Hexcel Corporation (HXL) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Hexcel Corporation First Quarter 2013 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Wayne Pensky, Chief Financial Officer. Please go ahead, sir.

Great, thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2013 First Quarter Earnings Conference Call on April 23, 2013. 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, including our 2012 10-K, our first quarter 10-Q and last night's press release. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be rerecorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. With me today are Dave Berges, Hexcel's Chairman and CEO; and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2013 first quarter results detailed in our press release issued yesterday. First, Dave will cover the markets and then I'll cover some of the financial details.

Thanks, Wayne. Good morning, everyone. First-quarter sales of $416 million were as expected, up about 4% from last year, as strong Aerospace revenues offset tough comparisons and depressed sales in Industrial markets. But nevertheless, we again delivered double-digit net income growth as diluted EPS of $0.43 for the quarter compared to $0.39 in the same period last year. Commercial aerospace sales of $269 million for the quarter were up almost 11% in constant currency from the same period of 2012. Total revenues from new Airbus and Boeing programs again increased about 20% for the quarter, as we did not see any noticeable slowdown in the planned increase for 787 materials. We're pleased to see that the FAA has approved Boeing's battery fix and expect the 787 to drive our new program growth this year, as we continued to ramp to their 10 per month rate at year-end. Sales for legacy platforms at Boeing and Airbus were up over 10% from last year's first quarter and about in line with the announced build rate increases. Sales to other commercial aerospace, which includes regional and business aircraft, were down modestly compared to last year as we absorbed the decline caused by the end of the Hawker business jet business. Space and defense revenues were $96 million, up about 13% versus last year. This is the third quarter in a row where we had double-digit year-over-year growth. Sales growth from fixed wing programs, such as the A400M, Eurofighter and the Joint Strike Fighter, complemented the continued strong performance in helicopters. In Industrial markets, sales for the first quarter were $51.6 million, down 29.5% year-over-year in constant currency. As expected, Wind sales were down over 30% from the record levels of last year's first half. They were also down about 9% sequentially with the U.S. market particularly weak due to the PTC extension worries. Other Industrial sales were down across almost all submarkets and geographic regions. While we continue -- while we expect continued weakness in our Industrial markets, growth in both of our other Aerospace segments should still allow us to hit our total top line guidance, which is a 7% year-over-year growth at the midrange of the -- midpoint of the range. But with a solid quarter under our belts, continued Aerospace leverage, demonstrated operational performance and the benefits from tax planning and the R&D credit, we're taking up our adjusted diluted EPS guidance to a new range of $1.73 to $1.83, up $0.06 at the midpoint from our prior guidance. Let me turn the call back to Wayne for some additional comments on the financials before we take your questions.

Thanks, Dave. The gross margin of $112 million for the quarter was 26.9% of sales as compared to 26.6% in the first quarter of 2012, thanks to continued operational improvements and a bit of a richer sales mix. This is our highest gross margin percentage in over 30 years. Our SG&A costs of $38 million were 3.8% above last year's first quarter, primarily driven by the timing of stock-based compensation expenses. Our Research and Technology cost of $11 million for the quarter were up $1.8 million over last year, as we continue to invest in new products and process technology improvements. Despite the increase in R&T spending, our operating income as a percent of sales was a respectable 15.1% this quarter with only nominal help from exchange rates. Our effective tax rate for the quarter was 29.2%, down from last year's effective rate of 31.9%. This quarter benefited from the January extension of the 2012 and 2013 U.S. R&D tax credits. The full retroactive benefit from 2012 was taken in the first quarter and reduced the tax rate by 1 percentage point for the quarter or added about 6/10 of $0.01 improvement to our EPS. Implementation of tax strategies and mix of income by country accounted for the remaining improvements in the tax rate. We now expect our full year 2013 effective tax rate to be about 30.5%. So for the year, the 2012 and 2013 R&D tax credits will add just over $0.01 to our earnings, and the remaining improvements will add about $0.03 to our earnings per share as compared to our prior guidance. Free cash flow for the quarter of 2013 was a use of $15 million as compared to a use of $61 million in the first quarter of 2012. A seasonal effect typically caused cash usage in the first quarter. Our cash from operating activities of $33 million was 50% better than last year. And cash used for capital expenditures in the first quarter of 2013 was $48 million, a $35 million reduction from last year's period. In the quarter, we bought back $15 million worth of stock, putting approximately 531,000 shares back into treasury stock. The company has $35 million remaining authorized under its previously-announced share repurchase program. So we'd now be happy to take your questions.

[Operator Instructions] And we'll take our first question from John McNulty with Credit Suisse. Abhiram Rajendran - Crédit Suisse AG, Research Division: Abhi Rajendran calling in for John. On your guidance increase, it seems like the commercial aerospace for your outlook is largely intact, while space and defense looks a little bit better and Industrial looks a little bit weaker. I guess, what do you think are some of the drivers that could get you to the top end of the guidance? Is it mainly some improvement on Industrial? Or are there any other factors that we should think about?

Well I would say, Industrial is sort of a question mark -- all of Industrial, but in particular Wind. So how long will it take for sales to start picking up in Wind is a question mark. If that comes on stronger at the end of the year, we ought to be able to push up to the top end of the sales guidance. On the other side of the coin, we're assuming that the 787 ramp continues, and that the A350 stays on track. Abhiram Rajendran - Crédit Suisse AG, Research Division: Okay, great. Just a quick follow-up. The growth in space and defense is strong and for the first time, you highlighted the military fixed wing programs. I guess, could you give us a little bit of color on how we should think about this flowing through looking ahead?

Well, we continue to believe we're going to have growth in space and defense even if total outlays are reduced due to our global positions and secular penetration. Helicopters and rotorcraft have been strong for us for some time, not just U.S. but Europe, China, India. And as I said on the last call, the A400M European transport, which has composite props and composite tail and composite wing, is finally starting to hit serious production. So we think we've got the wind at our back in space and defense. Abhiram Rajendran - Crédit Suisse AG, Research Division: Okay, great. And then one last one if I may. In terms of the remaining $35 million on buybacks, will it be relatively steady over the course of the year or accelerated in any way?

We don't have any comment on what the strategy is on the stock buyback, only that we did accumulate $15 million worth in the quarter. We'll report it each quarter.

And we'll take our next question from Howard Rubel with Jefferies. Howard A. Rubel - Jefferies & Company, Inc., Research Division: You've been steadily increasing your R&T, David. When might we see some benefits from that?

Well, I think we are seeing it in our capital spending projections. Nick was not able to join us today but last quarter, he spelled out the 2 focus areas: new products development and process improvements. So new products development will aid future sales. Those are probably longer term. Process improvements though, improve our capital efficiencies. So to the extent we can get either higher yields or higher throughput through equipment, particularly precursor and carbon fiber lines, we can reduce capital spending and we think it to be a very effective investment. Howard A. Rubel - Jefferies & Company, Inc., Research Division: Does this quarter mark the peak in your capital spending?

Don't know about the quarter. We said last year was a peak.

Yes, so, Howard, I wouldn't say for the quarter. I mean, our guidance for the year is $180 million to $200 million and we did $41 million this quarter. So I wouldn't view this quarter as the peak. Howard A. Rubel - Jefferies & Company, Inc., Research Division: And just a follow-up on that. Was part of the benefit in the quarter due to sort of bringing some things online so that your startup costs are moderating relative to the enterprise?

I would say that's not noticeable. Most of it is just good productivity on existing business. In the case where we have plants that are growing, focused on aerospace, they're getting good efficiencies and volume leverage. In the case of the Industrial plants, they had to deal with a big, big cutback in sales and they've done a good job to try to get their costs aligned.

We'll take our next question from Amit Mehrotra with Deutsche Bank.

First question just on Wind. Given the reduction in sales that we've seen, can you just tell us where the capacity utilization is in that business today? And should we expect any material facility or restructuring actions maybe to better align the cost structure? Or are you happy with where you're at now?

Well, we were not fully at capacity a year ago and our sales were 30% higher. So we don't have line by line. There's not a simple way to describe capacity but I mean, I guess it would be a good approximation to say that if our sales are down 30%, we didn't take any lines out. So I'd say we have 30% or so of excess capacity. We're always monitoring outlooks in our cost structure. I think we've done a good job of that over the years with a number of other upsets that we've had in our business. And I'm sure we'll do what we need to do once we get better clarity on the sales.

Okay, just a follow-up to that. There's another composite supplier to Vestas that's out there publicly saying that they're exploring strategic alternatives. I mean, how you guys think about the opportunity? Is there any opportunity there for Hexcel to gain some more content and maybe improve that utilization of the existing capacity on the Wind side of the business?

I'm sure there's always opportunities but we're not talking about any strategic alternatives.

Okay. Thought I'd try. One last question for Wayne. Has there been, I would say any raw material benefit this year? I mean, with some reduction in spot propylene prices here in the U.S. and then also in Asia, I mean, does that really move the needle at all? Or is it too small?

One, it's too small. And in fact, on acrylonitrile, the quarter -- the cost this quarter -- excuse me, the costs for the quarter this year were a little bit higher than last year and even a little bit higher than the fourth quarter. So for right now, it's been a little bit of a negative but nothing material.

We'll take our next question from Richard Safran with Buckingham Research.

I guess this question for David. David, I heard your comments about Wind and et cetera. Focusing on Industrials here, I just wanted to know in general, if you could maybe discuss what could be done to improve at Industrials. Maybe you could talk about here what the opportunity set is that you're looking at?

Well the Industrial grouping includes -- outside of Wind I assume you're talking about. Is that right?

Yes.

It includes a wide, wide range of customers in recreation, industrial equipment, tooling, premium automotive and an even wider range through distributors. This quarter was definitely down more than normal but there wasn't any one big miss. It was weakness across the board. Bad weather in the economies resulted in double-digit decline in snowboard sales. Year-to-date, Europeans ski manufacturers were also down. One of our Austrian customers declared bankruptcy. Carbon bike frames in Italy and U.S. are down. Even the NHL strike hurt our hockey stick manufacturers. So there's a lot of just general global economy impact for the quarter as best we can tell. On the bright side, our new HexTOOL composite tooling concept is being specified for a number of important programs. And we've begun to see some interest from oil and gas exploration applications. But these new opportunities just aren't big enough to offset the global weakness in the economy.

We'll take our next question from Steve Levenson with Stifel, Nicolaus. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Just looking out at the future, GE has been picked to supply the new engine for the triple 777X when that's formally announced. And they've talked about fourth generation composite fan blades in case. Can you tell us if and where you fit in there and what exactly a fourth generation product is?

Well, the fan blade, which was developed in the mid-'90s, is based on our best carbon fiber prepreg and it's been very, very successful. But each time they develop a new engine that requires more thrust, the blades are redesigned, generally longer, sometimes with a different cord width and twist. And I assume that's what they're referring to. And the case also has to be redesigned. In general, every new engine regardless of the manufacturer, and every new nacelle, which has to go on every new engine, has more composites than one that it replaces. We, of course, have carbon fiber, we have prepreg, honeycomb core. We've got an acoustical treatment that can be applied and our engineered products business does a lot of specialty machining, shaping and forming of honeycomb core for nacelle makers. So it's all good news for us. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: And actually while the call was going on, Boeing put out a press release that they were expanding one of their plants to build the acoustic inner barrel out of composite for the 737 MAX nacelle. So based on what you said, is it safe to assume that'll be a Hexcel product also?

It's safe to assume that we expect in everything that we bid. But I don't want to declare anything but...

Okay. Lastly, on the LEAP fan blades and cases, we hear that CFM is accelerating the construction of that engine and demand for parts is coming a little bit earlier. Can you sort of tell us the lead times when you expect your shipments to ramp up for LEAP-related parts?

Well, as we've said before, any new engine or new airplane program has shipments that go on for years before the first product is certified or flying. So we've been very active in the development of components for the LEAP engine and the nacelle for years. So definition of ramp up, I guess, is the question I'd have to have back to you but serious volumes will start to show when the airplane starts to approach certification. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay, so since they -- the first deliveries will be the A320 NEO planned for 2015, so it's probably not this year but could be next year?

If you're talking about enough of a number that we'll start talking about it, yes. But I'm sure we have a steady stream of sales to all of those new programs even at this stage.

We'll take our next question from Ken Herbert with Imperial Capital.

Hey, just wanted to follow up on sort of the cadence of the sequence here. Typically you see a nice step-down in SG&A from the first to second quarters as the compensation and other things step down with a nice step-up in earnings over the last few years. Do we see a similar trend this year? Or how would you talk about the transition here from the first to second quarter and through the rest of the year?

Yes. The long-term incentive grants and other seasonal effects typically make the first quarter $5 million or so higher than other quarters, might be closer to $6 million this year just based on some incremental spike in the quarter compared to last year with respect to retirement accounting treatments.

Okay, okay. So similar trend that we've seen in prior quarters, it sounds like?

Correct. I think we can present it as a percent of sales, is probably a smart way to look at it for year-over-year.

Yes. Even with the step-up this year, as a percentage, it was still more than or in line with last year and certainly less than we saw in '10 and '11 so I guess that's certainly a good development. Just then on the commercial aerospace side, nice to see that the new program's up 20% again in the quarter. Fair to say because of what's going on with the 47-8 (sic) [747-8] and the A380, fair to say the bulk of that was 787? Or how much was A350 in the quarter, if you could comment on that?

Well, I won't give you the detail but you're right to point out that the A380 and the 747-8 are probably pulling back a bit from their peak but continue at a very nice rate. The A350 is up year-over-year and sequentially, but the big growth for the quarter is the 787 as we continue to ramp up.

Okay. And just finally, as you look at the A350 for the year, can you just comment on your outlook for the year in that program and any change since the last quarter in terms of expectations on the timing of the ramp?

I would expect that we'll continue to grow sequentially and that the serious ramp will start as they approach certification.

We'll take our next question from Noah Poponak with Goldman Sachs.

Wayne, I apologize if I'm making you repeat here, but I just want to make sure I've got this pinned down. So how much of the EPS guidance change was tax? And how much was operational. And then separately, I think at the Investor Day when you gave the initial guide, you had official end market revenue growth targets for the year. Are any of those changing today?

Yes, I'll do the easy one. So for the EPS, for the full year, it's about $0.04 in total better than the guidance we -- which we originally were at. So view the rest then as operational improvements.

Okay, and was that purely on the space and defense growth?

I'd call it Aerospace in total, meaning both commercial aerospace and space and defense. With respect to the end market guidance we gave originally, I mean, our view now would be Industrial's a little weaker and then space and defense and commercial aerospace would make up that difference.

Okay. Got it. And then on the 787 comments you're making, I sort just want to ask or clarify if that was true through the entire quarter at a reasonably steady pace, and then also true thus far into the second quarter? I'm sort of asking if Boeing started to change their demand pull as things continued to get extended or not?

I don't track programs by day. I would say in general, we've been moving up steadily at the pace that was outlined a year ago and we didn't see any sign of a slowdown.

We'll take our next question from Robert Stallard with RBC Capital.

I thought just to follow up on Noah's question there. If you could clarify where you think you are on say, shipsets per month on the 787 and when do you expect to step up to the next level in line with what's Boeing telling you.

Well, I don't think we see any of these as steps because we have so many ship-to locations. So we typically, on a program, have 30 different points that we ship to, different Tier 1s, Tier 2s, Tier 3s, each with different schedules, each with different yield improvement programs. So it's always a more gradual slope for us. No significant steps. They were at 5 a month last year, targeting 10 a month at the end of this year. And we're somewhere in between those, gradually moving up every quarter.

Okay. And then just a second question on the Defense side of things, continue to put up a good number here. I was wondering, really, how much visibility you have on this Defense side of the business. You mentioned helicopters, F-35, A400M and Eurofighter. I'd imagine you actually have pretty good visibility on the build rates here and so you could see whether these rates are sustainable over, let's say the next 12 months?

We do have pretty good visibility. Things can change customer-by-customer or subtier, so it can be a little lumpy quarter-by-quarter. But we do have good visibility on all of our aerospace programs, both commercial and space and defense, and that's why we have, for years now, said we expect continued single-digit growth in space and defense.

We'll take our next question from Gautam Khanna with Cowen and Company.

You mentioned that you've been shipping on the A350 for a number of years. And I just wondered also on the 787, if you could comment on when you expect to be at kind of that targeted $1.5 million sales per '87 and $4 million per A350? And kind of where do you, where would you ballpark it where you are now?

Well, we are at $1.5 million per airplane. Just that the airplanes aren't flying. So we monitor it against their build rate. You, of course, you're seeing their delivery rates, which is in their control and all of their subtiers. But I expect we're somewhere between 5 per month and 10 per month as we ramp up because we generally deliver 6 months ahead of program on average. In the case of the 787s, since there are so many of them on the ground at Everett, it's more than 6 months.

I guess what I'm asking though, as we move through and the supply chain learns, presumably yields improve. Does that $1.5 million start to drop at some point next year or...

The $1.5 million generally is our attempt to estimate what the steady-state run rate will be. So if there is a shift in learning curve and if we've done our planning right, we would be higher at the beginning and it would move down to that run rate at the end.

And so on the A350, when would you expect to be at that mature $4 million and plus?

I would say when they get to 50 or 100 per year.

Okay. And depreciation was relatively flat sequentially. Can you give us some color on which quarter you expect it to step up or rise, even if it's gradual, and how big that might be when it does this year?

Yes, I still think for this year we won't see -- we'll see little jumps as opposed to huge jumps. Probably the next big jump is towards the end of this year or early in the first quarter.

And how would you define big?

With respect to next year, we'll let you know.

We'll take our next question from Ron Epstein with Merrill Lynch.

Just a quick question on the 777X program. There's been some discussion that, that will be a -- potentially have a composite wing. Is that an opportunity for you guys to pick up share from Toray? Per Toray has been a provider of that stuff for Boeing, as you know. Do you expect that to get put up for bid?

Every new airplane is an opportunity for everybody in the industry. As I've said before, I think that the competition for material selection, generally favors the incumbent. So I think the lead candidates would be the existing primary structural prepreg maker for the 787 or aluminum. And beyond that, if there's a big performance step-up desired, then it's long development program. So I don't have any more comment than that at this stage. I would say that in any case, I would expect our content on the 777X or any new airplane to go up just from the secular penetration. We have lots of products in addition to prepreg. And we talked earlier on the call about the new engine and the nacelle that would go with it so I would expect that we'll gain a position -- a bigger position on any new version.

Okay. Okay. And maybe just 1 or 2 more quick ones. I don't think you mentioned what your capacity utilization was during the quarter? And do you care to discuss that?

It's pretty difficult to bring it down to a simple number because we have so many different products and so many different plants. In general, Wind, with the big pullback in volume, would say we've got a excess capacity in Wind. Otherwise, when a business is constantly growing, you're constantly adding capacity. And so you're always pretty near the top or else you're overspending on capital. So I'd say we're in a very high level of utilization and adding capital to be able to handle the future growth.

Got you. And then on the Wind piece itself, do you think it's worth sticking around in that business? I mean, is it -- you're really just in a cyclical downturn? How do you think about that strategically?

Well, I think there's a lot of negative headwinds to Wind right now. Carbon emission, credits low, natural gas prices low in the U.S., electricity demand down because of global economies. But I do think long term, this is a market that's got good legs and we've got a very good position in it. So it's just something we need to adapt to for the interim and hope that when the global economy gets going again, interest in renewable energy will take off like it has.

And then maybe just one last one, another strategic one. With the introduction of the new engine, there's been, I guess, the introduction of ceramic matrix composites. Is that something that you could take the company into? Or is that just a completely different material space that's something that you don't...

It's a very much different material space but I wouldn't rule out an interest in that. I mean, we're always on the lookout for parallel sort of spaces that have the same secular penetration in growing markets that, that exhibits.

And we'll take our next question from Avinash Kant of -- with D.A. Davidson. Avinash Kant - D.A. Davidson & Co., Research Division: A few questions. The first one historically, you have broken out your percentage of revenues from the leading commercial aerospace programs. Could you give us some idea what percentage was it off to overall commercial aerospace revenues this quarter?

I think we only breakout the new programs, which are A380s, 747 and A350 and 787. We said last quarter that there are over 30% of the segment and in that same neighborhood this quarter. Avinash Kant - D.A. Davidson & Co., Research Division: So again, 30%?

Over 30%. Correct. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And Wind business, you did say that was down sequentially this quarter. Now when you talk about going forward, I think, do you still see further declines in that? Or you see that stabilizing at the current levels?

I don't really have a quarter-by-quarter outlook on Wind. I do remind everyone, though, that last year's second quarter was the strongest in history. So we've got a very, very difficult comp coming up. If you took, in fact, Industrial in total and held our current run rate from the first quarter into the second quarter, you'd see a more than 30% drop just because of the comparisons. So I don't really have a specific outline and I think what we gave as an indication of Wind early in the year is looking maybe optimistic at this stage. But we don't have a specific number for you. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And finally, any cash flow guidance that, I think you've talked about it in the past, for the year, has it changed or is it still unchanged?

Avinash, no change. Our forecast is the $20 million to $60 million positive on free cash flow and we're on track to get there.

We'll take our next question from Peter Cozzone with KeyBanc Capital Markets.

Incremental margins were muted a bit in 1Q but your full year outlook would imply very strong leverage over the remainder of the year. Can you talk about the factors driving the better leverage relative to your prior outlook, as your sales growth outlook remains unchanged? Is it more improved mix with growth in commercial? Or there are some factors, such as productivity initiatives, that are under your control there?

Well, I would say it's both of those. Mix is not something we normally talk about, but we have said before that Industrials and Wind tend to be lower gross margins but higher return on capital. So as you see, the dramatic drop in Industrial and strength in the Aerospace groups, we obviously get a little help there. You can see that by looking at the gross margin leverage. I think looking at EBIT leverage for, with such small growth numbers in this quarter is sort of not worth spending time on. But the last 12 months is pushing 24% if you look at the full rolling year. And the guidance does suggest more than 23%. So we're hoping for some continued good mix and good productivity from initiatives.

Great. And I think you had previously been expecting flattish-type growth in business and regional jets that are the other Aero business in 2013. Given this business was down in 1Q, your outlook would seem to imply some growth as we head into the second half. Can you talk about any specific programs that are driving the expected improvement there?

If we said something that implies growth in that segment, I don't know about it. I don't have enough visibility into other Aerospace. There are so many programs in there. We have to overcome the bankruptcy of Hawker, who was a customer of ours. We also have an engineered products contract that we chose not to renew and let go somewhere else because of the margin implications on an old aircraft. We do have a pretty steady positive outlook from the bigger business jet companies like Bombardier and Embraer, Dassault and Gulfstream. We've got some good growth from ATR, a European turboprop maker, but softness in some of the smaller aircraft. So I don't know where that nets out. I think we mostly are talking about commercial aerospace in total.

Yes, we've said early on that we expect regional business just to be flat and generally don't view much different from that. I mean, this quarter the decline was pretty modest. So in the grand scheme of things, it's noise.

We'll take our next question from David Strauss with UBS.

The over 10% growth that you saw on the Airbus and Boeing legacies' side, could you give a little color what exactly is driving that? Because I think, other than on the narrow body side where your shipset content's pretty low, we're pretty much at rate at this point. I don't think there are additional increases that are coming through.

Well, there are some -- remember we're comparing the last year and there are some rate increases versus last year. I mean, the biggest one being the 777, has gone from not quite 7 to 8.3 a month. 737 is up 3 a month, the A330s up...

I would, Wayne, I always just thought -- sorry to interrupt you -- given your lead times that you've already been there. You would have seen that already, those rate increases.

Yes, actually that's with a 6-month offset. Remember that we didn't see that much of it in the first -- this came in, in the first quarter last year; we didn't see that much of it.

Okay. I mean are you through that? You think your through those rate increases by -- through the next quarter? Or is it going to benefit you through the course of the year?

Not sure I can answer that one. I mean those rate increases we're just talking about, I mean, they are already in place. I don't know this [indiscernible] talk about big growth next quarter is about whatever the next rate increase is -- the next step-up is.

Okay. And then on 747-8, I mean Boeing did step it down, not a -- obviously, not a big decline but are you at that rate already? That lower rate, new lower rate?

Yes, it's pretty hard to tell. We're only talking about 3 planes over the course of the year and I expect some minor dips but it's pretty hard to tell. Remember we're selling material. We're not setting specific parts for a specific plane, so it's always hard to tell.

We'll take our next question from Chris Kapsch with the Topeka Capital Markets.

Yes, just wanted to follow up on the discussion about the margin variances. And I understand and appreciate the favorable mix shift towards commercial Aero vis-a-vis Industrial. But just wondering, given the meaningful overcapacity that you have, given the weakness in those end markets -- the industrial end markets, do that also contribute to dragging on the overall company gross margin in the quarter? And can you quantify it, if it did, assuming it did.

I'm not going to quantify it. But any time you have a dramatic drop like that, it's hard to manage down because of the fixed cost element. But I think we've done a pretty good job at it, but that was definitely a hill we had to climb. So if Industrial had stayed the same or gone up, you would have seen a lot more leverage.

Okay, but you can't sort of quantify it though?

I can quantify it but I'm not going to.

And with that, we have no further questions in the queue at this time.

Okay, thank you.

Thank you.

And with that, that does conclude today's presentation. Thank you for your participation.