. It's been qualified at Boeing, huge opportunity for penetration and growth, not only on the additive manufactured parts, but on the PEKK and the IP we get from that, so that we can work with our customers in advanced materials for brackets, clips, even going forward, maybe even into primary structure materials. So big believer in additive manufacturing, and Oxford Performance is a welcome addition to our team.
Mike Sison, KeyBanc. One of your slides noted that R and D expense will be up double digits in 'eighteen. Can you be a little bit more specific on why it needs to be up so much? Are there specific platforms you're working on, certain specifications? And is this an investment that will maybe hit in 2019?
Or is it beyond 2019 when you're going to get those investments in?
So I'm pretty much here to tell you it's not my objective to reduce R and T. So as long as I'm giving these presentations, you're going to see double digit growth. That's who we are. And I can tell you, we're working on the next new materials, the next new product, helps us drive efficiency and utilization. So on top of that, in our R and T, we have qualifications built in.
So we see some pretty significant qualification costs in 2018 that helped contribute to that double digit growth. And then just a
quick follow-up on the automotive markets. Aside the maybe the Hexcel corporate Ferrari, when do we get that carbon fiber into the normal car that's out there that a sell side guy like me could afford?
Well, tell you, I think that's a moving target. I don't know if you saw in The Wall Street Journal, GM just announced that they're going to offer a composite bed for the Silverado and the GMC. So they're going to a composite bed where Ford in the F-one hundred '50 went to an aluminum bed. Having said that, Mike, I don't think your Ford Fiesta is going to have carbon fiber composites from Hexcel on it next year. I think there's economic trade that has to be done.
I think it's certainly introduction is going to be brand and value and structural where weight needs to get pulled out. And again, I've told you, we do not go after the commodity stuff. The stuff, the components, the niches that we're going after are sustainable. The business cases stand on their own, and we're confident when we say barrier sanctuary and sustainable competitive advantage, that's just not how we think about aerospace and space and defense. That's how we think about industrial.
So I really like the automotive. It's really growing for us. Again, it's off of a small number, but it's getting bigger and meaningful.
Hey, gentlemen. Good morning. Patrick, in the 2018 guidance, what's embedded in the range for share repurchase, whether in dollar spent or in share count? And then also, what's the incremental operating margin that's in the 2018 guidance?
Okay. So I'm not going to answer directly either of those questions. So we are assuming share buyback. I think what we've committed to very clearly today is to return greater than 50% of our net income. And where we see the opportunity to do more, it's very much our intent to do more.
And obviously, their history, as we've shown over the last sort of four, five years, has been 75% of net income return. And in terms of the actual target, I mean our target is 25%. We've called that out several times. We work hard to achieve that. But it is a stretch target.
And depending on the mix of business that comes through, we may or may not hit that. But we continue to push in that direction is the answer to that So
2018 earnings guidance has some share count reduction embedded in it. It's not assuming zero.
It has some share count reduction.
In dollar level is I know you specifically guided to it in 'eighteen and 'nineteen, but it sounds like that's kind of where you see it run rate. It doesn't step down.
I think at the moment, that's a sensible assumption that we foresee. Because as Nick is talking, I mean, growth doesn't just stop. Yes, we've come off the back of a very significant cycle, but growth does not stop for Hexcel. And programs post-twenty twenty, if we're going to facilitate for those, we need to keep spending. So the 180,000,000 number is a sensible ballpark figure.
Yes.
And then just last one. What's driving other aerospace up double digits in 2018?
Go on, Nick.
Well, I was just going to touch because it surprised me a little bit. It's really driven by Gulfstream. New platforms, the 7,000 is a big one or excuse me, the 506, great positions, Bombardier seven thousand and the new Embraer platforms, the 175 and the 195 new planes. Very good positions in the structures. And obviously, composite penetrations picked up on the new platforms.
So as those new platforms come out, it's a step change for us. Those are the big drivers. There's a lot of movers, but those make up the bulk of the increase.
Ken Herbert with Canaccord. Just wanted to follow-up on your M and A strategy. It sounds like from your comments from both a sort of dominant question around that. One, what would
it take for you to maybe look at a larger opportunity? And is that ever something you'd consider? And if so, where? And then second, if you've seen opportunities in your portfolio. So we wouldn't shy away based on size.
It's really based on the technology and the fit. We've favored high-tech premium type technologies and parts, selecting not to go on the low side of the commodity type products, commodity type our core competency, Advanced Materials. I think there are areas where we can selectively expand that, maybe go upstream a little bit more as well. It's hard for me to give you too much color there without pointing out names, and I'm not going to do that. You know me well enough.
But I'm excited with the process and the way we look at it. Again, we look at it from technology across our markets, structural, OPM across our markets. That's the plan for growth.
And then just a quick follow on, different subject. You had this year, obviously, I think one of the surprises relative to last year was the change in the shipset value on the A350, the site stepped down. Clearly, your customers yourself still very focused on efficiency, automation, everything else. How confident are you that either on the A350 or the $7.87, there isn't another slight step down potentially in terms of your dollar content per aircraft?
Yes. So I feel very confident. Having said that, I will also tell you, I've mentioned customer intimacy many times, and that's something you earn. And you earn it by building trust and credibility, and you earn it by helping our customers achieve what they need. Our material served up in a different format that could cut the usage down and make it more efficient and save them processing time and money.
It's the right thing to do. We work with them on that. We had line of sight. So it wasn't a surprise. It may have surprised you.
Never was an intent to do that. I would say the longer a program achieves rate or gets to rate, the less chance that there's going to be changes. Because if you think of all the capital, not only within the supply base, but think of it at the OEs, the guys making wings, they're not going to go in and turn around a plant and change the product form that would drive huge changes, not to mention qualification changes. So might there be some tweaks here and there on programs that are still ramping up? Absolutely.
Do I see them as being material? And did we build those into our forecast? We did.
Imply capacity increases of greater than 100,000,000 per year through the decade. I was wondering what's driving this capacity increase, which means you're not going to meet those program increases post-twenty twenty.
Yes. So just to be clear, what we've guided to is through 2019. Carbon fiber assets are fungible. So when a program winds down, a program that's utilizing those assets winds down, we just reallocate it. We understand the cost of our capital, and we do not build it unless we have line of sight and contracts that are going to fill those plants.
So I'm not going to get into specifics. It's a whole array. It's everything out there on growth potential. Again, sole source position, you can't be short. And the bottom line is we do not have enough capacity in 2020.
We need to have the French assets online. We need to have that so that we can hit our 10 per month, okay? Beyond that, you've got LEAP growing, you've got narrow bodies growing, you've got JSF growing. It's not one program. It's the whole array of programs that require our carbon fiber.
And again, the new program positions we've been winning have all been on our carbon fiber. We continue to invest in it. We continue to position it. Again, the vertical integration allows us to optimize it, and that's how we're winning. And we're going to continue to win beyond our 2020 guidance that we've provided.
And our line of sight, we do a strap, five year, ten year. So clearly, we're looking out to the middle of the 2025, '2 thousand and '30 time frame, and we know we need more assets. Now given color on that, you have to wait until next year.
Sure. And that to follow-up, does that $180,000,000 through 'nineteen, does that get you to the 10,000,000 per month for the A350?
It will get us to our 10,000,000 per month. That's already in the plan. There's some incremental above that that we're putting in place. The announcement that's going to be made in Alabama, that's for excess demand that's in the 2021 and beyond time frame. Thank you.
You're welcome.
Sure. Just going into the investments for this year, you talked about the OPM technology investments and you talked about the ramp up of the plant. And last year you gave or this year rather, you gave some color on the Morocco ramp and the cost. Do you have any can you give any guidance on the expected investment? Is that in the R and T spend for OPM and the French plant?
Yes. OPM well, I guess there's it's split, it's true. Some of the OPM start up cost, I mean, it is an R and T type investment, is in R and T, and some is in operations. It will evolve to be operations longer term, but it's a good point early on.
This is Hunter Keay at Wolfe Research. You touched on Alabama a minute ago as well to front run the announcement or anything, but can you give us a sense for what's going come out of that facility after this investment is made, sort of the mix, whether it's by aerospace platform or maybe some adjacent markets platform? What do you have in store for that facility long term? Obviously, you mentioned it's kind of a beyond 2020 impact. But what do you see that facility producing over time?
So that's a great question. I meant to point it out. The announcement in Alabama will be for a precursor line, in essence, which is what we do in Alabama today. We have multiple precursor lines and a carbon fiber line. Today, we have two locations in production on carbon fiber, Salt Lake City in Isska, Spain, and we're building the plant in the one line in Roussillon, France.
This announcement in Alabama will include one precursor line and one carbon fiber line.
And do you care to touch on the order of magnitude of that investment that's going to be Yes.
It's about $200,000,000 1
last question, anyone?
Most of we'll care.