Good day and welcome to the Hexcel Corporation First Quarter 2016 Earnings Conference Call. Today's conference 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 would like to turn the conference over to Mr. Pensky. Please go ahead sir.

Thanks. Good morning everyone. Welcome to Hexcel Corporation's first quarter 2016 earnings conference call on April 21, 2016. Before beginning, let me cover the formalities. First I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and last night's press release. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President; Michael Bacal, our Investor Relations Manager. The purpose of the call is to review our first quarter 2016 results detailed in our press release issued yesterday. Now, let me turn the call over to Nick.

Thanks Wayne. Good morning everyone, and thank you for joining us today. As you have seen in last night's release, 2016 is off to a strong start with first quarter sales of $498 million, 5% above the first quarter of 2015 sales in constant currency. Our key growth programs remain on track and performed as expected. Our operations continue to perform well delivering first quarter operating income of $84 million with a solid operating income margin of 16.9%. Our adjusted diluted EPS of $0.59 was a record first quarter for us and a penny better than last year's first quarter. We’re also pleased that our continued strong performance and robust outlook has led us to increase our quarterly dividend by 10%. Now, let me briefly provide more details on our markets. As usual, I’ll discuss year-over-year comparisons in constant currency. As you are aware, currency movements influence our reported results and some of this impact is not intuitive, but the bottom line is that when the dollar is strong our sales translate lower while our income increases and so our margin percentages improve. Commercial Aerospace sales now accounts for 70% of our total sales and these sales increased 8.5% versus 2015. Total revenue for new Airbus and Boeing programs, which include the 787, A350, A320neo and 737 Max increased more than 50% in the quarter as compared to Q1 2015 driven by the 350 and the A320neo. Airbus and Boeing sales for legacy program declined slightly in the quarter as compared to Q1 2015, but we're above the run rates we saw in the second half of last year. Sales to other Commercial Aerospace, which includes regional and business aircraft, were about 15% lower compared to last year's strong first quarter. However, they were more than 10% above our 2015…

Thanks, Nick. For the quarter, gross margin was a strong 28.7%, but down from the record 30.1% in the first quarter of 2015. Last year's quarter benefited from a favorable product mix while this year's quarter saw additional costs related to the startup of several new production lines or capacity to achieve our forecasted growth. For the quarter, selling, general, and administrative expense was $47 million, $700,000 higher than last year's period. Research and technology expenses were $800,000 lower than last year's quarter. I’d remind you that the timing of our research and technology spend can be lumpy and we expect our investment in research and technology to pick-up as the year progresses. For the quarter, operating income as a percentage of sales was 16.9% as compared to 17.5% in 2015. Exchange rates contributed about 50 basis points to 2016’s operating income percentage as compared to 2015. Our engineered products segment delivered 12% operating income margin for the second quarter in a row as compared to the 14% to 16% margins we have achieved over the past few years. We do experience a learning curve in this business as we startup new programs and replace material legacy programs as they wind down. We will continue to work to optimize our margin in this increasingly competitive segment. So 12% operating income margin still produces a very attractive return on invested capital. The first quarters of 2016 and 2015 both included tax related benefits. This year's first quarter benefit of $1.2 million is due to the early adoption of new accounting standards regarding the accounting per share based payments. The adoption was on a prospective basis and therefore had no impact on prior years. Excluding this discrete benefit, our effective tax rate was 30.5% in line with our full-year guidance. In 2015, we had a first quarter benefit of $11.6 million, primarily related to the release of reserves for uncertain tax positions. Excluding $11.6 million benefit, our first quarter effective rate in 2015 was 30.4%. For the quarter, free cash flow was the use of $75 million compared to the use of $110 million in 2015's period as seasonal effects cause significant working capital cash usage. Working capital usage in the quarter was $91 million versus use of $113 million in 2015’s first quarter, primarily due to timing. Cash payments for capital expenditures primarily related to capacity expansions were $85 million for the first quarter 2016 as compared to $95 million last year. On an accrual basis, our capital expenditures were $73 million in the quarter. We also purchased $35 million of shares under our authorized share repurchase program and we now have $169 million remaining authorized under this program. Now, let me turn it over to Nick for some final thoughts before we take your questions.

Thanks, Wayne. 2016 is off to a great start. We’re executing on plan and we are on track for another record year. The outlook for growth in our Commercial Aerospace market is very strong. Thanks to our positions on new programs such as the A350, the A320neo, and the 737 Max. Our Board of Directors has authorized an increase to our quarterly dividend by 10% to $0.11 per share. This reflects our robust outlook and confidence in our ability to grow the business and consistently deliver strong operating performance. While in general, things are going very well. There are and will always be issues we need to manage. As I mentioned earlier, we think there maybe some challenges in Space & Defense over the balance of the year. However, we expect to offset any shortfalls in Space & Defense with additional sales in Commercial Aerospace and Industrial markets. As a result, we are maintaining our full year sales guidance of $1.97 billion to $2.07 billion and our EPS guidance of $2.44 to $2.56 per share. We also still expect free cash flow to be in the range of $20 million to $60 million after CapEx of $280 million to $320 million. Now, we’d be happy to take your call or happy to take your questions.

Thank you. [Operator Instructions]

Make the queue open up the line.

[Operator Instructions]

Hello, operator, are you there?

[Operator Instructions] We will take our first question from the line of Myles Walton [Deutsche Bank].

Thanks. Good morning. Can you hear me? I guess you can hear me. So hopefully, Nick, Wayne? Well, I will ask it for the sake of argument.

I can hear you.

Great, thanks. The Engineered Products business

I think we are having technical difficulties.

One moment Mr. Walton. One moment Mr. Walton.

Yes, we cannot hear you. We are working on it and hopefully we'll have this solved pretty quick.

Hello, can you hear me?

This is Myles, I can hear you.

Okay. Right now the caller cannot hear us right now. So, I'm going to clear your question out. [Operator Instructions].

Okay. No problem. Yep

Hello, this is the operator. Can you hear me? Hello, this is the operator. Can you hear me?

Yes we can.

I apologize for that technical difficulty. One moment. Hello, this is the operator. Can you hear me? Can you hear me?

Yes, we can.

We can.

Okay. Our first question comes from the line of Myles Walton.

Thanks. Good morning. Hopefully, everybody is on the same line this time.

Myles are you there?

I'm here now. Are you there? Oh God.

Hello, Myles?

Yes. I am good I will go ahead and ask the question because I know that the line can hear me.

We can't hear anything.

Oh my God. One moment, Mr. Pensky. I do apologize for the technical difficulties. We are looking into this as we speak. We are not able to hear the questioner and we are looking into this right now. I do apologize.

They did hear our discussion, all right.

Yes they did. That was on the line with the [Technical Difficulty]

Hello, this is the Operator, can you hear me?

This is Myles, I can hear you.

Okay we are still having the same problem. I am just going to place you back. [Operator Instructions]

That sounds great, yeah drop me.

Hello, this is the operator. Can you hear me? Hello, this is the operator. Hello, Mr. Pensky, can you hear me?

Yes we can hear you.

Okay. I think we might have resolved it.

Okay.

Give me one movement. I will take our first question from Gautam Khanna [Cowen & Company].

Okay. Can you hear me?

Yeah, we can.

Hey so a couple of questions. One, I wanted to ask if you could quantify the impact of the 777 rate reduction that occurred after you previously provided initial guidance, also the 47 and how should we think about that for this year and for next year the one that actually starts to affect you guys. And additionally to the extent we've seen some you know some movement on some of the Airbus platforms like you mentioned the A400M, I think there is some cuddle on the 380 and 350 ramp, how should we think about that this year in terms of what you have initially were guiding in January.

If my memory serves correct the 777 adjustment came like literally a few days after we announced – gave our guidance near the end of January beginning of the year. I think for us it's probably less than $6 million in impact on the year I think of it as roughly $1 million per plane and I think they dropped at one per month right. And probably six of those – some of them dropped per month starting 2017. So, we probably get hit a little bit from the back half of 2016. Similarly, with the 747, they dropped what a another half plane per month starting towards the back half of the year. So, we will probably see a similar size decline. We have a little over about $1.5 million in the 747.

And I would add for the A330, whereas it was at a rate of 10 per month last year, it's down to six and it will increase to seven back in 2017.

So, that offsets part of it.

Right.

With respect

I'll talk to the A350 specifically we continue to see the pull from the supply chain in Airbus as you can see reflected in to Q1. We continue to be aligned with Airbus on the schedule. Just as a reminder, they stated they were at five per month at the end of 2015 with a ramp rate up to 10 per month in 2018. And we agree with that and are supporting that. So based on our deliveries being six months in advance of the line build you can assume we are over five and probably headed towards seven.

Okay, that's helpful. And could you also comment a little bit about just inventory across I mean, you mentioned the 350 you are aligned, are you seeing any evidence of misalignment among any of the customers that you are shipping to and not just on the A350 but broadly whether it be the 777 or elsewhere?

Well, so I will talk to the inventory in total. We certainly expect inventory from a dollar perspective to go up to some ratio of sales. Having said that we are also holding strategic inventory for growth programs such as the A350 being one of the bigger ones but also for the narrow body ramp up and engine programs like the leap, which drive various materials. So being in a sole-source position we need to protect our customers and we just by plan put in strategic inventory, which for the most part is at steady-state now. So having said that, I feel good about our position and now we're really working on our terms to ultimately improve the efficiency within our system so that we can drop the absolute turn numbers.

Okay, more specifically I meant, are you seeing any sort of inventory destocking among or restocking or misalignment among your customers. Some of the rates are down like the 777, you know.

Okay. We look at that on a regular basis. And you have to keep in mind we are providing materials, some of it common materials across many platforms. So knowing our shipset content and tracking the build rates of the OEs we see very good alignment. Other than we did comment that we expect to see a little bit of supply chain adjustment for the A400M. Other than that, we believe we are aligned.

Thank you.

You are welcome.

Our next question comes from the line of Myles Walton. Please go ahead.

I will give another shot. Good morning.

Good morning Myles.

We’re assuming we have some technical difficulty.

I am sure it was me. You can give me – blame me. So can you size the level of shortfall at defense you might be thinking about, is it going to be down mid single-digits instead of flat, is that the kind of A400M plus Sikorsky supply chain changes that you are seeing.

We have a feel for it right now. As you saw the first quarter was down over 10%. But that basically came right in on our plan.

Okay.

So, we’re talking about numbers in the 2% to 4% range if we cannot claw back to breakeven.

Okay. Got it. And then the other comments you put into the Q was around competitive dynamics and learning curve on the Engineered Products and then Wayne, I think you mentioned that in your remarks as well that this 12% was kind of covering your – the business plan. Is the 12% what we should think about is the new go-forward run rate? And also could you comment on the competitive language you put into the Q.

Well, I’m not going to say I’m satisfied with 12%. I would tell you the 12% still yields excellent returns on invested capital which I’m very happy with. As Wayne mentioned, this business is a little different than our fiber business and our prepreg business in that we continually have legacy programs that are transferring to our joint venture in Malaysia or programs that are going away like the C-17 and we’re bringing in new programs. Now, there’s no question those new programs we’re bringing in, it is a very competitive environment. And we want to be competitive in that space and are taking that work in. At the same time, when you bring the work in initially, there is a learning curve because this isn’t a continuous flow process, it’s a parts business where you have to learn your processes, your procedures your efficiencies. So, again we’re not giving up on the range we’ve delivered over many years. But we remain happy with the 12%.

Would you characterize this as the peak of the competitive dynamics and then 12 is the base you grow from or is this a you know a conditioning for you could go a little bit lower and still cover your business plan.

Well, we could go lower and cover the return on invested capital without a problem, but we’re viewing this as it is a competitive environment. We’re continuing to drive our efficiencies and our performance so that we can offer competitive product while still holding margins that we’re accustomed to.

Okay. All right, great. I’ll keep it to two. Thanks.

Thanks Myles.

Thank you Myles.

Our next question comes from the line of Robert Stallard [RBC Capital Markets]. Please go ahead.

Thanks so much. Good morning.

Good morning.

Maybe just to follow-on from Myles’s question on the competitive environment has the consolidation in the materials and the composite structures area had any impact on the competitive environment at the annual broader business?

We haven’t seen any impact. You have to remember the cycle times in our business are very long, the development programs are very long and there are very few players that can provide the breadth of product and offerings that we have. So I don’t know if you’re referencing a certain consolidation or not, but we think our technology positions us to continue to win, continue to lead the market. Going forward in the broader range of products we provide ranging from fibers to prepregs through the core and engine and the cell components.

Okay. Then there’s a second one there has been some talk this morning about Airbus bringing down the A380, right. I was wondering if you could give us some idea of what sort of size that program is in terms of your revenues?

So in terms of an A380, our content on the plane is a little over $3 million. So you just multiply the number of aircraft against that number you’ll get the impact.

Right Okay. Thank you very much.

Yes thanks Rob.

Our next question comes from the line of Howard Rubel [Jefferies]. Please go ahead.

Well, thank you very much. Your CapEx was finally down in a quarter on a year-over-year basis. Well I have asked this before, Nick, maybe we can get a trajectory here as to going forward. Can you elaborate a bit more?

Well, I can tell you Howard, our CapEx spending tends to be a bit lumpy depending on what we’re bringing online, and I know Wayne mentioned some of the depreciation step up we had pretty significant assets come online in Q1. We remain on track for the $300 million CapEx spend this year. I’d also say remain on track to what we basically said when we gave our vision that 2015, 2016 and 2017 would probably be probably one of our highest capital spend periods to ramp up for the growth that we expect in 2020. So I feel good about where we are at. Again, we continue to execute our CapEx very well. We continue to get more output and continue to build and improve systems and processes in the CapEx that we are putting in place.

So how should I look then at the share repurchase in the context of that. It was a fairly aggressive repurchase program. So it might be that you do see some, I mean there’s two questions in this and we’ll see if you want to answer one which is you can see end of – line of sight to the end of or renewed to a lower level of CapEx, and also is there something that we should read into the opportunity you used to buy as much stock as you did in the first quarter.

Well, I’ll start here Howard. We – internally we have leverage targets that we feel real good about and we always look at those, we look at the organic growth platforms that we’re working on and the likelihood and timing for this to hit. And we look at things like Formax to see if we might have an opportunity to vote something on or expand our portfolio. While we go through that process and again it’s not an annual process, it’s really ongoing then we look at how do we return to shareholders to maintain the leverage in the range we’re happy with. Share buyback, dividend, or dividend increase, are some of those ways that we return to shareholders. So, I don’t know that I necessarily think we were overly aggressive in the first quarter. I would expect us to be in the market. We’ll be opportunistic when we can. But again there’s no fixed formula. If you look at everything in our capital lens and we basically manage it that way.

That’s fair. Thank you very much Nick.

Thank you, Howard.

Our next question comes from the line of Robert Spingarn, Credit Suisse. Please go ahead.

Good morning.

Good morning.

So, I wanted to ask about how your guidance holds in light of some of these negatives the pressure you’ve experienced in space and defense, the BizJet market is clearly weak. And yet you’ve held your guidance and said that any incremental downside, you’ll offset in Industrial and Commercial. So you sound fairly confident about that where is the upside there?

Well, first just to point out that the downside on the space and defense in absolute dollars is not a big number nor is it on other commercial aero. And if you look at the range we provided with respect to commercial aerospace for the year being in the 8% to 10% range and Industrial 10% to 15% range, we’re probably leaning towards the higher ends in those ranges which easily offset the shortfalls that we’ve mentioned earlier during the release.

I see. So the guidance accounts for that. Are there particular programs in Commercial and Industrial that support that higher range?

It’s really across-the-board. I would point out our acquisition in Industrial, the Formax acquisition, those sales are performing very well. And wind is holding very stable as well which was in our forecast and guidance. Commercial Aerospace, we’ve noted some of the legacy that are dropping off. But there is some upside with narrow-body rates going up a little bump on the Boeing 787 and we just see positive forecast in that market.

Okay. And then just a final question a little detail on the Defense side. How should we think about Eurofighter and F-35. Are those progressing in the same direction as one maybe offsetting some pressure from the other?

So the big three programs for us in space and defense segment are the V22, the F-35, and the A400M. The Eurofighter has trended down, whereas on our growth programs and the big ones, the V22 has held well. The A400M is growing even given the supply chain challenges it’s still providing growth this year as is the F35.

Okay, excellent. Thank you very much.

You are welcome.

Our next question comes from the line of David Strauss [UBS Securities]. Please go ahead.

Good morning. Thank you for taking the question.

Good morning, David.

Good morning, the release highlighted startup costs at some of your new facilities, Wayne, could you maybe quantify the impact there and where those costs go from here, they trend down from here and how big of an impact that just was in Q1.

Yes, so I won't give you specifics, but just in terms of – so if you look our depreciation and amortization is up about – since this first quarter of 2015 it is up about $4 million. You start the depreciation, you start to higher the labor and the people run – to run the equipment that in and of itself not a huge number. You have to have them there running they’ve been in terms of training, getting them going and then you are running the lines and they're really not developing you are going through the qualification process. So we will not give you too specifics. But you some all those up and just we have had those drop for the past few years, periodically have them to enough that we can absorb it generally speaking. But when you go to compare to the first quarter of 2015 when you didn’t have any of those, I guess to be a tough comparison.

Okay. BizJet in regional was down a lot in the first quarter, I think your forecast for the year for that part of commercial was up mid single-digits. Is that still in place or was Q1 in line with what you are anticipating?

Q1 was maybe a little bit light I suppose we're probably not ready quite to give up on our guidance for the year in that area. Again, if you look at Gulfstream and Bombardier and Embraer and Dassault and all of those they easily identifiable customers, those are about where we think within other commercial aeros always that's the hardest part to identify that's really where we're down. So to be honest could just be how – we don't know exactly where the sales ended up last year as opposed to this year. But we're not quite ready to give up on it yet.

Okay. Last one the A330neo, is your content on neo much different than CO on the A330?

Well, our content on the legacy 330 is about 900,000 per ship set. That program launches the first derivative launches the end of next year and the second one early in 2018 and we expect to have higher content on that. But keep in mind, we're still working on packages and since it's only an engine, the cell refresh, it will be somewhat limited.

Right. Okay. Thank you.

Thank you, David.

Our next question comes from the line of Ron Epstein [Bank of America Merrill Lynch]. Please go ahead.

Good morning guys.

Good morning.

Good morning.

Just maybe a bigger picture question. When Alcoa reported their earnings last week, they highlighted that the pricing in aerospace was a source of pressure for them. When you guys think about your longer term contracts, are there milestones as outsiders we should keep an eye on or in terms of price step down so on and so forth? I mean typically when you do these contracts, how should we think about it?

So there's not one formula as you can imagine for all customers so they vary with respect to indexes, timing and volume. I would tell you there are certain cases where there are volume levels as we achieve certain productivity and leverage on that increased volume we share some of that. But it's really impossible to give you any formula where you could see that. We don't expect our margins to decline over time because of those.

Okay. And then maybe just as a follow on to that question. When you think about a big customer like a Boeing or an Airbus, is it structured like it is for some suppliers were you have a master contract or is it a bunch of little contracts?

Again it depends on the program. But it varies. We've got master contracts that cover multiple programs and then we have individual.

The pricing is set and flow down to the subcontractors.

Okay. Okay. And then maybe one last one, when you mentioned that kind of it could fill the whole in defense versus Industrial, what specifically are you talking about it, I mean is it wind or what?

It is the combination of Formax and some of the nonwoven reinforcement as well as the other industrial automotive winter sports rack and wind.

Okay, okay. Great. Thank you.

Thank you.

Our next question comes from the line of Chris Kapsch [Topeka Capital Markets]. Please go ahead.

Yes. Good morning it’s Chris Kapsch with BB&T Capital Markets. Hey, Nick when you were at our industrials conference in Florida last month, one of the messaging points was sort of your comfort level with your five-year targets as laid out I guess early last year. And I guess the question is like with first quarter here in the books and reaffirming guidance, assuming that there is nothing that about the macro the changes that conviction. So I wanted to confirm that. But also just if you could comment there was – the one thing you said that maybe you would be least confident about would be the CapEx, I'm just wondering if you could elaborate a little bit more on what sort of new growth programs that might actually lead to increasing your CapEx and just how you see the cash – the cumulative free cash flow over the next five years at this juncture.

Yes, Chris, so our 2020 vision we still feel really good. We are in the process of rolling up our strategic plan this year and have seen the top-line numbers. And there's nothing there that leads us to believe it's going to be anything less. My comment on CapEx was my optimistic nature that we are going to go out and win new programs. What they may be, I am sure there will be more engine derivatives maybe A380. I am sure there will be development work for potentially the next level of derivative on the 320, the 737 and possibly even a middle of the market aircraft. Which as you know you have to work on those programs five to 10 years before they are – even the first aircraft is built and even before delivered to get a position in those programs. So we don't have clear line of sight on what those are today other than we are working with our customers on advanced technology, advanced solutions so we can provide a lighter material to provide an even better solution going forward.

Okay. I appreciate the additional color. And then just a follow-up I guess you can't get away or have a conference call without having at least one question on incremental margins, right.

So, the question I guess is twofold, one is how the A350 plays into that and as that program continues to ramp and becomes a bigger part of the mix. I'm just wondering if that would make it sort of easier or more challenging to achieve your targeted incrementals, the A350 program specifically? And then also just with your comments on the parts business being sort of more competitive same sort of question how does that play in to the incremental outlook looking forward? Thanks.

So, first we haven't given up or lost sight of our 25% op income and we still our holding that for the year, okay. Now if you look quarter-to-quarter, it does tend to be lumpy, as Wayne mentioned we had a step-up in depreciation almost $4 million. You have to keep in mind that we rolled in the Formax acquisition which is currently going through the integration and we've got some startup and some conversion costs going on in there. So, obviously, the first quarter leverage wasn't what we would expect over the long-term. Having said that the A350 is basic material running through the same assets through the same facilities at higher rates and per our plans higher volumes and higher speeds. So that will help us drive our leverage going forward. And similarly we commented on the parts business, that's program specific and part specific and we just continue to work on efficiencies and productivity to make sure we get our op income and leverage back up in that part business as well.

Great. And then just on the A350, what juncture in the program ramp do you think you know where it becomes big enough where it starts to move the needle on the incremental? I understand there is transitory cost right now with the recent capacity adds and the Formax integration like you mentioned. But is it sort of a second half of 2016 kind of phenomenon or more like 2017? Thanks.

Well, I see it more as just a gradual slope. Again we've been ramping up. Keep in mind we are at five plus per month, which is halfway up to our 2018 run rate, so we've been seeing incremental improvement on A350 at the same time we are bringing in a lot of new other programs and materials throughout the business. So again the 25% feel good about that. We look at it on a quarterly basis but we don't get excited when we have one down and one up.

Got it. Okay, thanks Nick. Thanks guys.

Our next question comes from the line of Ken Herbert [Canaccord Genuity]. Please go ahead.

Hi, good morning.

Good morning, Ken.

Hi, Nick or Wayne, I was just wondering if you can provide any more granularity on the growth you saw in the quarter the 50% from the new programs, you obviously called out the A350 but can you just mentioned how much growth in that was maybe 787 now that you are up to 12 versus probably 10 last year and if you are seeing much…

Hello, Ken. Are you still there? Operator, are you there?

Yes. Ken, continue your question.

Okay. Can they hear me?

No, no, I heard you – I heard your question, it sounded like we lost you.

Okay. Sorry about that.

On the new programs it is fairly straightforward. It was primarily driven by the A350 and the A320 NEO. 737 Max is a bit early and it’s very small at this point in time. And the 787 ramping up, it had a minimal impact. So just think of the bulk of the new program growth with those from Airbus.

Okay. That's helpful. And then I know it is obviously a small on an absolute level, but this Formax when does that get to sort of company – sort of company margins or does it ever get there and become sort of a positive contributed to the margins.

So those are different questions. So it is always going be a positive contributor. But it's in – when you're in the reinforcements business, it's a lot less capital employed, but it is lower margin percent just like the reinforcements business we also have today was significant amount of. And so it's value added, is relatively low compared to the material costs going through it. So you are always going to see it as a lower margin percentage. Now having said that once it's been here for a year and you are comparing year-over-year, on an incremental basis it will look fine. But when you are adding it all in the first year, it is lower margin percent than our total average of the company, but not any different than our existing reinforcement business.

Okay. And then as a quick follow-up on that as you move forward with this – with Formax, is there much opportunity to continue to expand margins or is it really volume-driven?

So, we always believe there's opportunities to expand and volume will help. And so we'll continue to work and volume will help. A big opportunity for us there is the industrial business is primarily what they have today, but the real big great opportunity for us is how successful we can be in aerospace and we see a number of opportunities out for that. Those are long-term and it will take a while to develop, but that is where the big home run will occur.

Okay. Great. Thank you very much.

Our next question comes from the line of Mike Sison [KeyBanc Capital Markets]. Please go ahead.

Hey guys. Nice quarter.

Thanks, Mike.

In terms of space and defense, the Rotorcraft blade business has weak for a couple of years here. Is there any secular changes? Are they still using carbon fiber blades? Any issue there is it just a kind of a cyclical issue with the oil markets?

Well, certainly on the commercial side I think it's cyclical and it's following what's going on with oil and gas industry, not much doubt there. With respect to composites and the penetration in the space and defense sector, I see no changes. We see no changes. And actually we have some great new programs things like the CH-53K that are still in development which will translate into nice dollars as it ramps up, and then just some differences in ordering patterns and blade replacements primarily on the Blackhawk impacting us in Q1 2016.

Okay, great. And then I think for the A350, you mentioned you're supporting the ramp – the ramp to 8 to 10 by 2018 and you are heading towards seven at some point, maybe your order pattern. So that affect you this year or is that something affects you in 2017, heading to seven?

It affects us this year. We are in that process as we speak.

Okay. Great. And then final maybe just longer-term, what you think needs to happen to maybe to get space – maybe just your view, is space and defense an area that you think can growth longer-term?

Absolutely. We haven't changed our vision. And again, if you remember we basically felt comfortable at mid single-digits. Granted, we got some pressure in the early years, but we still look at the programs we are on, we look at the growth programs with the F-35 and the A400M being strong as well as some other new Rotorcraft programs that are coming online. We certainly like the business and see it as single-digit growth going forward Mike.

Great. Thank you.

Thank you.

Our next question comes from the line of Richard Safran [Buckingham Research]. Please go ahead.

Hi, good morning.

Good morning.

I just have one quick question for you here. Nick, on your comment on stable wind, I noticed like Vestas orders were up a little bit. So I'm just trying to want to get your perspective, I mean is there something in the mix maybe that's causing you to be stable or is there maybe some incremental upside here Vestas orders continue to improve?

Well, I think you are spot on that Vestas performance is very good and their orders were strong, backlogs are high. And we continue to position ourselves with them and basically it is a mix issue. We are virtually on – excuse me, every blade that Vestas makes, some have more content than others and depending on the size and the class and where it is being shipped in Asia-Pacific, Europe or in the U.S. there are differences there. So in essence that's what you are seeing, Richard, is a mix impact.

Okay, Nick. Thanks for the help.

Thank you.

Our next question comes from the line of Ron Epstein. Please go ahead.

Hey, guys. I just wanted – just a quick follow-on. There has been a lot of discussion in recent analyst circles that we could see the 777 dip down to maybe five per month in 2018/2019 timeframe. How do you think about it? How should we think about it? And I mean does that – what kind of operational headwind that represent for you guys.

Well, if you kind of look at the 330 and what is going on there as they transition to the NEO, I would expect something different. There will be a transition going on. But you have to keep in mind as it is ramping down on the legacy, they're going to be ramping up on the new one and fill in the supply chain with new product and material. So all though there could be a dip, we have $1 million on the legacy. So if it drops down one per month, that's pretty much run rate of $12 million impact to the year, provided they are not ramping up the new derivative which would not be the case.

Yes. Okay.

So…

But from an operational point of view, it is a broad range of products that we sell and so it's not a huge carbon fiber intensive for us, and so it's capacity spread across a number of items. So, it's probably not a huge mover.

Okay, great. Thank you guys.

Thanks.

There are no further questions at this time. Please continue.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.