Good day and welcome to the Hexcel Corporation 2017 Second Quarter 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.

Great, thank you. Good morning, everyone. Welcome to Hexcel Corporation’s second quarter 2017 earnings conference call on July 25, 2017. 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 rebroadcasted 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; Patrick Winterlich, our soon to be CFO; and Michael Bacal, our Investor Relations Manager. The purpose of the call is to review our second quarter 2017 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, our second quarter sales were $491 million, 5.4% below our second quarter 2016 sales in constant currency. While overall sales were below our original expectations, thanks to strong operational execution and good cost control. We delivered second quarter operating income of about $90 million, with an operating income margin of 18.3%. Our adjusted diluted EPS of $0.67 was $0.03 below last year’s record second quarter. Free cash flow for the first half was a source of $13 million versus a use of $21 million last year, a $34 million improvement. We are now expecting 2017 sales of about $2 billion in line with 2016 and have lowered our sales guidance accordingly. I’d like to take a moment to put this revised guidance in context. First, as we have discussed in the past, we are very successful in partnering with our customers on innovative technology and process solutions to optimize material usage thereby enabling improved operational efficiencies on their end and providing us with a more competitive solution for next generation programs. We undertake an annual deep dive with our customers to update our estimated usage per program. This is typically part of our strategic planning process, which we are now in the process of completing. Based on our latest review, we are revising our estimated A350 ship set content to $4.8 million per plane. This is the expected weighted average per ship set of the -900 and -1000. The impact on 2017 sales as compared to our initial guidance is nearly $20 million. In addition, the inventory adjustments for most wide-body aircraft and various business jet programs that we described last quarter extended longer than we anticipated. As a result,…

Thanks Nick. For the quarter, gross margin was a solid 28.5% as compared to 28.8% in the second quarter of 2016. Strong cost control and productivity performance went a long way to mitigate the impact of the lower sales and offset the training and startup costs at our new facilities in France and Morocco. As expected, we had about $5 million of training and startup costs in the first half of these two new facilities and remain on track with the construction of startup activities. In addition, depreciation and amortization for the first half was $5 million higher than the first half of 2016 on a constant currency basis. And we expect depreciation to continue to increase in the second half as new additions are placed in service. For the first half of the year, SG&A expenses were 3% lower in constant currency than the prior year as we maintain tight cost control across all support functions. Research and technology expenses were $25 million in the first half or about 10% higher in constant currency as we continue to invest in innovation to support new technologies, products and process developments. For the quarter, operating income was $90 million or 18.3% of sales compared to the record $100 million or 19.2% of sales in 2016. For the quarter, exchange rates contributed about 70 basis points to 2017’s operating income percentage as compared to 2016. And for the first half, exchange rates contributed about 50 basis points to our results. Overall, we have done an excellent job of managing headcount. Our total headcount is lower than year end and 1 year ago even including the more than 100 people we have in training for the startup of our new French and Moroccan facilities. Our engineered product segment comprised of our structures and…

Thanks, Wayne. By staying in line with customer demand, while keeping costs under control and operational excellence at the forefront, we delivered a solid start to 2017. We are committed to achieving our earnings plan for the year and remained bullish on the long-term. Our performance this quarter demonstrates our operational discipline to respond rapidly to changing circumstances as well as our strategic commitment to ongoing investments in research and technology, acquisitions and funding CapEx required for future growth. I also want to remind you of our announcement during the second quarter that we have reached agreement with Safran to acquire their structural business and we expect this to close later this year. As with our other investments and acquisitions, structural will bring leading edge composite technology that will further enhance our strong portfolio, particularly in the areas of adhesives, prepregs and pultrusions. Before opening it up for questions, I would like to personally thank Wayne for his tremendous support and contributions throughout his 24-year Hexcel career and I would like to wish him and Kim all the best in retirement. Warren, we’d now welcome questions.

Thank you, sir. [Operator Instructions] We will take our first question from Myles Walton with Deutsche Bank.

Thanks. Good morning and congratulations on retirement, Wayne. Enjoy it. So, maybe just to start off with the obvious, so you have lowered the sales guidance here again and last quarter I think $20 million of the lower sales guidance was due to the legacy wide-body destocking and it looks like a similar amount here. So, it doesn’t look like it’s slowed down at all. Is that the right, so $20 million is effectively of rebasing of A350 and another $20 million is continued destocking?

Okay, Myles. So, you are close on the first quarter, we revised our guidance down about $60-$20 million FX, approximately $20 million on the 777 and then about $20 million on destocking or inventory supply chain adjustments. The second quarter is really made up of approximately think of it approximately ship set-related A350 volume, $20 million, approximately $10 million on supply chain and approximately $10 million between the negative headwind on wind versus the positive in space and defense. So, we have seen the supply chain slowdown. And given our view on the backlog and working with our sales team on what’s forecasted in Q3, we do think it has tapered off and majority of it is behind us.

So, you have also I think a couple of quarters ago talked about double-digit growth into 2018 and I am just curious given what you are seeing on the ground now in the destocking you are seeing, are you looking more at high single-digit levels of growth. I know you reiterated your industrial business sales target, but I am curious on your other two?

Yes. So, again we will give specific guidance, updated guidance towards the end of the year, but fundamentally, we remain very optimistic on 2018 with regards to continued growth with the A350. The narrow-bodies which continue to not only grow, but the rates are continuing to go up. Upside on the military with very strong performance on the JSF, A400M, V-22 Blackhawk and then a big rebound in wind going into 2018. So, a little early for us to really get to zeroed in on the exact numbers, but next year is going to be good.

And then one last one, so you lowered the ship set content based on kind of roll-off, so does that mean it wasn’t based on negotiation with the customer, it was based on recalibration of what you are actually seeing go out the door for each aircraft?

Yes, this topic warrants a little bit of a discussion. So, I think we are going to spend a couple of minutes on it. So, in general, every year as part of our strategic planning process, we work with our customers and we understand the best we can on what material goes to what customer for what application. So you got to keep in mind we are shipping materials in multiple forms that can go in all different directions. Let’s just talk about the A350 alone, we have 60 ship-to locations with various material forms. So, there is strap process. We work with our customers. We look at their usage in the plans. We look at their inventory levels. And then when we get to plan, we basically build our plan with our customer forecasted orders and what they are telling us they need to buy. We then check back, do a sanity check with our ship set and we tweaked that and adjusted it continually. So, we are always working with our customers, number one, to find new opportunities to replace heavier parts, weaker parts within advanced composites. So, we see application increase and our number go up. We also work with our customers on productivity initiatives finding ways to reduce scrap waste within the supply chain and that affects us on the downside short-term, but helps us position our materials much more competitively for the long-term. So to get back to your question, it had nothing to do with customer negotiation. At the end of the day, it was good productivity work with our customers to help them be more competitive and help us position our materials for future opportunities.

Okay, alright. Thanks. I will leave it there.

Thanks, Myles.

Our next question comes from Gautam Khanna with Cowen & Company.

Yes, and I echo Myles’ sentiments. It’s a pleasure to work with you.

Alright. Thanks, Gautam.

So, just going to that point that Myles just raised, is there – I mean, do you think the A350 content you guys will have is going to continue to shrink over time and if so sort of what is the limit and any thoughts there? And then I will follow-up.

Well, I am certainly – and the team is certainly working to increase the ship set content. So, there is no doubt we are focused very intensely on new opportunities, new applications. Now as an aircraft matures and you get into a steady state production, the likelihood of introducing a change becomes less. So, it does tend to stabilize. Having said that, I am hopeful we can continue to find opportunities to make our materials more competitive, but I don’t see a dramatic move here.

Okay. And was the reduction largely the function of yield improvement downstream, you people are cutting the parts more efficiently or what actually drove the reduction?

Well, I don’t know that there was one item. Clearly, we are always working to help reduce scrap in the supply chain. That was one element. The technology has continued to evolve. So, if you look you look at when the A350 was developed and the first parts were made, we have more efficient ways of making some of those materials. So, some transition to a new higher technology, more efficient material form, some in scrap reduction and throughput rate reduction. So it really was a combination, not one factor.

Okay. But we should consider it a reduction and also profits right, it’s not like you keep the value of the technological leaps that are allowing you to save your customers’ money. Is that right? So a lower profit dollar on the A350 is expected to…

Let’s just – we look at it as it may impact the sales, but we are always pushing to enhance and expand our margins.

Fair enough. And just one last one in terms of the de-stocking across a number of the programs, how broad-based is it within the subcontract manufacturers that you supplied to. Is it one – isolated to one or two of the subcontract manufacturers you sell to or is it broad and how confident are you that it’s not going to spread, some people are ahead and some people are still behind? Thanks.

Yes. Well, we do it is fairly broad. It’s not one or two driving it, whether you are talking about Airbus or whether you are talking Boeing. And again remember, the supply chains are extremely complex with 60 plus for the A350 and similar types of numbers on other programs. And each one of these can be at different points in the part assembly process for the final aircrafts. So, there is a lot of variation there. So again, we think we have very good insight although not perfect we will continue to refine it and try to get better. Our backlog view helps us gain confidence that the supply chain corrections are subsiding and we are really getting to a more steady state position. That’s basically where we think we are today.

Thank you, guys.

Thanks.

Our next question comes from Howard Rubel with Jefferies.

Thank you very much. Patrick, I think Wayne set a heck of a high bar for you, but I am sure he knows that and you guys will do well and Wayne it’s been a pleasure.

Thanks.

Thanks. Thank you very much. Nick, you talked about going through this study on product and looking at the change in volume, how does that play through to the capital spending plans that you are working on?

Yes, that’s a great question. Yes. As Wayne said, we are still on track for our midpoint this year of 280 and then pretty substantial drop over the next couple of years, with a total of 320. Howard, we have got what I think is one of the best-in-class capital management organizations and processes. And I tell you everyday we look at our spend versus the demand and it’s continually tweaked. So, having gone through our strategic – internal strategic review and getting ready for our board review this fall, we still feel very good. We do not see anything that changes. Matter of fact, there are some areas we are actually accelerating some of our CapEx. I am thrilled with the fact that we are bringing online our assets in Salt Lake City and Decatur very soon we will have our assets in Russian and Morocco up and we will get that headwind behind us. As you know, it’s been roughly $5 million for the first half of the year, a little taper down in Q4. But at the end of the day, I still feel good about our CapEx spend. It’s still required. And again, I love having our assets running 100% filled and that’s what we have line of sight to.

But you’ve basically said your volumes that were de-bottlenecking and your suppliers have done the same thing. And if we just look at the 350 and sort of spread it across the number of other opportunities, wouldn’t it really say that as you scrub your plan or as you scrub your volume demands that there is some lower capital requirement for the enterprise, because it’s got productivity and other factors and we might not see it this year I recognize that, but you know next year and year after it should have some spill?

Absolutely right, Howard. And I can tell you, we have various small and even a few very large programs that can significantly change our go-forward capital profile. When we talk about R&D investment, that’s a combination of material science, chemistry as well as new processes and manufacturing technology, so that’s a big focus for us, because how expensive these capital assets are in the long cycle time we have. So, the more efficient we can make those investments the broader we position our materials for entitlement and positioning for new programs.

And so your acquisition of the small Safran business in talking to them, you folks looks like it has some pretty interesting and unique capabilities that I will just call it you can drop in to your portfolio and offer multiple solutions to a host of customers. How fast you think you can integrate it and when do you think it could turn into something that’s more than just a modest contribution to results, Nick?

Well, Howard, I have to give you credit, you summarized the benefit and why we bought this perfectly. The overlap is almost nonexistent. It fits right into our core. It provides qualifications in technology that enhances our position. So, we are thrilled with this. I can tell you we have a team on the ground. We are already into our integration plans and how we are going to organize, structure. We are already looking at sales synergies and a few transitions that are going to help us. Now, to put some numbers around what it could be going forward, I need that by a little more time for us to really get in there. Otherwise I would be afraid, I’d understate it.

Just two quick questions. One is did I hear you say or did Wayne say tax rate for the year on a reported basis would be 27% or was it another number I am sorry?

No, Howard, that’s correct, the 27%, but that excludes that first discrete benefit in the first quarter of $9.1 million, so the GAAP rate is a little bit lower.

Thank you. And then finally, Nick you talked about auto being a little bit better or larger, is it new platforms or can you elaborate a little bit on the forward look that you have there?

Well, if auto has – I have to go back and look quarter-over-quarter has done very well, on a percentage basis, very nice double digit growth on a very small base. So, Howard, we continue to look at niche opportunities with some of our key customers, including BMW, the -7, now B-pillar continues to do very, very well. Our roof business continues to do very well. And then we are being successful in various other pursuits. So, it’s a combination. Still feel good about it. I am really excited about the technology that the team is working with respect to production rates, snap cures, manufacturing processes that just help us become even more competitive gives the metals.

Thank you all gentlemen.

Thanks Howard.

Our next question comes from David Strauss with UBS.

Thanks. Good morning. Congrats, Wayne and thanks for all the help over the years.

Thanks, David.

I want to ask about narrow-body rates in Q2 did you see the full impact of the higher narrow-body rates this year actually flow through your numbers?

Well, I can tell you we on the neo and the MAX, we actually were slightly above our forecasted sales. So, we did see that come through. We do believe there is still some transition between 320neo and CO based on engine ramp rates, but working our numbers back on what we are shipping in materials based on the rates that they are climbing to, which I believe Wayne this year is 47 for the 737 and 50 for the A320. We believe we are aligned.

Okay. Alright, great. And in terms of your – what you have talked about for 2018, what do you I know A350 is a big volume number, but you have got a pretty high ship set content there. What had you kind of been thinking on A350 when you had made those comments on 2018?

Well, we are in the….

Well, are you talking about 380 or are you talking about 350?

Sorry, yes, 380. Sorry.

380, so as David, they dropped from two a month basically down to one a month. And our assumption is that’s what we are expecting for 2018 now. I suppose there is a little bit of risk in that number, but essentially it would be flat with this year.

Okay. And then I guess the same question on 350 if your view is changed or modified at all in terms of the – I think you have been talking about previously getting to 10 a month by the end of 2018. Is that still your current thinking?

Yes, it is. We think we are right around 8 and we will ramp up sometime mid second quarter third quarter next year to the tenth.

Okay. And Wayne last one for me, obviously tax rates are running lower this year I think the last several years. So you have had some items of that’s allowed to come in lower. How should we think about tax rate in 2018? And then also any potential impact from the change in the revenue recognition standard?

Okay. So with respect to 2017 just to remind we went in expecting a 30% effective rate and we are now expecting about 27%, 3% is worth $10 million or $0.11. So it’s been a meaningful contributor to this year. A lot of that difference between 30% and 27%, some of it will carryover to next year, but most of it won’t. So, we are not ready to opine on the 2018 tax rate. But if you are thinking – don’t think 27% think towards 30% absent any change in tax rates. With respect to revenue recognition, we are firmly committed to adopting it on January 1, 2018 and will advise of any impact later on, but it’s not obvious to us that there will be a significant impact, but we are in the heavy midst of going through the implementation process now, but I would say, we are hopeful that there is not a big impact.

Thanks a lot.

Yes. Thanks, David.

We will go next to Robert Stallard with Vertical Capital.

Thanks so much. Good morning.

Good morning.

And Wayne, I will echo everyone else’s comments that we have a great retirement. Before you go, we got a couple of questions for you. The first one is inventory destocking that’s been going on. You mentioned there is lots and lots of different customers you are talking about here. What’s your sense of the reduction you now need to bring it down to current rates rather than anticipating any further production cuts could be coming on for 777?

Yes. So, I may get step back and say why we are having the stocking in the first place. So, it really is about most of it the legacy wide-body rates being reduced. So remember you got to think by last year you have had 777 going from 8.3 a month to 7 to 5 on it’s way to 3.5. And so we probably accounted for the build rate drops, but you also have that destocking as you go through it, because people need less inventory and the same for the A330s dropdown, the 747s dropdown, the A380s dropdown. So, it’s really all those. Now, to your point, do we know whether the dropdowns just to reflect the new rates or is it beyond that? That’s probably beyond our scope to figure that one out. But in general, it’s really why it’s happening so much this year as opposed to any other year? And I guess the last one I would add just is the 787s probably one in that latter court category where there isn’t been a drop in rate, but there has been a steadying of rate and now they have been at 12 a month for a while. I think everybody has been able to operate much better and more cleanly and therefore you are seeing some inventory go down there.

Okay. And I think you made pretty positive comments about winds heading into next year. I was wondering how much of this optimism is reflected in the orders of the backlog that you currently have whether that still has to flow through the system?

Well, if you look at investors’ backlog, it’s strong. Their performance continues to be strong. And we are working with them daily. They have recently announced some of their new blade launches which we are excited about and those are some of the exact blades where they are bigger, they are longer, they are more efficient and we have significantly more content. So, I am not betting against Vestas. They are doing very well. They are still the market leader. And they are going to require our materials to ship those turbines. So, we feel very good. Now, the timing and how quick the ramp up again we will refine as we get into latter part of the year and provide our guidance. But everything we are seeing with respect to Vestas efforts, with respect to positioning their plants, we are getting ready for the upswing.

Okay. And then just a final one from me. Was there anything you give us any update on any discussions you might be having with Boeing relating to customers on a midmarket aircraft and what the materials could be on that plane?

Well always I am careful about what we are talking to our customers about specifically. I can tell you we are very excited with some of the communication and increased excitement around the new aircraft announced during the Ratley’s [ph] position during the air show and also some of the derivative type platforms that could follow as well. So, I can tell you we are actively working with the engine manufacturers, then the cell manufacturers and the primary OEs on new materials, new solutions, new options for next-generation platforms. So, it’s not officially launched. We are hoping that happens. We will be ready when it does happen and look forward to capturing more than our fair share of content.

That’s great. Thanks so much.

Thanks, Rob.

Thank you.

[Operator Instructions] We will go next to Robert Spingarn with Credit Suisse.

Hi, good morning and congrats, Wayne and Patrick. I wanted to go back, I think Gautam often asked you the question on the lost sales and in the context of lost profit, you held your guidance, but you have this $0.11, I think it’s an $0.11 tailwind from tax. So clearly there was some lost profit, does it allocate the same way that the sales guidance – in the same proportions as the sales guidance decrease or do you have greater decremental margins in certain things than others?

No, Rob, I guess in general to answer your question that’s proportional to the drop in sales, but that’s not easy to do. We have had to do an excellent job of controlling the headcount as we talked about to make sure we dropped. I mean, one of the things we do well is respond to the drop in sales and we did that accordingly. We don’t have a lot of discretionary spend, but the limited amount we have, we have done a good job of balancing there. So we have been able to offset it proportionately, so we didn’t get incrementally hit harder than that.

Okay, alright. It’s about average margin. So, moving on – this was asked about earlier as well, is there a natural – decay is maybe the wrong word, but decline in the buy-to-fly ratio for composites over time that we could use as a rule of thumb. So I understand that you said in some cases your content rises, but it sounds like that’s because scope would increase. But what I am talking about is just greater efficiency on the part of your customers where you just have to build in some expectation of shrinkage over time?

Yes, I think you summarized that quite well. I mean, productivity is here to stay for everyone, not just to us. I mean, you can see Airbus and Boeing and for that matter everyone in the space are looking to drive profitability up, recognizing that they have to get costs down and get more productive. And what that means is use materials more efficiently, reduce scrap rates, increase tier times, tier time speeds. So to give you a general number, it’s very difficult to do given the complexity of the supply chain. I would say the more mature a program is, the more it is learned and the less likelihood there would be adjustments, whereas a new program that’s ramping up like the 787 or A350, there tends to be a little bit more opportunity on the front end as customers in the supply chain get more accustomed with handling materials, they get more efficient. And it certainly has a curve to it and a slope to the level of opportunity and improvement, while staying within the qualification window, because that’s really where the difficulty comes in deviating from the qualification window and making major changes.

Okay. And then Nick, if I could just ask you going back to the 797 discussion, I know you don’t want to get too specific and frankly I don’t know how specific your customers gotten yet, but could you give us some sense of what new technology means relative to the composites that are out there on today’s platform? How significant leap are we talking about that maybe puts you in the contest for a customer where you haven’t – where one of your competitors is dominated in the past?

Yes. So, again, I know what we read in the magazines and I think Boeing on the NMA or 797 whatever you want to call it, they are really leaning towards a unique configured fuselage and I believe they have declared, they are close to saying it will be composite, which was music to our ears. We have always been trying to position our materials to maintain those positions. Clearly, the material choice has not been made. What gives me great hope and optimism is the multiple opportunities and options were provided. So when you think of technology advancements, the next generation aircraft my belief will have materials that are lighter, are stronger and will be much more efficiently made, i.e., the cure rates will be faster. They may or may not use an autoclave, which will reduce capital for the customer base. The cure rates will be faster. So overall not only the materials will be advanced or a derivative of what’s existing, really the manufacturing processes will go to the next level.

Okay. And is Hexcel positioned better for the material or the manufacturing processes I mean what are you going to lead with?

Well, we certainly work in the materials side, but we are working with manufacturing equipment, designers and makers to make sure our materials are ready for those. It’s really a combination the material and the processing equipment design for that material have to work hand-in-hand. And we work integrally with them throughout the process.

Okay, thank you.

Great. Thank you.

We will go next to Noah Poponak with Goldman Sachs.

Hey, good morning, everyone and congrats, Wayne and Patrick.

Thanks, Noah.

Can you guys elaborate on what drove the upward revision to the defense revenue growth guidance?

Well, I can tell you that our key programs were all up nicely, JSF probably the biggest, although A400M, V-22 and the Blackhawk, was up nice. Rotorcraft in general rebounded on the military side and even the commercial side was sequentially up. Still year-over-year, it’s a fraction of what it was in ‘16, but it gives me hope that maybe on the commercial side, we have turned the corner. So, I think you just look around and you read and you see what others are reporting. There is a lot of optimism in the space and defense market. I know some of that optimism and excitement will take time to transition down through the supply chain and translate into hard sales, but the programs we are on are very good. We are seeing great growth projections going forward. And I am looking forward to doing our roll up for 2018 plan and having good news to share with everyone.

Yes. So, maybe on that point, I mean you have the 3% to 5% CAGR for the segment through 2020 and I know you just mentioned looking forward to doing the rollout, but it’s a long cycle business where you have some visibility. Would you be willing to maybe speak to where you are preliminarily seeing 2018 shake out versus that range just because ‘17 we are now talking mid single-digit and you have a negative quarter in it, you have got another big step up in JSF next year, you just mentioned that easy comparison at least in the commercial helicopter side. It would seem like there is decent prospect for being ahead of that range in 2018?

Well, I sure hope you are right. I will tell you have to keep in mind the fact that we are on 100 plus programs. And remember, a lot of these volumes in aircraft terms or platform terms are relatively small volumes and it tends to be lumpy. So, I don’t want to get ahead of ourselves and talk about what we are seeing in Q2 being the trend long-term. I am optimistic and I sure hope we can give you a number above our prior range for guidance going forward, but again it’s just a little earlier than I want to declare.

Okay. And then just lastly on margins, I know you have said you still have a 25% incremental running through the business on an underlying basis, but ‘17 it’s not going to be that way on a reported basis given the FX news and the investment changes. How should we think is then about how 2018 margins compared to 2017 margins as those items normalize?

So with respect to incremental margins since ‘17 sales are going to be flat with ‘16 it doesn’t become exactly a meaningful number. I am hoping that you are right on 2018 sales and the bigger the sales increase, obviously the easier it is to hit the 25% target, we are not backing off of that and we fully expect to do it as long as there is meaningful sales increase.

Wayne, have you quantified in millions of dollars, what exactly how much is hitting the P&L this year for investment that doesn’t recur beyond this year?

I am sorry you are talking about the startup of new facilities or are you talking about depreciation?

I’m talking about either of those or really anything that’s unique to this year?

Yes, so depreciation going up unique to this year, I mean that this year and last year and we will another big increased step up next year as well, but obviously we have more assets to use and hopefully we will be up and generating revenue. With respect to the two startup locations, Nick mentioned, it’s $5 million for the first half of the year and we expect that run-rate to taper as we go into the fourth quarter, but hopefully that doesn’t recur at that magnitude next year.

Okay, thank you.

Alright. Thanks, Noah.

We will go next to Chris Kapsch with Aegis Capital.

Yes, good morning. A couple of questions on FX and I apologize if you touched upon this, but the dollar is certainly weaker vis-à-vis the euro. Can you just remind us how hedged you are for the balance of ‘17 and perhaps ‘18? And then also just have you provided an approximate operating income, EBIT sensitivity to FX and I realized we ae talking about primarily the euro and to a lesser extent I guess the British pound?

So, Chris, with respect to the second half of the year, we are hedged enough and there is not that much time remainder of the year that most movements of the euro and the pound for the last 6 months are going to have a whole lot of impact on our operating income. They will impact the sales translation both with respect to operating income probably not much. As you go in the next year, we are probably 50% to 60% hedged at this point. And the rates get worse that will hurt next year a little bit as we continue to hedge into it, but think about it this way, we hedge out 10 quarters and we sort of roll – in every quarter roll into that number. So, we are not completely hedged, where we want to be for 2018, but we are fairly far along.

And is there a sensitivity number kind of assuming kind of an un-hedged environment?

So think about – yes, just an order of magnitude think about and this is the combination of the euro and pound together. We are at about 200 – at the operating income line, we are about $250 million of exposure. So if we had no hedges and the rates move 10%, that’s a $25 million impact, but that’s the size of the magnitude we are trying to hedge.

Okay. And then just follow-up on this discussion about efficiency that are now being passed along and I guess your commentary suggests that those efficiencies are mostly in the form of material, reduced scrap, maybe less content, but I would have thought maybe some of that is also just pricing that you might pass along as particularly for the advanced programs as the production volumes ramp, they achieved certain thresholds, so they might hit price points where you pass along efficiencies in the form of price. But I think what you are saying is it’s more of the former, not the latter, could you just elaborate on that and also discuss any implications associated with whether it’s material or pricing that is the pass along and described as efficiencies? Thank you.

Yes, Chris. So, just to be clear, it’s not price. Having said that just to also be clear, when we have given out ship set content, we have given that the price when it’s at the highest rate and therefore at the lowest price. So, that price hasn’t changed and that’s always been built in whether it was $5 million or $4.8 million, so the change between the 5 and 4.8 does not have anything to the price.

Okay. And then I mean is this enough that it would affect your anticipated margin profile as you ramp up the assets that are being used to produce these advanced materials for some of these key programs like the A350?

So, on a margin percentage basis, we are trying to hold on to as much margin dollars as we can as if it’s gone down. Having said that, as a margin percentage, we don’t expect it to get worse whether it gets better that’s obviously our goal, but we don’t expect it to get worse.

Okay, thank you.

Thanks, Chris.

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