Hexcel Corporation (HXL) Q2 2013 Earnings Report, Transcript and Summary

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

Thank you. Good morning, everyone. Welcome to Hexcel Corporation's 2013 Second Quarter Earnings Conference Call on July 23, 2013. Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings, including our 2012 10-K, our second quarter 10-Q and last night's press release. Lastly, this call is being recorded by Hexcel Corporation. It cannot be rerecorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. Last night, we announced that as of August 1, Nick Stanage is being elevated to President and CEO, and Dave Berges will move to Executive Chairman until his planned retirement at the end of the year. With me today are Dave and Nick as well as Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2013 second quarter results detailed in our press release issued yesterday. First, Nick will cover the markets, then I will cover some of the financial details and Dave will have some comments before taking your questions.

Thanks, Wayne. Good morning, everyone. Second quarter sales of $423 million were in line with our expectations, up about 5% from last year as strong aerospace revenue offset tough year-over-year comparisons in our industrial markets. Operations performed well, producing record-adjusted operating margins of 17%, up 90 basis points from last year's period. Our adjusted diluted EPS of $0.48 was 14% above the second quarter of last year. All in all, a very satisfying quarter. Commercial aerospace sales of $270 million for the quarter were up over 15% in constant currency from the same period of 2012. Total revenues from new Airbus and Boeing programs, again, increased by over 20%, driven by the 787 ramp up as expected. Of course, the highlight of the quarter for Hexcel was the first flight of the Airbus A350 XWB, a program that will be a key contributor to Hexcel's growth in the years ahead. Sales for legacy programs at Airbus and Boeing were up over 10% from last year's second quarter and in line with announced build rate increases. Sales to other commercial aerospace, which includes regional and business aircraft, were down about 5% compared to last year. Space and defense revenues were about $97 million, up over 9% versus last year. Growth was again led by sales of materials for rotorcraft with help from the new European A400M transport. In industrial markets, sales for the second quarter were $56 million, down almost 29% year-over-year in constant currency. As expected, wind sales were down over 35% from record levels of last year's second quarter, though just above the first quarter of 2013 sales. Other industrial sales were also down from 2012 but up modestly from unusually low levels of the first quarter. Now let me turn the call over to Wayne for some additional comments on our financials.

Thanks, Nick. Gross margin of $117 million for the quarter was 27.6% of sales as compared to 26.4% in the second quarter of 2012, thanks to continued operational improvements and a bit of a richer sales mix. Our SG&A cost of nearly $35 million were 7% above last year's second quarter, primarily driven by additional staffing and investments to support our projected growth. Our R&D cost of $10 million for the quarter were in line with expectations in the last 2 quarters as we continue to invest in new products and process technology improvements. Our adjusted operating income as a percent of sales was 17% this quarter with only nominal help from exchange rates. This compares with 16.1% last year's period. I should remind you that last year's quarter, second quarter, we recorded a $9.5 million benefit from the settlement of an insurance claim in the tornado damage at our Alabama facility in 2011, so that our GAAP operating income in the second quarter of 2012 was an eye-popping 18.5%. Our effective tax rate for the quarter was 30%, down from last year's effective rate of 31.7%. We continue to expect our effective tax rate for the rest of the year to be about 30.5%. As we previously announced, in late June we entered into a new 5-year $600 million senior secured credit facility that replaces our old $442 million facility. The new facility will provide us with lower interest rates and expanded flexibility. The transaction resulted in a $1 million pretax charge in the second quarter as we accelerated recognition of certain unamortized financing cost in the old facility and the deferred expense and related interest rate swaps. Free cash flow for the first half of 2013 was a source of $16 million as compared to a use of $71 million in the first half of 2012, reflecting lower year-to-date CapEx spending versus last year and better working capital usage. We still project CapEx spending for the year to be $180 million to $200 million. We also completed our previously announced $50 million share repurchase program in the quarter by investing $35 million in Hexcel stock. And lastly, for those of you keeping track, we set records this quarter for sales; gross margin; adjusted EBIT, both in dollars and percent; adjusted net income and market cap. Most of you view market cap as the ultimate measure of Dave's success, so just to remind you how we did, when Dave started 12 years ago, our market cap was $300 million. Today, it's around $3.5 billion. That's nearly a 23% CAGR over a 12-year period and 3x higher than the S&P 500 average. So we think he did pretty well or as our English colleagues would say, not so bad, and we're excited to help Nick keep the run going. So, Dave, I'll let you get the last word in.

Thank you, Wayne. I didn't see that on the script. Our 2013 outlook remains very positive. Industrial markets has certainly been even worse than we expected year-to-date and there's little evidence of recovery yet, but because of Aerospace strength and great operational performance, we reaffirm both our sales and earnings guidance for 2013, with sales expected to be between $1.64 billion and $1.74 billion and adjusted diluted EPS to be in the range of $1.73 to $1.83. But because of our improved cash outlook, we're increasing our cash flow targets for the year by $20 million to a range of $40 million to $80 million. On a related note, because of our improved cash outlook, yesterday, our Board of Directors authorized a new $150 million share repurchase program. And finally, as Wayne said, yesterday, the Board of Directors named Nick Stanage the next Hexcel CEO effective August 1. This is a culmination of a carefully orchestrated succession plan that began in earnest 4 years ago, when I informed the board I didn't want to work past 65 next year. In the 3.5 years that Nick has been with us, he's reorganized the company around markets, worked seamlessly through 4 very senior retirements on his staff, created a forward-looking business development team and process, delivered the product and process improvements necessary for us to meet the demands of the A350, oversaw the biggest capital expansion program in the history of the company with flawless execution, and established product-by-product market-based technology roadmaps to focus our R&D efforts on the inventions needed for 5 to 10 years out. Sadly, however, he read his first script flawlessly, which I have not done in my entire 12 year career. My wife actually counts my stumbles and tells me when I get home as an effort of positive reinforcement. And also for 12 years, I preached to both inside and outside stakeholders that we should have 20% incremental operating leverage on our near certain growth. Nick's made me look silly by delivering over 25% leverage during his 3-year tenure. But I'm thrilled that the board recognizes his leadership and want to be the first to congratulate Nick in a public forum. Congratulations, Nick.

Thank you, Dave.

And now, we'd be happy to take your questions.

[Operator Instructions] And we'll now go to Howard Rubel from Jefferies.

Well, the first question, Nick, other than good luck is, so do you think you can repeat Dave's market cap run here?

Well, Howard, thanks for the question. That's certainly our objective. I think we've got the team in place. Dave certainly has set the standard and developed the organization roadmap and we're going to certainly deliver and give it everything we have going forward. So I'm confident we're in a position to deliver, Howard.

Let me ask 3 kind of very specific questions then I'll move on. First, Boeing and Airbus are relentless in developing new products. As you talk to them, do you still see some incremental opportunities for penetration? And can you help me a little bit outline some of those.

Well, I think you've heard Dave say multiple times that any time there's a new plane, we're ecstatic. Any time there's a new wing, we're excited. And when there's a new engine, we're delighted and working all of them aggressively. So as you see in the press, there had been launches at the Paris Air Show with Boeing. The NEO and MAX are in development and contracts are being let. I can tell you we're working all of those programs as well as new military programs that are on the radar as well. So we focus on technology and development. That's who we are. We're not going to change that. And we are very close to our customers, and certainly Airbus and Boeing are key to our future and customers we focus on every day.

The second thing is Industrial has been pretty mixed and while the good news is that it's not as high profitability, the bad news is there's a lot of market opportunity out there. What are you doing to make a difference there?

Well, as you know, wind makes up approximately half of our Industrial segment and the other half is a combination through distribution, automotive, other applications. I'd say a couple of things. First, part of the reorganization a couple of years ago, we focused on Industrial and I pulled that out to have it be a standalone segment. Second, we've gone through our internal strategic plan process, and the team have done deep dives in those markets to better understand those segments, to better understand where Hexcel can position our differentiated technology and really, Howard, that's what we're working on for the long term. Day-to-day, we're aligning our operations to align with the market condition. So as you can imagine with the wind being challenged, we have had to make some tough decisions, but that's what we do.

And then last, Wayne, as the business moves a little bit more towards the 350, one would suspect that -- as operations are a bit more centered in Europe, we could continue to see long-term tax rate come down. Is that a fair sense and where might you think it could go?

Yes, Howard, my ability to predict our tax rate is not very good. I mean, if you look at the 2 countries where most of our tax, we pay it for a big tax there, it's the U.S. and France, and both of those rates are high. So it really just depends on the mix within with each country.

And we'll now move to Amit Mehrotra from Deutsche Bank.

Quick question, first on margins, specifically the gross margin. Incrementals were close to 50% in the quarter. Was there something you characterize there as extraordinary? It just seems that it's gets really high versus what you've done recently and I noticed, Wayne, that D&A is actually down in the quarter. So what's going on there given the increase you've seen on the CapEx the last couple of years, and if you could provide some run rate for us in the back half of the year?

Yes, with respect to the margins -- on the gross margin being so high, I wouldn't get too excited over a short period of time. Our sales increase wasn't that huge. The mix of products we had was fairly rich, so that helped us well. But I think you're probably going to look at that over a longer period of time than just the quarter. With respect to depreciation, I promise you someday it's coming. We'll give you more guidance in the -- at the end of the year towards what 2014 will look like, but there will be a big step up. If you remember, at the fourth quarter of 2012, we changed the depreciation lives for the new assets we've put in service. So you're really comparing this quarter with a quarter before that had a little bit shorter lives and that had a little bit back, but the depreciation charge is coming but we'll let you know before it happens.

Amit, excuse me, I want to just do what I always do in the second quarter and remind all of you who are modeling that, seasonal effects almost always cause a margin decline in the second half versus the first half. You'll see that, I think, every year you look; last year was about 1.5 point, I think, on gross margin just because of holidays and summer vacations in Europe, et cetera.

Okay, understood. And then just, Nick, a high-level sort of open-ended question for you. Can you just give us your perspective on what you think Hexcel's biggest opportunities and risks are over the next few years? And then can you just provide a scenario where maybe you're going to increase your focus now that you're, so to speak, steering the ship?

Well, I think from the 3.5 years I've been here, the first thing I really focused on was making sure we have the right team in place to deliver on the programs we've won. The market positions in aerospace, which as you know, is who we are, driven by commercial, the new programs making up 30% -- over 30% of our commercial and growing, with the A350 starting to ramp, the 787 approaching 10 per month. So execution is critical and operational performance will be a focus. Identifying the right metrics, holding the team accountable, empowering them to deliver, technology, continued investment in R&D. I think you'll see, compared to last year, we've raised that. Some of it driven by process improvements and productivity in our plants, specifically around precursor and carbon fiber, but also on new products. Again, to align with the next-generation aircrafts and applications that we're working. So this isn't broke [ph]. Dave has created a tremendous organization and basically, I'm going to continue that trend and find nits [ph] and opportunities and growth pursuits that we're going to work from here on forward.

And we'll now go to Steve Levenson from Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Nick, has Airbus given you any sort of timetable on how the build rates are going to go for A350 that you can talk about, at least?

Well, I have to tell you, we've got people in virtually every plan every day. We're working with Airbus always. They do keep us updated on their schedule and the revisions to the schedule. We really do not advertise that. We let you get that from our customers and not get ahead of them. But we think we're very aligned. Obviously, after the first flight, there's a lot of momentum and we're continuing to support the program with healthy deliveries. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: At the air show, you did have a release of that, your arrangement with Safran. They showed a lot of things that are made with 3D woven fiber, I guess, a lot of that's going into the LEAP and it sounds like it's going to go into the GE9X. Given your druthers, would you rather be selling fiber for that sort of application or prepreg or are you also selling resins?

Well, given my druthers, we'd always like to have as much content as we can win and provide as much value as we can to our customers. Prepreg such as on the GE-90, which is used down the 777 or the GEnx, used on 787, use our prepreg, one of our highest performing prepreg and as you know, it's been flawless since its introduction. The LEAP is -- you're looking at a different design. As you mentioned, it's using a woven material that's infused using our fiber, so the resin system is different. It's not Hexcel's. Nevertheless, we've got good content and good positions in that program, not only on the fan case but the blades, as well as prepregs and other materials on the nacelles. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Got it. Last one, given what happened to 787 a couple of weeks ago now, can you talk about what sort of opportunities you see for repairs. I mean, is this something you think will be repaired or a big piece replaced or the whole thing scrapped? And how does 787 differ from A350 in that regard?

I probably know as much as you do and what I read, it looks like the engineering team are evaluating whether or not there's a fix possible or whether the certification process would be so cumbersome that it would not just be easier to replace that section of the airplane. So we've got our eyes open. We certainly have technology where we're working on repair systems. So that's a part of the aircraft life that we need to be able to address going forward. So I guess the short answer to that is we're going to have to wait and see.

Our next question comes from John McNulty from Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: Just a couple of quick questions. First of all, with regard to the margin, I mean they were clearly strong in the second quarter. I guess, how much of it is that you're reaching kind of a tipping point in terms of filling utilization rates and that type of thing versus maybe some of the mix issues around wind being weaker. Can you quantify that at all?

John, I'm not sure if we'll quantify it for you, but the mix clearly helps and it also helps with respect to the fact for this quarter, we weren't adding new capacity for the quarter, so you didn't see depreciation charges start up or the ramp up in hiring of new people or you're running machines where you qualify for material, not generating a lot of it. So as we've said, on those kinds of quarters we're going to have great leverage. When we talk about the target of 23%, it's the overall and it factors in some quarters we're going to be starting up equipment and we're not going to be getting anything out of it other than depreciation costs and running the lines with no revenue. So I think it's a combination of the 2 of those items. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough. And then just 2 questions with regard to uses for cash. So your share buyback definitely happened or concluded a lot faster than we thought it was going to. So I guess, how should we think about the timing of share repurchases going forward. Is it more opportunistic and you'll do it whenever you did some stocks skipping or what have you? Or is it going to be a relatively consistent rate going forward at these kinds of rates we saw in the first half?

John, I've been given a little wallet size card from legal. It says, "Now the timing of purchases will depend on a number of factors, including the price of the offloading of shares of common stock trading volumes in general market condition." Does that help? John P. McNulty - Crédit Suisse AG, Research Division: Anything beyond what legal's commenting on?

Essentially, we acknowledge that with our cash outlook, in the absence of a compelling acquisition, our low leverage isn't an efficient use of capital. So we like Hexcel's in acquisition and we promise it will be accretive if we go there. John P. McNulty - Crédit Suisse AG, Research Division: And that brings me to the last question. We've seen, I guess, in the last year or so one of your -- actually 2 of your big aerospace competitors, Toray and Sitec, both making investments in auto-related industrial platforms in composites. Can you speak to whether or not that may make sense at some point for Hexcel? Or if it doesn't really make sense?

I think, at some point, it will make sense for everyone. It's the economics of composites in automotive have never been compelling other than Formula 1 or extreme high-priced cars. However, government mandates that insist on energy efficiencies that go beyond the capability of engines or electric vehicles, government mandates will cause people to do things that are not financially practical. And cost will go up and as that environment changes, carbon composites will have a roll. I think it's a well served market so far, a lot of people are very interested in it. We're certainly monitoring it, but we want to find a place where we've got a technology that will provide a sustainable competitive advantage, not a temporary fix to meet some standard while they find a lower cost solution.

Cowen and Company's, Gautam Khanna, has our next question.

Just wanted to touch on the topic that we hear Boeing talk about a lot, which is the sole partnering for success initiative that could drive down supply chain cost. I wondered, how does it affect you guys? Has there been any renewed discussions about reducing price and/or in exchange for share or anything else, I mean, how does this initiative, which started a couple of years back, actually play out for Hexcel?

So if you're wondering if Boeing is looking to us to participate, absolutely. They view the market competitive and the need to drive cost out. Being a partner with them, we certainly work to offer up cost reduction ideas, cost-reduction initiatives and ways for us to help them deliver their result without pulling it out of our margin, which is a nonstarter for us. So we have multiple ideas and ways on how we can eliminate waste in the supply chain as well as how incremental leverage can be gained through more business. So we're having discussions ongoing with Boeing and certainly are helping them -- working to help them deliver what they need to be competitive in the marketplace.

Okay. And to switch gears, your defense and space business has been very strong. Obviously, we're coming up on difficult V-22 comparison. And I heard Sitec talk about F-35 destocking on their call. Could you frame for us when you expect you'll start to see negative quarters in the sense? I mean, it sounds like that might be as early as Q4. Is that a fair assessment?

We can have some swings quarter-to-quarter. So I'm not going to forecast a specific quarter. We still continue to believe we are going to have single-digit growth going forward. We've got all the activity in helicopters, not just in the U.S. but in Europe, and then India and in China. We've got the A400M ramping up, which has got a composite wing and it's a pretty big airplane. F-35 is not growing like everybody had hoped 40 years ago, but it is still incrementally more than what it has been. So we think we can grow through the tough comps on the V-22.

And lastly, Nick, could you just comment on whether you think there's any technologies or properties -- types of property you would actually want to get into kind of inorganically. Besides just buying back stock, are there any M&A opportunities that you think you kind of need to get to the next level? Maybe just in terms of technologies or what have you.

Well, I would say we've got a very comprehensive view of our technology roadmaps aligned with future customer needs. We look at internal development and we look at if there are any gaps and how we might be able to fill those gaps. As you could expect, that's kind of sensitive, so we don't advertise it. But I would say we've got a very aggressive and active program to make sure we're positioned to win the next-generation aircraft.

And we'll now move to Noah Poponak from Goldman Sachs.

You mentioned the A400Ms specifically as a driver of the defense segment strength. Can you quantify how large that is now on an annual run-rate basis?

We don't have anything that's over. I think we've said our biggest program is now over 15% of the segment and -- so our top programs, we've named before A400M is not yet a tough program but incrementally, it's growing because it had been sort of on a lull for a number of years. So we're getting a boost from that. It's not dominating the segment. It's just additive to the year-over-year comparisons. And we add it now, along with helicopters, as one of the reasons that we've seen the step up. In fact, as well as Eurofighter this particular quarter.

Got it. And are you able to quantify how much of the space and defense segment now is U.S. DoD?

I think we've indicated this in the neighborhood of 60%. It's plus or minus 10% depending on that...

It's in the low 50s probably.

Okay, great. And then, Wayne, can you just walk us through what drove the change in the cash flow guidance?

We've been doing much better on working capital, and that's really probably the biggest driver of it. The assumption has no change in our CapEx spending, it's really about the --

No change to CapEx?

Correct.

We'll now go to Ron Epstein from Bank of America Merrill Lynch.

Just a couple of quick questions. Maybe a follow-up on Noah's. As we think about the introduction of the LEAP-1, their new engine and the fiber that you guys are going to provide for the blades and as the rollout of those various airplanes that had engines on happens, how do we think about the impact that will have on CapEx?

I don't think it's going to be as overwhelming as the A350 from a magnitude standpoint. We're really happy to be on the engines and that will be a good count. Those blades are much smaller than what you'd see on the airplane. So I think, we've given guidance that we think we're through the peak of our capital spending. If programs continue to ramp successfully as they seem to be in the last year or so, it will be a little steeper, but I don't think those are going to be overwhelming, not like a new airplane wins of primary structure.

Okay, great. And then just a follow-on, I think in the past you said on average your content for narrow body is about $300,000. With the new engines on the narrow bodies, is that for set up to maybe $450,000, $500,000 per plane?

Yes, well what we've said, Ron, before is the opportunity has increased by about 50%, so your math is correct.

Okay, great. And then maybe just one more quick one. There's been a lot of discussion around potential M&A opportunities and new technologies. Is ceramic matrix composites, anything that you guys would look at or be interested in because the engine guys have -- particularly GE, CFM has expressed more interest in using more ceramic matrix composites throughout the engine. Right now, I guess, it's not in the hot section, but just potential that is going to move there?

We keep an eye on it but it's not a lot like what we do. Composite really just means a combination of materials. It's not necessarily carbon fiber-based. So we are aware of the technology and have paid attention to it and it is interesting. It's highly technical and we like that about it, but we aren't in a position to talk about any significant move in our base of business.

Okay. And then maybe just one more. When Sitec sort of split up their company, how does that change the competitive dynamics or doesn't it at all in the markets that you compete in?

I don't know if they've changed their behavior at all. They're focusing on the aerospace OEM market just like we are, just like anybody should be, including you investors. It's a market like I've never seen before, despite what everyone thought were ridiculously high backlogs at Boeing and Airbus, everybody except me. We find ourselves after the Paris Air Show with Boeing and Airbus backlogs 19% higher than they were a year ago, despite liner increases and an enormous backlog. So I'm not at all surprised that they want to focus on commercial aerospace just like we do and most everybody else in the industry. I'm flattered that they followed our lead.

And we'll now move to Avinash Kant from D.A. Davidson. And he has disconnected so we'll move to Mike Sison from KeyBanc.

Nick, when you think about the 2017 long-term targets that Hexcel's has put out there. Any thoughts on that? Do you feel pretty good about it? Any areas of focus that you're going to pay attention in terms of that plan to ensure that it will succeed?

Well, I mentioned we just recently went through our internal strategic plan and I feel even better about it now than I did a year ago and I felt pretty darn good back then. I think we've positioned our technology and our solutions well. Our win rate is good and I feel confident that we'll deliver on our basic communication that we gave in the December Analyst Meeting, $2.5 billion by 2017.

Okay. Then there's been some questions on acquisitions but wind has been a business that has been great, then it's been sour. I mean, is it still in your mind, Nick, a business that makes strategic sense for Hexcel longer term?

Well, we all know the challenges that wind has been faced with over certainly this year compared to 2012. Tax credits and green energy from my perspective are not going to go away. At the same time, I don't think we'll see the type of growth we saw in the 2008, '09 time frame. But if you look at the need for energy, if you look at the cost of fuels, I'm a believer that they'll continue to go up, although it maybe will take more time. I think the wind will be a competitive technology and I think there's future there.

Okay. And then final question, heading into 2014, now it's a little bit early to give a specific outlook but when you think about the commercial aerospace segments had a very strong run here with double-digit top line growth. When you think about some of the new platforms coming on and maybe some commentary in regional business, do you think that you could sustain similar momentum as we head into that year?

Well, we're just getting ready to go into 2014 plan. So, I'm certainly not going to get into specifics. But with the development of the NEO and MAX coming up, the ramp up of the 350 continuing to increase and the 787 still pushing towards its max rate, I feel really good about 2014. We'll see how the numbers roll up, but I'm feeling good right now.

And we'll now go to Avinash Kant from D.A. Davidson.

This is Karen Colitas [ph] filling in for Avinash. Sorry for being disconnected earlier. I just had a few quick questions. So you mentioned that other commercial aerospace was down 5% and you talked how it's mainly the business jet and regional jet businesses. I was just wondering what percent of the total commercial aerospace business is from those 2 combined?

It's definitely less than 20%. It's probably in the 17% or 18% range.

The run rate has been at 100 to 150 range over the last couple of years. We peaked at 200 for the all other commercial aerospace back in 2008 or 2007 before the credit crisis, but 140 or 150 seems like kind of the normalized rate.

Perfect. And then, second, bookings that a key wind customer has been weak on a year-over-year basis but it has seen meaningful uptick this recent quarter. And you talked about the year-over-year decline in your wind business but I was wondering if you could give us some idea about what you're seeing on a sequential -- on a quarterly basis and if you expect any notable uptick?

We don't have a lot of great visibility in this as the markets or the economy, and particularly in Europe, stays slow. The third quarter does have a bunch of a shutdown holiday sort of events that makes sequential look a little funny typically. So we don't have a lot of visibility, but what we -- what you should look at is what the comparative quarter is. So last year there was a decline in the second to third quarter but then again, in the fourth and the first. So we're coming off of the toughest comparison but not yet all the way laps. So I think is our total Industrial was flat sequentially, Industrial in total would be down 15% year-over-year in the third quarter. So I expect we'll be talking about another down year-over-year quarter in the third. And then by the fourth, we start to have easier comparisons and how we think we -- and hopeful we'll start seeing something more stable.

I believe in the last call you mentioned on a sequential basis, wind was down 9% and the 2 quarters before that was down 15%, so what was it again for, like, on a quarter-over-quarter basis this in Q2?

That was actually up just a touch. It's basically the same as last quarter, but a little bit higher.

And then, third, thus far you've talked about the opportunity from the A350 plane being greater than $4 million. Would you mind providing a little more clarity to that number and addressing any changes recently?

It's greater than $4 million.

I wasn't sure you if can explain closer to $5 million or closer to...

It's less than $10 million.

Okay. And then just, lastly, with the recent announcement to the secured credit facility and the lower interest expense, would you mind providing what you're expecting on a quarterly basis going forward?

Yes, we've said in the first year that the savings on the interest that the volumes we're at our current borrowing levels, the current leverage ratio, the savings is about $2.5 million a year in the first year.

And we'll now move to Chris Kapsch with Topeka Capital Markets.

Just had a follow-up question and discussion on wind. I appreciate the longer-term opportunity there and understand the notion that clean tech and renewables will play a role. But Nick, listening to your comments about your excitement about the portfolio, how it's positioned to be a technology driven company focused on differentiation, how the grace opportunities are Commercial Aero, some of the innovations that are taking place have been in carbon fiber and process and precursor improvements and how you're focused on sustainable competitive advantage. I'm just wondering how much of that discussion, since it's really skewed more towards carbon fiber and carbon fiber-based composites, it's really relevant to wind. So I'm just wondering if you think of it that way, and just how relevant is the wind business, given that it's class-based, to your -- strategically to the portfolio?

So, as you know, we have -- we're vertically integrated on producing carbon fiber but we have quite a few other products within our portfolio, including engineered products, where we make subassemblies all the way to completed products, tooling and engineered core and core. So we have a broad range of product offerings. The other point I'd make is when I think of technology, certainly, product technology and mechanical performance and life are critical. But I also think that technology in manufacturing and processing and processing time to improve the competitiveness on products, both from a manufacturability as well a cost position. So we're looking at all of those on wind. Obviously, cost is a concern and there's a pressure to help align and compete with the other fuel types. So -- and at the same time, if you look at the technology in the wind markets, the blades are getting longer. Longer blades require engineered solutions to help them offset the length, the flexion and the better stiffness requirements to prevent them from hitting the tower. So there are opportunities within wind to drive technology that we're looking at.

Okay, fair enough. Appreciate the comments. And then just had a follow-up on the updated guidance and free cash flow. It sounds like mostly was out of working capital, just wondering if you could provide some color, what specifically might be contributing to working capital there. Is it just manufacturing efficiencies, less width?

I guess, it's 2 things to me. So one on inventories, we've continued to do a nice job of better managing draws [ph]. And second, our receivable collections have always been excellent and they continue that way. And we've picked up a little bit just in terms of mix of customers and what their terms are and we're just continuing to do better.

And not to ignore the obvious, if our margins keep expanding, you're getting more EBITDA for a smaller receivable. So we have less working capital than receivables and higher EBITDA that comes from it.

And we'll now go to Yair Reiner from Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Just a couple of questions. First, any impact so far that you could attribute to sequestration?

No. I mean, those -- the programs we're on are long, long-term programs, run over 100 active programs around the world. And to the extent they slow the ramp-up of the F-35 or slow reblading of helicopter, it might have a little bit impact in the out years. But it's -- we've just got way too much momentum for these kinds of discussions to be a worry to us. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Great. Now just thinking then on the rotor side, in fact, it could have a bit of an impact. And then the other question on the 747-8, have you begun to see lower pulls on the updated rate there or is that something that's going to flow in more towards the end of the year?

We would normally expect to be 6 or 8 months ahead of their build rate changes, but it's a little complicated with the long supply chain, all the customers that we deliver to. So there's not a big noticeable swing. It's a sort of overwhelmed by the growth in 787 and the volumes on the A380 and the growth of A350. So it's not appreciable.

And it appears there are no further questions. I'll turn the conference back over to our presenters for any additional or closing remarks.

We don't have any additional or closing remarks. We're done. Adios.

Thank you.

Thank you. Bye-bye.

And this does conclude our presentation for today. Thank you for your participation.