Hexcel Corporation (HXL) Q4 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Hexcel Corporation Hosted Fourth Quarter and Full Year 2013 Review. Today's call is being recorded. Hosting today's conference are Mr. Wayne Pensky, Chief Financial Officer; and Mr. Nick Stanage, Chairman, Chief Executive Officer and President. At this time, I'd like to turn the conference over to Mr. Pensky. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2013 Fourth Quarter and Full Year Earnings Conference Call on January 24, 2014. Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statement 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 third 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 express permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President; and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2013 fourth quarter and full year results detailed in our press release issued yesterday. First, Nick will cover the markets, then I'll cover some of the financial details and we'll go back to Nick for comments on our guidance before we take your questions.

Thanks, Wayne. Good morning, everyone. Fourth quarter sales of almost $427 million were up 9.1% in constant currency from last year as a 21% increase in Commercial Aerospace revenues more than offset tough year-over-year comparisons in our Space & Defense market and continued softness in Industrial markets. Our operations continue to perform well, producing fourth quarter adjusted operating margins of 15.7%, up 170 basis points from last year's period. Our adjusted diluted EPS of $0.46 was about 28% above the fourth quarter of last year. A record close to a record year. For the full year, sales of $1,678,000,000 were up 5.6% in constant currency from 2012, led by strong growth in Commercial Aerospace. We converted these sales into $271 million of operating income, 16.1% of sales, 90 basis points higher than 2012 and a new annual record for the company. 2013's adjusted earnings per share of $1.85 was up 19% from the $1.56 we generated in 2012. Now let me turn to our markets. As usual, I will discuss the year-over-year comparisons in constant currency. Commercial Aerospace sales of almost $284 million for the quarter were up nearly 21% from the same period of 2012. Total revenue from new Airbus and Boeing programs increased by over 30% primarily driven by the 787 ramp-up, as expected. Sales for legacy platforms at Airbus and Boeing were up over 15% from last year's fourth quarter and in line with the run rate for the first half of this year -- first half of last year, excuse me. Sales to other Commercial Aerospace, which includes regional and business aircraft, were up about 9% compared to last year's quarter. For the full year, Commercial Aerospace sales were up 14.5% with new program sales up about 25%, legacy Airbus and Boeing sales up 12% and regional and business aircraft about the same as last year. Space & Defense revenues for the quarter were almost $89 million, down 6% versus last year. The decline was primarily due to the expected lower V-22 production rates and customer year-end inventory reductions. For the year, Space & Defense sales grew. Sales were up 4.5% as we continue to benefit from a wide range of programs globally, including rotorcraft, transport, fixed wing and satellites. In Industrial markets, sales for the fourth quarter were about $54 million, down 11% year-over-year. As expected, wind sales were down by less than 10% from the levels of last year's fourth quarter, and they have remained at about the same run rate for each of the 4 quarters of 2013. Other Industrial sales were down about 14% from the fourth quarter of 2012. For the full year, the Industrial market was down nearly 23% from 2012 levels with the wind submarket down over 25% and the rest of the Industrial sales down about 15%. Now let me turn the call over to Wayne for some additional comments on our financials.

Thanks, Nick. Gross margin of $113 million for the quarter was 26.5% of sales as compared to 24.7% in the fourth quarter of 2012, thanks to growth, continued operational improvements and sales mix. For the full year, gross margin improved to $450 million, or 27.1% of sales, which was 130 basis points higher than last year's 25.8%. Our selling, general and administrative costs for 2013 were $141 million, or 7.7% above last year in constant currency, reflecting added infrastructure to support our growth and higher variable incentive compensation. For the year, our research and technology costs of $41.7 million were in line with our expectations as we continue to invest in new products and process technology. Our adjusted operating income as a percent of sales was 15.7% this quarter. This compares to 14% in last year's period. Exchange rates had a nominal impact as compared to last year. Our gross margin and operating income margin in dollars were the highest for a fourth quarter in our history, and our full year performances were records as well. For the full year, our 2013 adjusted operating income leverage was 34% on incremental sales after adjusting for the impact of exchange rates. This was well above our target of 23% and driven by sales mix, continued improvement in operating performance and that the first meaningful step up in depreciation did not start until the fourth quarter. Our effective tax rate for the quarter was 28.7%, down from last year's effective rate of 29.7%. This quarter benefited primarily from the release of reserves for uncertain tax positions. All of 2013, our effective tax rate was 28.9%, down from 2012's effective tax rate of 31.2%. Excluding discrete items impacting this year's provision, effective tax rate for 2013 would have been 30.7%. Our guidance for 2014 remains at 31.5%, reflecting our best estimates of mix of income by country and state as well as the R&D tax credit not being extended. Free cash flow for the year generated $78 million as compared to a use of $31 million in 2012, reflecting higher earnings, lower working capital usage and lower capital expenditure spending versus last year. Our accounts receivable collections have historically been very good, but this year was exceptional. Even with the 10% increase in fourth quarter sales, our accounts receivable were $6 million lower than last year in constant currency. In December, we invested $40 million to buy back Hexcel shares, bringing the total buyback for the year to $90 million. We have $110 million remaining under our currently authorized share repurchase program. And total debt, net of cash, at December 31, 2013, was $229.5 million, an increase of $5.5 million from December 31, 2012. Now I'll turn the call back over to Nick for some final comments.

Thanks, Wayne. We are proud of our accomplishments in 2013 and are very excited with our opportunities looking forward. We remain highly focused on delivering earnings leverage and cash on anticipated higher sales in the coming years. We are reaffirming our guidance provided in December 2013. We expect sales between $1,800,000,000 and $1,880,000,000. We expect adjusted earnings per share to be between $2 and $2.12. We expect to invest between $225 million and $250 million in capital expenditures for capacity needed to support our growth in the years ahead. And we expect to generate between $25 million and $75 million in free cash for the year with a typical use of cash in the first quarter. With that, we would now be happy to take your questions. Alan?

[Operator Instructions] And we'll go first to Amit Mehrotra with Deutsche Bank.

Nick, back in October, you expressed some concern that your customers may reduce year-end inventory levels. That didn't seem to play out given the growth in the quarter. Do you still have that concern? And maybe just offer some color on where you think inventory levels are for some of your products.

Well, I think what we've seen, especially in Space & Defense, we do think we saw a little bit more than maybe we expected in the fourth quarter and a little more than we historically see. So we're keeping a close eye on that. If you look at -- on the commercial side, we continually monitor build rates and our ship-tos and performance against those build rates and feel that we're pretty well aligned there. So we'll keep an eye on Space & Defense. I think it is mostly year-end-type supply chain tightening, and I wouldn't expect it to continue.

Okay. And just a quick question on acquisition or M&A activity. Last quarter, you said you beefed up the M&A organization and the pipeline was active, but that was before the big increase in CapEx for this year. Are those 2 things sort of separate from each other? Or does this year's higher CapEx plans push to the right any M&A activity that you guys were entertaining?

No, it doesn't change what we've said before. And just to remind everyone, our first priority is basically innovation and new technology to position us for the next new aircraft or wing or engine and basically win new business, which ultimately requires investment in CapEx. Second, we're always looking at our portfolio. We have technology road maps. We have strengthened our M&A organization, our business development organization, but that happened several years ago. And we've got an active process where we look at how we might enhance our portfolio to offer even better solutions to our customers. And then last but not least is return to shareholders. And as you know, we have a stock buyback program where -- we initiated in 2013, and we've got available capacity going forward.

Okay. And just one quick one for Wayne. Wayne, can you just offer us a way to think about working capital for this year?

Our working capital actually has been pretty stable and just roughly moves with sales. So I don't expect any surprises. I mean, the only, I'd say, pleasant surprise for this year, as I mentioned, was our receivables collections. But generally speaking, I just move with sales.

And next, we'll go to Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Given the fact that Commercial Aerospace is growing and the incremental margins sort of show that with the decline in wind in 2013, even if wind grows, do you think you're being a little conservative on the incremental margin target?

Well, we do believe wind will grow in single mid-digits looking into 2014. Having said that, we've got investment that we're continuing to put in place. We had depreciation that picked up in the fourth quarter of 2013, and we're going to see a step up this year. So we always look to leverage the incremental volume. We always look to drive efficiencies. But we believe that 23% continues to be an aggressive target and one that we're going to work hard to make sure we deliver. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I know in the past you've talked about platforms and content like 787 and A350. What else is up? What are -- I saw something about the Irkut MS21. Now I don't know if that's going to be a big seller, but can you give us some details about what you've got on that plane, please?

Sure, Steve. Well, we said before whenever there's a new program, whether it's a new airplane, a re-wing or re-engining, you can pretty much assume that we're working on it. The Russian application you've talked about, the 21, we are working on that. It's a little early to get ahead of ourselves or our customers on content and awards, but I can tell you we're very aware of what's going on there. With respect to other programs, you know we're continuing to work on the A320neo and the 737 MAX as those re-engine applications are continuing to move forward. And then the 777X, which was launched this past year at Dubai with very strong orders, is certainly on our radar as well.

And next, we go to Richard Safran with Buckingham Research.

First, I wanted to just ask, if I could, on cost reduction here. Nick or Wayne, could you discuss how you're thinking about cost reduction and efficiency efforts in '14? Is this something where you see a lot of potential? Is this factored into your guidance? And I know you're a bit interested in ROIC, so I wonder if you maybe could also include in your answer how you're thinking about improving ROIC.

So I'll take the cost reduction and I'll let Wayne comment on our return on invested capital. So I would say cost reduction, regardless of how you define it, whether it's volume leverage or productivity or continuing to drive efficiencies with processes and systems, has been an ongoing priority for us and certainly will be in 2014. Our capital that we put in place, we're always looking at ways and technology on how to improve it so that we get more throughput per dollar invested. So I would say, Richard, we focus on productivity. We focus on cost reduction. That helps drive margins. That helps put us in position to win even more in additional business. So with ROIC, Wayne?

Yes, with respect to ROIC, if you go back several years ago with the higher earnings, we've gotten the number up to -- we're now approaching 15%. As you look forward and you make the assumption that incremental leverage of 23% continues, our sales growth continues and we do the CapEx ramp-up as we expect. We basically -- our targeting is really to hold the ROIC where it is during the CapEx ramp-up period. And once that period is over and we're collecting the number, we'll go from there. But if we can hold during this ramp-up period, we're happy.

Okay. Just switching topics here. I wanted to ask about the composite repairs in the aftermarket. With the 350 and flight testing and hopefully first delivery soon, I just wanted to know if you're participating in a program to support composite repairs and aftermarket services. Is this something that's kind of factored into your relationship with Airbus and the 350 program?

So I would tell you it's absolutely factored in with our customers, including Airbus. As composites penetrate and secular penetration increases, there'll be an increased focus on scrap reduction and repair procedures and how the product will actually get used and repaired in the field. So we are working multiple programs on that topic.

Next we go to Yair Reiner with Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So just to start, a couple of modeling questions. Can you help us think about how the incremental D&A paces in over the course of 2014?

I would just say at this model, it's steadily increasing. We're not going to get into quarterly specifics, but remember it stepped up almost $2 million in the fourth quarter, and we expect it to sort of steadily rise. And for the year, it's about $12 million. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then SG&A was higher in the fourth quarter, I think higher than maybe some of us had modeled. Can you help us think about SG&A next -- this year?

So with respect to the fourth quarter, almost all the increase in the SG&A for the quarter over last year is really due to variable incentive compensation, just the timing and the amounts, just in terms of how it hit. The -- probably the only number you'll actually see in our financial statements that's visible is the stock compensation expense, and that alone was about $1.5 million higher for the quarter and a little over $3 million for the year. With respect to going forward, I -- our goal is to continue to hold SG&A roughly at inflation, and we expect to continue to do that and then leverage from there on the higher sales. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then just one other question. On the 777X, when would you expect to have a better sense of your content? And when do you think there might be announcements about some of the content going to specific suppliers?

So the launch took place this past year, introduction at the end of the decade or early 2020. So it will happen over time, depending on components and the various suppliers and the technology that's changing. So I really don't want to get into specifics, so I'll let Boeing potentially comment on that next week. But we wouldn't expect to get confirmation until maybe later this year, early next.

Now we'll take a question from John McNulty with Crédit Suisse.

This is Rob Betz in for John. So on Industrial, you guys reiterated your guidance for a mid-single-digits growth in 2013. How should we think about the sequencing of that growth through the quarters with the recovery in wind versus the comp in 2013?

In terms of 2013, sales were pretty even each quarter during the year. So it's pretty flat all year. So the comps are always kind of they're going to be at a similar level. So we'd expect to see -- without getting too specific on quarterly guidance, we're hoping to see the growth in the first quarter as well to start then.

Next we go to Mike Sison with KeyBanc.

In terms of Space & Defense, when you look to 2014, you still feel pretty good that you'll have good growth next year even with the de-stocking become -- being a little bit weaker here near term?

We do. Keep in mind the strength of our Space & Defense is in the breadth of the programs we're on, including global business. So we're starting to see some of the V-22 wind-down. We believe seasonal inventory adjustments end of the year, which will recover. And then we're seeing the growth with the A400M, JSF and a host of helicopter programs that we believe will allow us to deliver single-digit growth in 2014 and beyond.

Okay. So if the de-stocking did subside then it would be pretty linear, I mean, you'll have growth in the first quarter, second quarter, third quarter, fourth quarter throughout the year? Or is there some lumpiness with the -- with how the new platforms come in?

I would say it's more just the generic lumpiness of what's going on that makes predicting sales quarter-by-quarter a little bit tough. But I wouldn't read anything into that a particular program is intentionally causing the lumpiness.

Okay. And then, could -- in the Industrial market, aside from wind, any update on trends in the other markets, maybe transportation, auto? Are those improving, getting worse? How does the outlook for 2014 in those other areas look?

So in our other Industrial, which includes the markets you talked about as well as winter sports, rack, et cetera, we see mid-single digit, very similar to what we see in the wind going forward. We really do not see a catalyst that's going to drive significant growth in 2014. But we'll continue to work opportunities and find those so we can provide sustainable competitive advantage.

Okay, great. And last one, on regional business jets, it looks like it's perking up a little bit. Should that get better as we head into '14 as well?

Mike, it's generally been -- I think we'd be happy if it was stable.

Now we'll take a question from Howard Rubel with Jefferies.

Nick, one of the things that happened with the V-22 is the contractor signed a multiyear procurement contract. One of the requirements there is usually a 10% give-back somewhere along the way. How do you manage to play and yet at the same time hold on to margins?

Well, the V-22 wouldn't be the first program or customer that came to us looking for cost reduction ideas and initiatives. So we certainly work with our customers. We recognize the cost pressures that they're under. And we offer up reductions through supply chain efficiencies, alternate materials and approaches or leveraging assets with increased volumes, all areas where we can reduce costs and transfer some of that into our customers. So we're not looking at just shaving margins and using that as cost reduction. We're really looking for true cost reduction that we can share.

Well, I mean, Sikorsky has the same issue. They did that as well on their most recent multiyear. So it's pretty much how do I either help them -- I should say, how do you help them get their numbers as well is what you're really saying.

Right.

Exactly.

Can you be a little bit more specific, though, of where you break down barriers and how that links you better to -- because it's clearly in some of your numbers because it's not as if the V-22 was a mystery all of a sudden in the fourth quarter? We've talked about it before.

Right.

Right. Well, we -- as I mentioned earlier, we focus on productivity. We have internal cap challenges and targets to leverage our resources and assets. We're looking at quality improvements, scrap reductions, more efficient uses of our assets that we have in place. And you can see from the financials that's translating through, and we'll continue to do that. We have Lean projects, Six Sigma projects that continue to be worked in every one of our plants on identified cost reduction improvements, quality improvements and safety improvements. So it's an ongoing process. We're not running out of ideas. Actually, it seems to continue to grow as we build capability. And volume helps that as well, Howard.

Got that. The -- 2 more things. One is, taking sort of this and talking about structurals for a moment. Have you been able to take your capability there and find some new opportunities with some of the primes or the airframers that you could elaborate on?

Howard, just to be clear, when you mentioned structurals, are you referring to our engineering product?

Yes.

Yes. So we are expanding our engineered product capability. We've got expansions going on in our sites in Washington. We continue to work with our customers in identifying areas and opportunities where we can provide cost-effective solutions, technical solutions, and help them possibly free up space where they can bring in other product into their facilities. So I think the productivity works as well in Engineered Products, and we continue to see opportunities and win business there as well.

If I'm not mistaken, I'm trying to think about 7 8 versus 350 at the moment, 7 8 is probably still maybe 3 times as large as the 350 in terms of volume?

I don't know that we've shared exactly what our split is today. Obviously, the 787 is getting much closer to their stated 10 per month target, whereas the A350 is not delivered yet. It's not certified yet. So much earlier in its production ramp-up cycle. So I don't have the numbers at my fingertips.

Good try, Howard.

Well, Wayne does, but he's not sharing. And then last, are there some changes going on in European energy regs that change the dynamics with respect to wind? And how do you think about that? In media, obviously, but...

Right.

No, there was some press, and I'm sure you're picking up on EU is giving up on the targets for individual member states for renewables, and they're setting an overall broad 40% reduction in CO2 emissions by 2030. And they're saying that they're trying to help harmonize the EU energy prices and maintain competitiveness. So it's going to be more up to the member states on how they prioritize, how they set policy and how they ultimately achieve that renewable. So it's really too early. We still feel good about wind. But how this might impact priorities and the spend levels in combination with the global economic challenges that the European community is faced with is something we'll keep an eye on.

Maybe you can do composite masks for the additional coal that will be -- going to be spewed out from the fume but anyhow...

[Operator Instructions] We'll next go to Gautam Khanna with Cowen and Company.

So wanted to just follow up. I think -- remember last quarter one of your competitors cited de-stocking of some sort in the rotorcraft blades market. I just wondered, is that -- was that part of what you saw in the fourth calendar quarter?

We suspect within the Space & Defense that there was some seasonal inventory reductions, and I wouldn't expect the rotorcraft to be completely immune to that. So I suspect that was part of the inventory correction.

Okay. And just to follow up on your response to Howard's question on just how you kind of share -- find real savings that you share with customers. Where are you on your PFS [ph] agreement with Boeing? Have you already come to terms? Or is that something that's ongoing? And have you factored that into your margin targets of 23% incremental?

Yes. So we obviously have been working very closely with Boeing on identifying ways where we can help them deliver their cost objective. We feel good about where we're at. Really inappropriate for us to say where we're at with respect to signing any agreement or reaching final conclusion with Boeing. Keep in mind, as I mentioned, we're constantly working cost reduction and productivity to make us more competitive. And that always offers more opportunity for us to penetrate, win new programs and help our customers win new programs. So I'm not going to get into specifics, but we feel we're well aligned with Boeing's PFS [ph] objective.

Okay. And last one just in terms of your assessment of the maturity of the supply chain in the A350 program with respect to composites. I know you guys have talked about there's a learning curve. So early on, it's well in excess of the $5 million shipset content and then when you work down that curve. And when do you think you actually get to that $5 million per shipset level? Is a couple years now? How many shipsets do you usually have to get to before you kind of cross over to where you're at, the maturity?

Well, we provided the $5 million per shipset as the learn rate, which would be as they -- once they get up to rate, which, as I believe, the latest communication from Airbus is that they would reach rate by the end of 2018. So we really aren't going to break out what our curve is with respect to learning, but you have to anticipate that it's just higher today versus where it will be fully learned.

And is it dropping fairly rapidly now? Or kind of how -- where are you in terms of that curve in terms of just relative slope? I don't need numbers, I just need direction.

That's -- you got to keep in mind we're shipping to...

40, over 40.

40, over 40 OEs and suppliers and sub-tiers, which are all across the map with respect to their maturity and their place in the supply chain with respect to where they are. So some will be more mature where others are still learning and changing processes and refining processes. So it's too early for us to really give any indication on where we are on a fully learned curve versus a Day 1-type introduction.

Maybe just to answer it a different way, if you could just speak by analogy on other programs historically. Early on, is it kind of 2x the targeted rate? So by analogy, $10 million a copy right now relative to the $5 million target if it's -- if you're looking out 3 years in terms of when you're going to get to that? I mean, I'm just curious, like how much access is there usually early on? By now it's not...

Yes. I mean, you have to remember we've got 2 programs that have pushed secular penetration up above 50%, both of them relatively early in their life cycles. So I don't want to guess on the learning curve for composites. I can tell you it's a technology that continues to drive innovation and technical solutions, which we're working on, both to enhance performance with respect to mechanicals as well as processing. So it's kind of a moving target which you're asking us to calibrate on a very long cycle time, and I just don't want to throw out any numbers. It'd be -- it wouldn't really be meaningful.

And next we'll go to Steven Cahall with RBC.

Maybe just a quick question on the A350. I mean, Airbus has talked a bit about changing the 800, making that a big bigger, possibly moving up the -1000. How much incremental upside might there be for you if this happens? And with some of these changes, are you essentially already scoped in? Or does this introduce new competitive processes? And what's sort of the upside and downside risk to some of the changes Airbus has talked about?

Yes, so we're working very close with Airbus on the -900 as well as the -1000, which is next in line, and certainly will on the -800 when they decide to move forward and solidify that design. So I don't want to get into specifics because there are a few moving parts that continue to be worked, but we're in a good position. We've got a contract with Airbus and really like the progress of the program.

Okay. And maybe just a follow up on your R&T spend. I mean, we have a good sense of where CapEx is going to track. Can you give a bit of a feel maybe over the next 12 to 24 months of how you see the R&T in terms of headwind versus any potential tailwind?

Our R&D spending has been, I'll say, relatively stable. I mean, we -- we'll spend what we need to. As Nick has talked about, we are a technology company, and we do -- we'll do what we need to, to make sure we get on the next new programs. But I wouldn't -- but it is surprisingly steady, and I wouldn't expect any unusual lumpiness, at least in the next year. We do expect it to grow faster than inflation but probably not as fast as sales growth.

Yes. So just to clarify. Stable means sort of stable on a nominal or inflated basis, not necessarily as a percentage of sales basis?

Correct. Well, I expect it to grow faster than inflation but probably not as fast as our total overall sales growth. So, I mean, we've been -- for example, this year, we were in the sort of $10 million to $11 million range each quarter, and that -- I expect that to slowly sort of pick up, but not any -- it's surprisingly stable. I mean, there's a lot of noise going on underneath. But I don't expect any one quarter we'll have $15 million and the next quarter it will be $10 million. I think it'll be pretty steadily increasing.

That's great. And just a quick final one. Is there any scope for the share count to go down as we push through the last bit of the buyback? Or are we really thinking this is more of a creep offset for '14 or '15?

Well, I think if we did the full -- once we do the full $110 million, that -- it drops it a little bit. But that's more than just offsetting the increase.

Now we'll go to Ken Herbert with Canaccord.

Nick, I just wanted just to attack this margin question once more from a different angle. If you look at the benefit of productivity that you've done, obviously the volume you're looking at in '14, some of what of you just talked about on supply chain, could you -- within those 3 buckets, just help me with where you see the biggest opportunity from a margin standpoint to maybe do better perhaps where you see the most upside, and then conversely perhaps where you see some of the most risk heading into '14 and your 23% incremental goal that you've talked about? Or if there's something else that you'd highlight as particularly critical for the margin, that'd be great.

Yes. If I don't hit all those, Ken, just come back to me. So again, just a reminder, when the growth -- revenue growth is in the 4% to 5% range, the results get a little bit magnified. So you have to keep that in mind. We do continue to improve the operating performance. But remember, we benefited from a bit of mix shift from wind to aero. We also -- with wind being our lowest margin product, as we said before, it drives the change there. Leverage target continues to be more challenging as chunks of capital capacity come online. As Wayne mentioned, potential step-up or expected step-up this year of around $12 million in depreciation. So where the opportunity comes is from leveraging the volume. We're duplicating assets. Our investment are in assets with no well [ph] that we're replicating. They're fungible, so we can move product around to optimize the output, to optimize scheduling. So whenever you can take advantage of infrastructure, i.e. plant managers, quality systems, to run more volume through, I would expect leverage. And it's no different to me on the SG&A side with our sales, in our marketing, in our HR, in our corporate staff. So I think there's continued opportunity going forward. We still feel real good about 23%. And I think, as obvious to you, we're not shy about pushing it harder and yielding higher results when we can. But long term, we still feel 23% is a good number.

Okay, okay. No, that's helpful. And then if I could just follow up on that. When you look at volume specifically on the aerospace side, I know you've got still some capacity to perhaps add, but to what extent does that incremental volume leverage existing capacity? And maybe any comments you can make about where you are with utilization with the existing footprints that you have today?

So it varies depending on the equipment. But you have to remember, we build capacity when we have identified and are on contract for demand. So you have to assume when we're putting in capacity it's because we've filled up the existing capacity. Again, our -- some of our capital with respect to especially the carbon fiber can take up to 3 years to put in place. And then they come -- it comes in place in a chunk or a block, and it's not immediately filled. So that's the process we're running through. And again, it varies depending on the equipment we're running, the demand profile we're ramping up against and the future programs that we're positioning for.

Okay, great. And just finally, sorry if I missed it, but did you or can you identify more specifically for the inventory issue in the fourth quarter in Space & Defense, was that one customer? Was it a group of customers? I understand it was -- sounds like it was more international versus domestic, but any more granularity you can provide on that would be helpful.

I'd say it's handfuls, and it was Europe and Asia as well as up here in the U.S. side. But beyond that, there's probably not much to say. Ken, I do want to get full credit for one thing with respect to leverage. Our sales increase for the year was exactly $100 million. So we did what we could to make sure it was easy to calculate the leverage for the year. Hope you guys appreciate that.

Much appreciated.

Now we'll take our last question from Avinash Kant with D.A. Davidson & Co. Avinash Kant - D.A. Davidson & Co., Research Division: Nick and Wayne... [Technical Difficulty]

[Operator Instructions]

There we go. Avinash Kant - D.A. Davidson & Co., Research Division: So the first question I had was that up until lately, your content in the Airbus 350 program has been going up, and you are now up to $5 million a plane. Now how much upside do you see to this as the new generations come out? And maybe some order, like what's the best-case scenario? How far can you get to?

So we're pretty much sticking to $5 million. We feel comfortable with that number. I don't believe we'll see it grow significantly, if at all, with the derivative applications, but we'll continue to monitor that. But again, $5 million is what should be used for the A350 in total. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And your CapEx budget went up lately. Of course, that's partly primarily because of the increased content you have in the Airbus 350. Now if we think of the CapEx that you're going to spend in 2014 and the programs that we already know about, where do you think CapEx could come down to in 2015 if there were no new major programs to come through?

So you're asking me to predict a failure scenario. Because our objective is to continue to win and penetrate new programs. So I don't see that as a likely or certainly not a desirable scenario to model. Having said that, again, Avinash, we're putting in capital and capacity to meet the programs we have. We have very accurate tracking systems and a team that does a very good job in implementing and managing our capital budget and making adjustments if and when required. So we tweak it up and down depending on what that demand model does in total, and we'll continue to do that going forward. So I'd prefer to think of us winning the next program and the capital implications that might have.

But... Avinash Kant - D.A. Davidson & Co., Research Division: No. Actually, I definitely did not mean that, Nick. So what my question was that we know the targeted build rate at Boeing 787 and Airbus 350. What I'm saying is that with the $225 million to $250 million in place this year, would you already have the capacity to meet the full run rate of Airbus 350 and Boeing 787 or not?

No. Today, we do not. We have continued capacity that needs to go in place for those programs.

So Avinash, if you think about -- wait, wait, between the 78s -- excuse me, between the A350, the neo and the MAX, they're not at full ramp run rates until 2018 or '19. And so we're adding capacity along the way. So even at the end of 2015, we're not going to have enough to supply both. Avinash Kant - D.A. Davidson & Co., Research Division: I see, I see. So you're adding it incrementally based on the demand most likely over the next year or so, not for the full program at one time?

Right.

Oh, absolutely. We have schedules that we're aligning our capacity buildup to align with Airbus and Boeing and our other customers' ramp rates. So we do not put the capacity in all at once up front. Avinash Kant - D.A. Davidson & Co., Research Division: I see. And the final one check. The D&A target that Wayne talked about, that's $12 million upside for the full year, right? So if you were at close to $60 million, that's $72 million for the year, right?

Right. That's correct.

That's correct.

There are no further questions at this time. So that does conclude today's conference. We thank everyone for their participation.

Great. Thank you.

Thank you.