Hexcel Corporation (HXL) Q3 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Hexcel Corporation Third Quarter 2013 Earnings Call. Today's conference is being recorded. Hosting today's conference are Mr. Wayne Pensky, Chief Financial Officer; and Mr. Nick Stanage, President and CEO. At this time, I would like to turn the call over to Mr. Pensky. Please go ahead, sir.

Great. Thanks. Good morning, everyone. Welcome to Hexcel Corporation's 2013 Third Quarter Earnings Conference Call on October 22, 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 third quarter 10-Q and last night's press release. Lastly, this call is being recorded by Hexcel Corporation and is a copyrighted material. It cannot be rerecorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our President and CEO; as well as Dave Berges, our Executive Chairman; and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2013 third quarter results detailed in our press release issued yesterday. First, Nick will cover the markets, then I'll cover some of the financial details, and we'll go back to Nick for comments on our guidance before we take your questions.

Thanks, Wayne. Good morning, everyone. Third quarter sales of $412 million were up 4.2% in constant currency from last year as strong aerospace revenues again offset tough year-over-year comparisons in our Industrial markets. Operations performed well, producing adjusted operating margins of 16.7%, up 140 basis points from last year's period. Our adjusted diluted EPS of $0.48 was 23% higher than the third quarter of last year. Another very strong quarter. Now let me turn to our markets. As usual, I will discuss year-over-year comparisons in constant currency. Commercial Aerospace sales of $262 million for the quarter were up over 11% 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. Sales for legacy platforms at Airbus and Boeing were up 5% from last year's third quarter and in line with announced build rate increases. Sales to other Commercial Aerospace, which includes regional and business aircraft, were up about 7% compared to last year's quarter and are about 2% lower on a year-to-date basis versus the 2012 comparable period. Space & Defense revenues were over $94 million, up almost 3% 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 third quarter were about $56 million, down 19% year-over-year. As expected, wind sales were down about 25% from the levels of last year's third quarter, though they did continue to modestly improve sequentially from second quarter 2013 sales. Other Industrial sales were also down from 2012 and about flat with the levels of the second quarter. Now let me turn the call over to Wayne for some additional comments on our financials.

Thanks, Nick. Gross margin of $112 million for the quarter was 27.2% of sales as compared to 25.3% of the third quarter 2012, thanks to growth, continued operational improvements and sales mix. Our selling, general and administrative costs of $33 million were 7.6% above last year's third quarter in constant currency, primarily driven by additional staffing in investment to support our projected growth. Our research and technology costs of $10 million for the quarter were in line with our expectations and the last 3 quarters as we continue to invest in new products and process technology improvements. Our operating income as a percent of sales were 16.7% this quarter. This compares to 15.3% in last year's period. Exchange rates had a nominal impact as compared to last year. Our gross margin operating income margin in dollars were the highest for the third quarter in our history, though seasonally down from the record second quarter of this year. Our effective tax rate for the quarter was 27.9%, down from last year's effective rate of 31.1%. In the quarter, we had a $1.8 million benefit from favorable tax return to provision adjustments and the release of reserves for uncertain tax positions. These benefits added $0.02 to the quarter's reported EPS. Excluding these discrete benefits, our effective tax rate for the quarter was 30.5%, and that is what we expect for the fourth quarter. Free cash flow for the first 9 months of 2013 generated $63 million as compared to the use of $58 million in the first month of -- first 9 months of 2012, reflecting lower year-to-date capital expenditures spending versus last year, as well as lower working capital usage and higher earnings. Net debt was $207 million, a decrease of $17 million from December 31 of 2012. In broad terms, of the $63 million of free cash flow we generated for the first 9 months, we used $50 million to buy back shares in the first half of the year and the rest was used to pay down debt. Our available borrowing capacity at the end of the year was $334 million. We did not make any share repurchase this quarter against our authorized $150 million buyback. And now, I'd turn the call back over to Nick for some final comments.

Our sales outlook has narrowed within our prior range to be between $1.655 billion and $1.685 billion, but thanks to continued strong operational performance, this quarter's $0.02 tax pickup and partially offset by an approximate $2 million increase in our fourth quarter depreciation run rate, we are increasing our earnings guidance for 2013. We expect adjusted diluted earnings per share to be in the range of $1.80 to $1.86, which is a $0.05 increase in the midpoint from our prior guidance. There's no change to our CapEx guidance of $180 million to $200 million as we expect our fourth quarter spending pace to increase from the level of the first 9 months. Because of our improved cash flow outlook, we're increasing our free cash flow targets for the year to a range of $50 million to $80 million. We'd now be happy to take your questions.

[Operator Instructions] And we will hear first from Steve Levenson of Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: I have a question on capital expenditures. Where do you stand on precursor capacity? When do you have to add the next slug? And do you think it'll be less expensive than the last slug?

So in the carbon fiber, the precursor, that will be one of the elements that will increase our depreciation in the fourth quarter. As we noted earlier, with respect to R&T expense, we continue to invest in not only product but technology and productivity. So we always look for our capital assets to become more efficient, more productive going forward. So it's hard to quantify with respect to the actual outlay versus the cost per pound, Steve, but we do expect it to improve. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And do you hear -- is some of this, of course, related to the ramp up in A350?

Certainly. The A350 is a driver, but as you know, our assets are fungible and we basically compile all the demand needs across all programs and that feeds into our capital model. So although we will be bringing capacity online in the fourth quarter, some of that will be A350, but it will all support other programs as well. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I guess a question on the buyback. Was there -- is there something else weighing against your capital needs that made you decide not to buy back stock during the quarter, or is it just the price was moving up?

Yes, Steve, we're just going to report our purchases quarterly as required, and we're not going to talk about our plans or details or anything like that.

And we will hear next from Amit Mehrotra of Deutsche Bank.

Great. Nick, can you just talk about how you view the wind and other Industrial businesses? We haven't really heard from you on how you think about that business fitting strategically within the company, especially given all the investment and growth in the Commercial Aerospace side of the house.

Well, Commercial certainly is exciting, and with all the growth in the backlog, it's certainly our focal point. Having said that, we still like the Industrial segment. Wind certainly had its challenges this year with the late renewal of PTC, compiled with record low natural gas and just a general global slowdown. If you look at the challenges, I still like wind. We still like wind. Renewable energy are here to stay. Wind turbine efficiencies continue to improve, making them more competitive. Blades and turbines are getting bigger, thus driving the efficiency. And when they do get bigger, it drives more of a technical requirement for a technical solution to reduce the weight of the blades, as well as reduce the deflection of the blades. So certainly, wind is struggling this year. I would not expect it to bounce back to the levels we saw in 2008. But I think if you look at the industry projected growth rates, they're respectable going forward and we're sticking with it. The rest of the Industrial has been tough to predict. Obviously, we've seen some tough winners with respect to our winter sports and rack. But all in all, we think that's a solid business. It fits with our model where we can find areas where we have competitive advantage, we continue to pursue those.

Okay. And then just a follow-up. With the good free cash flow performance comes a question on cash deployment, and can you just give us some color on how you're thinking about that? What some of your priorities are since you're not really providing any color on the pace or timing of the share repurchase?

Sure, and I think this is a repeat from what we said last quarter. I would hope you would expect it. First and foremost, we want to invest in our current core technology, and that is identifying the new platforms, the new airplanes, the new retrofit wings, the new helicopter blades and engines and the cells and wind content, and do that globally. That's our first priority. That would require investment in CapEx which we believe we're very good at. Second, we continue to evaluate our portfolio and look for opportunities and gaps on areas we may need to develop technology or potentially acquire it through M&A bolt-ons. That would be our #2 priority. And third would be returning capital dollars to shareholders through stock buyback. So that's pretty much the way we look at it. It's not one or the other. We basically look at all.

Would you characterize -- would you put a characterization on the M&A pipeline?

I would only say that we have beefed up that organization, we've got very good roadmaps, technology roadmaps, aligned with market needs and new engine and aircraft needs going forward. So I think we consider it active. But I'm not going to really get into details for the reasons that you could obviously understand.

Yes. Okay, that's helpful. And just one quick -- really quick one for Wayne. Could you give us the margins or incremental margins excluding any foreign exchange impacts?

Yes. Actually, the FX impact was pretty nominal and leveraged. In fact, the FX adjusted, it's slightly higher on the year-to-date basis. [indiscernible]

And we'll take our next question from John McNulty of Crédit Suisse. John McNulty - Crédit Suisse AG, Research Division: Just a couple of questions. In your prepared remarks and in the release, you indicated some year-end inventory reduction at the customer level. Is that something you expect to end at the end of the fourth quarter, or there are other issues that may be impacting and we should be thinking about going forward?

So John, we certainly heard other suppliers discuss it in their earnings call, and we always monitor year-end destocking. Typically, at the end of the year, our customers do push a little bit of inventory and try to push it into the first quarter of next year. I can only say we keep an eye on that. It hasn't been material to us up to this point. How it's going to play out during the rest of the year? I can just say, we keep a close look on that to make sure we understand what's going on, so that we don't create supply-chain issues in the first part of the year. John McNulty - Crédit Suisse AG, Research Division: Okay, great. And then thinking about growth, this year sales growth definitely moderated a reasonable amount. It seems like it's largely tied to the Industrial segment. I guess, how should we be thinking about your sales growth as we kind of look to 2014? Just given kind of all the puts and takes out there between build rates maybe moderating a little bit, but wind maybe not being such a headwind. Do we see it accelerate from the current levels? Or is this kind of a reasonable run rate to be thinking about kind of looking out?

Well, we're really going to give you guidance in December. I would touch and say that aerospace sales, we believe, have been a little better than expected. Commercial Aero is still up double digits, and Space & Defense is up single digits, which is what we pretty much have said and continue to say. The Industrial market, including wind, has had a very challenging year coming off of 2012, which was largely driven by the PTC potential expiration. So it's too early to say that market's going to come back. We are hopeful that we'll see incremental improvement as we progress into next year. John McNulty - Crédit Suisse AG, Research Division: Okay. And then just one last question. In terms of some of the efficiency measures that you've been putting in, they certainly seem to be working based on how your margins have progressed throughout the year. I guess, how should we think about what's kind of left in the tank on that? Or how much further, in terms of efficiency measures and costs cuts, can you get through kind of looking forward?

Well, as you know, volume and making similar type products off the same assets can be a beautiful thing, especially as we do more in our existing plants with our existing infrastructure. So we're always pushing leverage. Having said that, you have to keep in mind that we do have chunks of CapEx and depreciation that will come online, and those assets are not fully utilized the day they come on. There's a qualification cycle, there's a ramp-up cycle and then it has to be aligned with demand. So we're always pushing the margin. We still think 23% is a good number going forward over long term.

And we will hear next from Noah Poponak of Goldman Sachs.

I sort of wanted to try to dive into how conservative or not those revised 2013 guidance range is, because I sort of -- if you're seeing some inventory destock in aerospace, maybe at the end of the year, that the fourth quarter there is often flat sequentially; Industrial just kind of keep showing flat sequentially; Defense, there aren't a ton of reasons to expect a pickup there. And if I just put all segments flat sequentially, I'm pretty close to the low end of the revenue range. And then even if I was in the middle or high end of the revenue range, on my math, it looks like margins need to stay fairly resilient sequentially, whereas they normally decline or sometimes they decline somewhat significantly sequentially 4Q versus 3Q. So I'm sort of -- I know it's a little bit of an odd question, but I'm sort of wondering if you can speak to whether or not there is something very specific you can point to in one of the segments that makes it accelerate sequentially, or if there's something different about the seasonality of the margin this year or anything else that I might be missing?

Actually, no, I think you summarized it pretty well. The midpoint of the guidance is maybe 1.5% higher than the third quarter. The margins that we need to get are still pretty strong and so we're still expecting a pretty strong quarter with respect to the operating performance. But if you look between the low end and the high end, I think you hit what's going to happen, causing it to hit one or the other, if the destocking continues further and that will be more towards the low end of its, say, the normal year-end adjustment as opposed to anything worse than we're at the midpoint or hopefully slightly a little bit higher. But we still expect a strong operating performance, and that's where we're at.

Okay, that's fair. And then just one other one. I know we won't have 2014 guidance till December, but I'm just wondering how much you're willing to say you can see at this point on free cash or maybe even just CapEx specifically. The thing that jumped out to me at the last Investor Day was, you guys put up a pretty long run future free cash flow chart that it didn't have numbers on it, but it showed free cash improving pretty significantly, pretty quickly here. And so I'm wondering if you can maybe talk at all about what kind of line of sight you have into free -- cash from ops and CapEx next year versus this year?

Yes -- no, I think we'll wait till December to give you guidance on that. I mean, we are expecting fourth quarter of this year the CapEx to ramp up quite a bit over the last 3 quarters, so we will -- we do expect to get to our $180 million to $200 million target for CapEx, which requires a pretty hefty fourth quarter. Beyond that, we'll give you more guidance with respect to that in December. I mean, we do have good visibility as what we think should be, but we just want to see final build rates settle before we go out and give further guidance. But in terms of your numbers -- in terms of the numbers we put out last year, nothing changes. We don't expect any change in total. It'll be just about timing as to exactly when it occurs.

And we'll take our next question from Richard Safran of Buckingham Research Group.

I just wanted to ask a question about engineered products margins. Looking back, we've seen margin improvement. It's been a bit erratic and I think I understand the reasons. But given where we are in the phase of development for a lot of aircraft programs into several programs and ramping up production, I want to know if you could comment on, should we be expecting more of a straight-line-margin improvement from here, or do you still think it's going to be the same type of pattern?

Yes. Richard, we always expect to be a little bit lumpy and for us, it stays between 15% and 16%, that's probably as good as we're going to get. When you look at that capital employed to get that margin, that's a great return on capital, so we're very happy there. But there'll always be some new programs start-up, some settlements with customers, some -- there's always a lot of little things going on underneath, so it's never probably going to be a real straight line.

Okay. Just one more quick one here. On regional and business jet aircraft sales up 7%, if you said this and I missed it, I'm sorry, just want to know if you could break out a little bit of a comment here on what you were seeing on business jets?

Probably nothing unusual. I mean, business jets has still been relatively steady. We're up 7% for the quarter, we're down 2% year-to-date. Overall, the trends has been pretty flat, no expectation -- our expectation is not any different for the fourth quarter either.

And moving on, we have a question from Robert Stallard of Royal Bank of Canada.

On your new aircraft programs, you noted that sales are up 20% year-on-year. I was wondering if you can give us any color on perhaps what the biggest contributors there were in terms of growth rate or overall volumes. And in relation to that, does the reduction in the 747-8 rate have any material impact on you?

So there's no question. Just to clarify, the new programs we quantify as the A350, the A380, the 787 and the 747-8. No question, the 787 drove the sales increase, and that was as expected as Boeing continues to ramp up towards their 10 per month rate that they've said that they're trying to hit by the end of the year. With respect to them dropping from 1.75 to 1.5 aircraft per month on the 747-8, it certainly will flow down to us, but it's a small number.

Okay. And then as a follow-up on what you're calling the legacy programs and this issue of destocking, what gives you confidence that we'll snap back to normal on the 1st of January and, in fact, that the OEMs are heading full rate, wouldn't it make sense to carry on maybe destocking and taking some inventory out of the chain?

So I don't know that we said we've really seen destocking in the legacy aircraft for commercial. We believe our build rate is pretty well aligned with what the aircraft build rate is, so we will continue to monitor it. As you know, we ship to many subs and not just Boeing and Airbus for the narrow bodies, and depending on where that fits in the supply chain, there could be ups and downs here and there. But again, we watch that, we monitor that and we try to make sure that it doesn't get out of line to prevent -- to present a problem downstream with the supply chain.

Okay. And then just finally, Wayne is probably going to yell at me again for trying to talk about next year. But on the defense side of things, UTX and Sikorsky is saying some pretty negative things about their expectations for next year this morning, but you seem to be quite confident that defense can remain steady and slightly up next year. What sort of programs would you be pointing to, to give you that confidence? I imagine A400M, for example, would be part of that.

Correct. And I would even say -- I was going to say some of the Sikorsky programs until you mentioned that. But we still think Space & Defense, you look at the broad base of programs we're on, we're on over 100 programs. It's not just the U.S. It's Europe, it's India, it's Korea, it's China.

Well, and I'd also point out that it's not all U.S. government. It's global. It's -- U.S. government make up between 50% and 60%, so the other continues to go strong.

But we said we expect single digits for a while, and we continue to believe that.

And we'll go next to Mike Sison of KeyBanc.

Just wanted to understand, you did sort of suggest that the destocking that you noted isn't really hurting you, but maybe it's impacting a little bit in the fourth quarter. So when you narrowed your range for sales this year, is it primarily destocking or is that more maybe Industrial-related than anything else?

I think from my perspective, it's as much driven by Industrial as anything. We have our eyes open to the destocking and what might happen. We believe there may have been some on the JSF. But again, given our mix and breadth of products in rotorcraft continuing to be up, it really wasn't felt strong.

Okay, got it. And then just in terms of your sales growth this year, can you maybe give us a thought of how impactful maybe the A350 was thus far and maybe how much more impactful it can be next year?

I think the short answer is it'll be more impactful next year. We haven't gotten into given specifics on the exact sales for the A350, but we do expect it to start becoming much more meaningful number next year. But it has helped the growth this year as well.

Okay. And then just last question on, when your competitors sort of suggested a sluggish outlook for their rotorcraft business, any update there on in terms of what you think you'll see over the next couple of quarters in terms of the momentum in that business?

Well again, we just reiterate the breadth of our offerings. The fact that the platforms we are on, there's pretty significant secular penetration in the new programs. So it's -- again, we just feel good about the mix and the breadth we have to continue that single-digit growth going forward.

And moving on, we have a question from Gautam Khanna of Cowen and Company.

So just to follow up quickly on the rotorcraft question. Are you guys seeing any weakness on the retrofit side of that market?

So when you think about the product that we provide, the materials we provide to our broad range of customers, we basically do not have great visibility on whether or not our material is going into a new blade, a retrofit blade or an aftermarket blade. So we basically have those lumped together and do not have a lot of visibility.

And your point though is you're not seeing any weakness incrementally? Is that fair?

That is fair.

Okay. Can you -- Wayne, would you mind commenting on which quarter you expect depreciation to step up in '14? And I think you even mentioned previously, it could be sometime late in this year. And how much that might be, just so we're not blindsided when it comes through?

Yes. So Gautam, we'll see in the fourth quarter this year, we'll -- approximately, we will have about a $2 million bump up from the third quarter run rate that will obviously carry forward in the next year, but we'll give more guidance on next year in December.

But we should expect another incremental step up at some point next year, correct?

Correct. That's correct.

Okay. And could you also elaborate a little bit more on where there might be destocking. Is there any -- is it broad-based across the intermediaries you supply to in the Boeing and Airbus supply chain, or is it kind of 1 or 2 customers that are subcontract manufacturers specifically that might be destocking?

So again just to reiterate, we have not seen a lot of destocking take place up to this point in time. We have our eyes open. Obviously, we see rates going down on things like V-22, so you have to ask, is that destocking, or is that just the rate coming down as predicted. So there's really -- we can't elaborate any more than that.

Okay. And could you give us some color on when you might expect the 777X composites down selector or contract announcement of what your position will be on the 777X?

So we really don't like to comment and get ahead of our customers on development programs. I can just say, whenever there's a new program, a new wing or a new engine that we're working it, as we are with the 777X. So last I knew, I don't believe Boeing has officially launched the aircraft yet or provided dates. So we'll wait for them to launch and then we'll work closely with them to try to win more than our fair share.

How quickly after the programs typically are announced do you have a sense for your position?

Well, it would depend by program. But typically, the solutions are being worked well in advance of the official launch date, which they are here as well. So it depends on what program. I really wouldn't want to get ahead of Boeing and give you an idea on when they're going to firm up contracts.

Okay. And last follow-up to Wayne. I'm sorry, maybe I missed this, but in your comments on the $2 million step-up in the fourth quarter on depreciation, I mean, should we think about the next step-up being kind of similar on a per-quarter basis so that we're going to net something close to $15 million year-to-year incrementally on depreciation?

Yes -- no, we'll -- Gautam, I'd wait till December, we'll give you a little bit of guidance there, but it's not necessarily always going to be that type. It just depends on what assets come online at the same time.

But your point is, the 23% incrementals are net of all this, and...

Yes, correct. Absolutely.

Yes.

And we'll go to our next question from Greg Konrad of Jefferies.

Just a quick question. Just to go back to Boeing, they've announced the partnership for success and when we look at your operations, you've done really well at driving incrementals. Do you view this as an opportunity? And do you see any opportunities out there for stuff such as JVs or ways that you can work with Boeing?

So we're always working with Boeing on new programs or working to help them meet their cost objectives. Their Partnering For Success program is no different. We stay close with them to identify opportunities and supply-chain efficiencies, alternate materials and solutions or leveraging assets with increased volumes. Don't forget, our business is very capital-intensive, our ROIC is in the 14% range, which it needs to be to support the capital investment that we have going forward.

And just in terms of some of the new engine programs, are you seeing any meaningful volumes on those programs? And then just a follow-up to that, any type of indication of your position on the Leap-X?

So when you talk about the new engines, I assume you're talking about the Leap and the geared turbofan Pratt & Whitney's competing engine, which are going on the NEO for Airbus and the MAX for Boeing. We are working with both, both for engines, blades and engine containments, as well as nacelles and structures. We did announce earlier this year that we had reached an agreement with Safran to provide our fiber for the containment cases and the fan blades for all the LEAP engines. So we love our positions there, we like the engines and nacelle business and it's a big part of where we're going in the future.

And moving on, we will go to question from Yair Reiner of Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: I don't want to beat this -- a dead horse, but I just want to make sure I understand. In 3Q, the numbers do not reflect any kind of inventory reduction but are pretty much reflective of the build rates at your customers?

Correct. If you look at our, particularly, Commercial Aerospace, if you look at our sales there and you look at the build rates that our customers have talked about, our sales are very much in line with those build rates. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay, great. And then can you quantify for us again what your dialing in, in terms of the anticipated drawdown in the fourth quarter?

We won't answer specifically, Yair. It's more reflective in our year end -- in our guidance for the year. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay. And then you kind of touched on this, but if I look at your military programs, you mentioned the V-22 is going to be coming down in rate, as will the C-17. When do you expect that to start flowing through to your orders? Is that something that's going to -- we're going to see in 2014 or more in 2015 time frame?

Well, with respect to V-22, we're already starting to see a little bit now. I mean, if you look, for us, the peak was about 1 year ago and the sales this quarter were probably 20% lower than they were 1 year ago. We expect more reductions going forward. And ultimately, I think for 2014, it's probably half what it was at its peak. With respect to the C-17, always have 1 more year in it and I can never remember which 1 more year is left. But I think '14 is probably down a little bit from '13, but I cannot remember on the top of my head when it goes away. But we'll talk about that in December. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then just one more question on inventories. Do you expect any kind of correction in terms of the 787, or do you think that right now, you're pretty much in line with what Boeing is actually using as factories?

So we still think we're aligned. We -- again, we're not going to get ahead of Boeing, but I think they're reporting next week and wouldn't surprise me if they give an update on their 787 plans going forward.

And we'll take our next question from Ken Herbert of Canaccord.

Just wanted to see if I could dig a little bit further into the incremental margin and the improvement you saw year-over-year in the operating performance. How -- is there any way you can parse that out with volume versus, obviously, a lot of the efficiencies and everything else you've done across the organization as we think about that improvement?

Well, I'd sort of -- I'd break it, Ken, in sort of 3 buckets: one, volume always helps; second, we have made lots of operational improvements and we're working hard, continuous on that and we expect it; and third, we do have a sales mix, and that our -- and thus, our wind sales, in particular, we've always said our lowest margin, not necessarily a lowest return on capital, but the lowest margin percentage. And so when you're swapping aerospace sales for wind, that mix looks good. With respect to leverage, when sales increases are only up 4% or 5%, you got that mix switch, it makes leverage look pretty darn good. So part of this quarter and even the year-to-date leverage is -- it's a little tough to look at the numbers with that level of sales growth.

Yes, okay. So if you were to x out wind or the Industrial segment, again, you'd probably be -- when you think about volume and efficiencies sort of split evenly there, or is there one that's really been a bigger driver?

Yes, I'm not sure I can quantify it exactly, but both are contributing.

Okay, great. And then, just again on the sales within the rotorcraft and Space & Defense in general, are you seeing any help from commercial rotorcraft? I know it's not a big part of the business, but is that anything that's been particular source of the upside this year?

Yes, I was going to say, I can't remember the split exactly between commercial and military and sometimes, it's not obvious to us, on materials, which one it's going to. But I think they, for the most part, are growing evenly. I'm not sure I'd characterize one more so than the other. The only exception, just to be clear, is we do put the V-22 in helicopters, and so if you pull that aside, the rest of it looks pretty -- nothing obvious to report on.

And we will hear next from Chris Kapsch of Topeka Capital Markets.

Totally different subject. I was wondering if you could comment a little bit on the recent acquisition of Zoltek by Toray. A couple of things, I mean I understand having looked at that company in the past, their assets are obviously different. They're designed to produce large tow fiber and therefore, only applicable to industrial applications. And the question would be -- a couple of things. One is, do you have knowledge of those assets? Is there any way that this could be retrofit for Toray to convert that to Commercial Aerospace-grade fiber? And then more generally, just thoughts on how, if at all, that acquisition may change their competitive landscape? And then one of the things they're talking about obviously is an investment there to capitalize on growth in industrial fibers as it penetrates applications like wind and automobile. So I'm just wondering if -- with -- on the subject of auto, it's been talked about for a long time, if that's something you're addressing and does this big Toray investment in Zoltek have changed the way you're thinking about that opportunity longer-term? So just some thoughts on that transaction?

Sure, Chris. So I'm sure you know that we have a long relationship with both Toray and Zoltek. Toray, we compete with. We supply to them and they supply to us. So we have a supply -- supplier arrangement, as well as a customer arrangement with them. Zoltek, as you mentioned, they participate in aircraft brakes, and then their assets are for large tow carbon fiber, which primarily support wind and the Industrial segment, which we do not compete in. So I would view Zoltek as a supplier today. I would continue to view the Zoltek-Toray combination as a supplier going forward. With respect to what and how they treat the assets and what they do with them, I guess, I'd let you get that from Toray and/or Zoltek. Automotive, everybody is talking about automotive. That market's well served. It's -- the economics are the challenge today. When you look at carbon fiber and composite solutions versus steel or even aluminum, there's quite a gap that exists, so you've primarily seen penetration in F1 or premium type cars. Now certainly, as regulations stiffen and push down more requirements on emissions and weight management, there'll continue to be growth in the automotive sector. So we keep our eyes on it, we have an Industrial group that certainly know the competitive landscape, and again, we continue to look for our niche which happen to be sustainable competitive advantage areas.

Got you. Is it -- the use of low-tow or medium-tow fiber in automotive, is it just prohibitively from a cost standpoint, or is it overkill to use the better quality fiber for those applications, or can you play there with some -- with the higher-grade fiber?

Well, I think when you look at an industrial grade fiber, a large tow, the mechanical performance is lower and the cost is lower. So as the property's improved and you go down to low tow, the economic gap becomes even bigger. So again, right now, I think the Industrial tow play is trying to make an entrance which, from my perspective, is going to be very limited opportunity for low tow.

And we do have one last question in queue. And we have a question from Michael Derchin of CRT Capital Group.

Some of the Japanese suppliers expressed some concern when Japan Airlines chose to order the A350 recently, concern related to potentially because of the historic relationship between the 2 countries and the industrial implications of that, that they may be losing some business overseas. Do you have any comments on that situation?

So you're reading the same material I'm reading it sounds like. I think there's a lot of speculation out there on what the response will be. Obviously, we align and partner with both Boeing and Airbus, so it's win-win for us. We certainly like our position with Airbus and our content on the A350, and are excited about the incremental orders that JAL placed. But as far as how the supply chain will evolve, again, I'll defer to Boeing's call next week.

And do you have any update on just the content on the A350? Is it still roughly $4 million per plane?

It is. $4-plus million.

And with no further questions in the queue at this time, that does conclude our call. And we would like to thank everyone for their participation today.