Hexcel Corporation (HXL) Q2 2015 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Hexcel Corporation Second Quarter 2015 Earnings 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. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Great. Thanks. Good morning, everyone. Welcome to Hexcel Corporation's 2015 second quarter earnings conference call on (sic) July 21, 2015. 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 2014 10-K, our second quarter 10-Q, and last night's press release. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be re-recorded or re-broadcast 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; and Michael Bacal, our Investor Relations Manager. The purpose of the call is to review our 2015 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, then I'll give it back to Nick for some final comments before we take your questions. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thanks, Wayne. Good morning, everyone, and thank you for joining us today. As you have seen in last night's release, we delivered another record quarter with second quarter sales of about $476 million, up 5.4% in constant currency from last year. Our operations continued to perform well, delivering second quarter operating income of almost $91 million with margins of 19%, up 170 basis points from last year's period. Our adjusted diluted EPS of $0.63 was 14.5% above the second quarter of last year, continuing great conversion on our topline sales growth. For the first half, sales of $948 million were up almost 6% in constant currency from last year. Operating income in the first half was $173 million, with margins of 18.3%, up 160 basis points from last year's period. Our first half adjusted diluted EPS of $1.21 was 15.2% higher than 2014's first-half and reflects the excellent job we have done converting our sales growth. Now let me turn to our markets. As usual, I'll discuss year-over-year comparisons in constant currency. As you are aware, there was a significant strengthening of the dollar against the euro and the British pound this quarter as compared to last year. For example, if you compare the second quarter of 2015 versus Q2 2014, the dollar on average was about 19% stronger than the euro and 9% stronger versus the British pound. This influences our results, and some of this impact is not intuitive. But the bottom-line is that our sales translate lower, while our income increases and so our margin percentages improve. Our sales growth this quarter was led by a 7.7% constant currency increase in Commercial Aerospace revenues versus 2014 as Q2 sales totaled almost $325 million. For the first half of 2015, Commercial Aerospace sales are up 8% over the first half of 2014. Total revenue from new Airbus and Boeing programs, which include the B787, A350, A320neo, and the B737 MAX, increased more than 30% in the quarter as compared to Q2 2014, primarily driven by the A350. Airbus and Boeing legacy sales declined slightly as compared to the second quarter of 2014. Sales to Other Commercial Aerospace, which includes regional and business aircraft, were about 4% higher in constant currency compared to last year's quarter. Space & Defense sales were $88 million, flat as compared to the second quarter of last year. Our top 15 programs account for about 70% of our Space & Defense sales and in aggregate are nearly 10% above the first half of 2014, as growth in these programs helped offset reductions in programs that are winding down or reducing build rates. In total, we are on more than 100 programs, and the decline in the non-top 15 sales has come from smaller programs with less predictable ordering patterns. Commercial helicopters, which comprise less than 10% of Space & Defense sales were about 20% lower than sales in the comparable quarter in 2014. For the first half, sales to the Space & Defense market are down almost 2% in constant currency from 2014's period. Year-over-year comparisons for the second half of the year will be more difficult as Space & Defense sales set a record in Q4 2014. Accordingly, we now expect Space & Defense constant currency sales to be slightly down for the year. In Industrial markets, sales for the second quarter were $63 million, up 1.8% year-over-year. Wind energy sales were up over 10% for the first half of the year compared to 2014 and the rest of Industrial was up slightly on a constant-currency basis. Now, let me turn the call over to Wayne to discuss some of the financial details. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Thanks, Nick. Gross margin of $139 million for the quarter was 29.2% of sales as compared to 27.5% in the second quarter of 2014; strong results for both quarters. The strong dollar contributed about 90 basis points to the 170 basis points improvement in gross margin percentage. For the first half of the year, gross margin was $281 million or 29.7% of sales as compared to $258 million or 27.7% of sales in 2014. For the first half, the strong dollar contributed about 80 basis points to the 200 basis points improvement. We're quite pleased with these results as our operations teams remains relentlessly focused on continuous improvement. For the quarter, SG&A expense was about $38 million, up 6% in constant currency from 2014's period, as we continued to add infrastructure to support our continued growth. Research and technology costs of $10.4 million in the quarter were $0.5 million lower than the comparable 2014 period, but slightly higher in constant currency. Due to the timing of operational initiatives and continued investment in technical innovations for new products and process improvements, our research and technology expenses are expected to be higher in the second half of 2015 as compared to the first half. Our operating income as a percent of sales was 19% this quarter. This is an increase of 170 basis points from 17.3% in the same period last year. Exchange rates contributed 120 basis points to the increase. For the quarter, operating income leverage was about 30% on the incremental sales if you adjust for the impact of exchange rates. For the first half, operating income leverage was 26% on the incremental sales after adjusting for the exchange rates. Our Composite Materials segment reported an 8% increase in external sales for the quarter on a constant currency basis, and the Engineered Products segment was down 4% on a constant currency basis. Engineered Products was impacted by the end of the C-17 program and the helicopter sales. For the quarter, the Composite Materials segment had an operating income margin of 23.2% as compared to 21% in 2014. And the Engineered Products margin was 14.1% in 2015 as compared to 16.1% in 2014. Engineered Products was impacted by the lower sales and the startup of new programs and work packages. Our Composite Materials segment is significantly more capital-intensive than Engineered Products, so higher operating margin is required to achieve the same returns on invested capital as Engineered Products. Our effective tax rate for the quarter was 30.6%, down slightly from last year's effective rate of 31.3%. Our year-to-date tax rate is 23.6%, and as a reminder, it includes first quarter benefits of $11.6 million, primarily related to the release of reserves for uncertain tax positions, which contributed approximately $0.12 to our reported GAAP EPS in the first quarter. There was no cash impact this year from the release of the reserves. Excluding these benefits, our first half effective tax rate would have been 30.5%, in line with our 30.5% expectation for the full year. For the first half of the year, free cash flow was a use of $116 million compared to a use of $9 million in 2014, primarily reflecting higher capital expenditures and working capital usage. Our working capital usage was particularly high, primarily due to the timing of customer receipts and our payments. Our working capital is seasonal, as receivables and inventories tend to wind down at year-end and wind up in the first half. Our receivables were about $66 million use of cash for the first half as compared to use of about $50 million for the first half in 2014. In general, we do a great job of collecting our receivables and we continue to maintain our past dues at low levels. Our inventories of our use of cash for the first half of $48 million as compared to a use of $24 million in the first half of last year. We've also added some strategic inventories for the A350 and other programs to ensure we can safely meet customer requirements during the ramp up. We would expect the safety stock to be in place until we're fully ramped up and at a steady state. Cash payments for capital expenditures were $166 million in the first half, as compared to $119 million in the 2014 period. On an accrual basis, our capital expenditures were $141 million for the first half. During the quarter, the company did not repurchase any stock. We have $100 million remaining under our currently authorized share repurchase program. As a reminder and follow-up to Nick's comments, we do benefit from a strong dollar. When the dollar strengthens against the euro and the British pound, our sales translate lower and our income goes up. If rates held near current levels, that would be an EPS benefit of about $0.05 for the year, about a $0.01 more than from our guidance at the end of the first quarter. As we're about 80% hedged for the rest of the year, it will take a 7% exchange rate movement to impact our 2015 earnings by a $0.01. Finally, as previously announced, Hexcel's board of directors declared a $0.10 quarterly dividend payable to shareholders of record as of August 3 with a payment date of August 17. Now, let me turn it back to Nick for some concluding thoughts on our guidance before we take your questions. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thanks Wayne. Our continued growth and solid operational performance leads us to maintain our adjusted EPS guidance range of $2.33 per share to $2.43 per share, as compared to the guidance we started the year with of $2.26 per share to $2.38 per share. On a constant currency basis, our view of 2015 sales has not changed in total. However, when you adjust for the impact of the strengthening dollar and the reduced translated values of euro and pound denominated sales, we need to adjust the top-end of our sales range, and now expect sales of between $1.85 billion and $1.9 billion. As compared to our original guidance in January, exchange rates are now expected to reduce our reported sales for the year in the neighborhood of $70 million. This has a positive impact on our operating and net income. As Wayne mentioned, exchange rates will add about a $0.05 of earnings as compared to our January guidance, which is reflected in our updated guidance. We continue to expect between $260 million and $290 million for accrual-basis capital expenditures in 2015. We do expect a strong second half of cash generation and to generate between $10 million and $50 million of free cash flow for the year. We remain confident in our operational focus and continuous improvement mindset, while working to position the company for the forecasted growth ahead as we support our customers by investing in technology, capacity expansion, manufacturing innovations, and our people. We'd now be happy to take your questions.

Thank you. Our first question is from Steve Cahall from Royal Bank of Canada.

Yeah, thank you, good morning. Nick L. Stanage - Chairman, President & Chief Executive Officer: Good morning, Steve.

Maybe first just a question on sales, so you talked down the Space & Defense sales for the year, if we think about where that's offsetting since you didn't change the organic sales number, are you seeing some tailwinds in some other parts of the business or how do we think about that balancing effect? Nick L. Stanage - Chairman, President & Chief Executive Officer: Yeah. Thanks, Steve. We do see some balancing; as you noted Wind was strong, little bit stronger than we expected. And overall, we still expect Industrial to continue the year well. So that's going to make up some of it, and Commercial Aero continues to run strong with rates continuing to go up. So, overall on a constant currency basis, we're comfortable holding our sales.

Okay. And then just a second one on the earnings side of things, I know it's a bit simplistic, but with the FX providing the translation headwind on sales, usually we've seen them in the past come with some support at the EBIT line or the earnings line. So, how come we're not seeing that or is that benefit being absorbed somewhere else? And relatedly I think in Q1, you talked about some input tailwind that you have, did you see any incremental input cost tailwinds in the quarter and for the balance of the year? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yeah. So, Steve, on FX, remember we're about 80% hedged for the year, so; whereas exchange rates movement hold down, the sales go down a little bit more, but not much impact to the bottom line. We did increase the impact of the FX from $0.04 for the year to $0.05 for the year but that's about it. In terms of input costs, still sort of similar to the first quarter in terms of the impact and so, we're still getting a minor tailwind from that, but we had expected that in our guidance.

Thank you. I'll get back in the queue. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Thanks.

And moving on, we'll hear from Howard Rubel from Jefferies.

Hi, thank you very much. A couple of things. First for Wayne. How are you thinking about the hedge for 2016? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: So, Howard, we roll-in our hedges over a 10-quarter period – look out a total of 10 quarters. So, we're about 50% to 60% hedged for 2016. We sort of give ourselves a range in which to hedge, then we try to target the middle, but if we think the rates are good, we'll hedge towards the high end of it and it is pretty tempting to stay towards the high end right at the moment in terms of where we're at.

No, I get it. I mean I think it's hard to figure out where rates are going to go, but I'd figure what you're saying is you would just want to stay conservative in your outlook? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yeah. Correct.

I'm sorry. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Go ahead.

You also had a fair amount of a cash usage in the first half. And I understand the safety stocks, but the receivables seemed little high given the currency. Are some of your customers being a little – it's unusual for some of these big customers to be slow to pay, was it calendar or something else? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Well, I would just say, it's really just timing of the calendar. I mean, we do have a number of different payment terms from our customers. I'd say just to be clear, our past dues have historically been great, and they continue to be great – excuse me, great being low. Our customers do pay on time. So, it's not a collection issue, it's really more about the timing in which customers have to pay us, and when our sales occur during the course of the quarter. Nick L. Stanage - Chairman, President & Chief Executive Officer: And our year-over-year days sales outstanding are comparable. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yeah, correct. Nick L. Stanage - Chairman, President & Chief Executive Officer: So, we were down extremely low at the end of 2014. So, there's a slight incremental increase, but overall we're pretty much in line.

Thank you, Nick. And then, just Nick, the last question, how do you think about what kind of opportunities you have for win rates on new platforms today. And sort of do you have a scoreboard of where you stand versus where you'd like to be. And could you elaborate on that, please? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, I guess, I'd say our scoreboard is our strategic plan process which we just went through three days of intense discussions over the past few weeks. So, I feel better, every year I go through STRAP (19:33) process, in looking at the technology that we've been able to develop to look at how we're aligned with customer current needs as well as their future needs, whether it provides mechanical performance improvements, weight reduction or processing improvements. So, I am very bullish on our opportunities to capture content on new programs, new reengining platforms, new industrial opportunities across the board. So, I'm very bullish, Howard. That's not a score of a 1 to 10, but I'd put it towards the high end.

And you can't really elaborate at the moment on where some of the things are that you might be able to be close? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, I never like to get ahead of our customers and we basically communicated when it's clearly defined and understood. So things like the A320neo and B737 MAX and our communication to get 50% more contact, I can tell you, we're well on pace to do that, although we're still in competition for various opportunities on both applications. So, I hope you understand that, it would be inappropriate for me to give you a number now because I'd only set ourselves up to be wrong.

I get it. Thank you very much, Nick. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thank you, Howard.

Our next question comes from John McNulty from Credit Suisse. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Great. Thanks for taking my questions. So a question on the wind business, if I'm kind of doing the sequencing right, it looked like first quarter was up 15% and second quarter was up about 5% I guess, and I know the business is relatively lumpy, but how should we think about how that business should progress throughout the rest of 2015? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, as you know, John, Vestas is our largest customer in the wind segment, and if you look at their backlog, which I believe is over 8 gigawatts today, and if you look at the order intake that they received in the second quarter, they're doing quite well globally. We're aligned with them. So, I believe we're going to continue to do quite well with them. Now, what's that do for us overall? We still are confident we're going to be in the mid-single digits in total wind, so basically modest growth in the second half. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Just as a reminder, John, the first quarter of last year was by far the lowest quarter, and so the comps get tougher once we get going during the course of the year. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Okay, sure, no, that's definitely helpful. And then a question on the cash flow, you took down the top end of that. I guess, I'm wondering what that was? Was it some of the inventory build around the A350 or what kind of took down that top end of the cash flow guide? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, you've hit the reason on the nose. Basically, CapEx is on plan. We went through receivables, which pretty much are going to be where we expected them. On the inventories we have several programs internal as well as things like the A350 that we did have plans to put inventory in place, and we're just going to have a little bit more of that than we expected, so that's why we brought the top end down. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Okay. And then with regard to those inventories and the build needed to kind of prepare or I guess get the backlog where you wanted to for the A350 and some of the other platforms, are you where they need to be now or do you think this continues to creep as we go into 3Q and 4Q? Nick L. Stanage - Chairman, President & Chief Executive Officer: We feel very comfortable that we're very aligned with what Airbus is doing on the A350 and what materials they need to actually do the production builds. Now, we recognize that deliveries are nowhere as near where production rates are today, but that's to be expected in the initial launch and ramp-up of a program. So we're comfortable. As I said before, our materials are basically in freezers. So we have very good line of sight of where the materials are and what quantities of material. And in our models we have sanity checks where we look across the spectrum of programs to make sure that the demand aligns with production rates and we don't get out of balance. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Great. Thanks so much for the color. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: John, if you're just specifically asking about the safety stocks, we're not expecting those to go up, if that's what you're referring to. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Yeah. No, that's exactly what we're looking... Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Right, and those inventories aren't the ones in the freezer. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker): Okay, thanks very much. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Just to be clear.

Myles Walton from Deutsche Bank has our next question.

Thanks. Good morning. Just to follow up on that one, maybe Wayne, so the safety stock as it relates to what you've incrementally added to the guidance, was it because of what you're seeing in the supply chain or preemptive in some way? It sounded a bit unplanned and maybe a bit more preemptive of maybe something you're seeing. Can you just elaborate a little? Nick L. Stanage - Chairman, President & Chief Executive Officer: Yes, basically nothing has changed other than Airbus and our key customers have stayed on schedule. And the supply chain is very complex with materials moving between countries and between continents .So, we ended up putting a little more inventory in place just to provide us assurance and protect our customers, which we fully intend to bring out and continue to work as we increase velocity going forward.

Okay. Okay. And then a clarification on the R&D and I think the initial guidance was 8% to 10% growth in R&D spend and I know you said it's going to be up in the second half. Is it still in that 8% to 10% range or is it more moderate given FX or others? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Our R&T is a little lumpy because we have key programs, development programs as well as production productivity programs where we run campaigns and we're doing that in the second half of the year. So that drives some of the lumpiness. At the end of the day, we'll probably be closer to the 8% versus the 10% as we see the plans evolving.

Okay. And the last one for me, just on capital deployments both on M&A commentary and/or barring no M&A what your look is for share repurchase. Certainly in January during the Analyst Day it sounded like, Nick, you were willing to get ahead of where the cash flow would actually arrive. So if you can just update us on your thinking there? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, just to put it in context a little bit, we ended last year at about 1.0 leverage. We ended June at about 1.2 leverage. So we knew we were going to have a big cash usage in the first half of the year. Having said that, we have internal targets that we continue to monitor and evaluate our growth opportunities, i.e. putting in capacity in development for organic growth, then M&A and then return to shareholders through either stock buyback or dividend. So we pretty much knew where we were and balance those options as we proceed through the year. Now, second half of the year we expect to generate significant cash and I would expect to provide you updates at the end of Q3.

Okay. Great. Thanks. Nick L. Stanage - Chairman, President & Chief Executive Officer: You're welcome.

And our next question comes from Gautam Khanna from Cowen & Co. Gautam J. Khanna - Cowen & Co. LLC: Yes, thank you. Follow-up to one of the questions earlier on the A350. Nick, are you seeing any perturbations within the subcontract manufacturing base that you supply to? Were some guys were away ahead, some guys were way behind. Any sequential changes, because if you recall Alcoa was commenting how they took down their numbers on A350. I just wondered if you're seeing anything programmatically that worries you? Nick L. Stanage - Chairman, President & Chief Executive Officer: Yes, obviously, there's a pretty complex supply chain, and we have suppliers or customers that are serving the A350 that are at various stages of the production cycle. So some maybe on one build number, where others depending on, when it's used in production, might be on a different number. To answer your question, we really have not seen anything unusual or abnormal. Gautam J. Khanna - Cowen & Co. LLC: Okay. Nick L. Stanage - Chairman, President & Chief Executive Officer: It's part of what our team continually look at to make sure we stay aligned and that there isn't inventory building in a specific location or a specific region where we might get a surprise. So as of right now, it looks on track. Gautam J. Khanna - Cowen & Co. LLC: Okay. And just if you could calibrate us on some of the sequential things we should look for. The rate on the A350 in aggregate does it move up in the third quarter or the fourth quarter and if you could remind us on depreciation step-ups, how we should model those in and if you could quantify kind of first half versus second half? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, I'll take the A350 ramp. A350, the way we look at it and the way we plan and forecast is it's going to be a gradual ramp. So, again, given that we're delivering products roughly six months in advance of the time it's needed for production parts or production assembly, we're probably approaching the five per month as Airbus stated they would be at the end of the year. So over the next few quarters as they ramp up to 10 per month by 2018, I would expect that to be gradual and just a continuous quarter-over-quarter increase. Having said that, there's some seasonality with summer vacations, but overall delivery by half and by year we'll be fairly even. On depreciation, I'll let Wayne... Gautam J. Khanna - Cowen & Co. LLC: Okay. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: So Gautam, I'd say overall we're looking at the range of a $10 million increase in depreciation, and just to confuse you that's basically a constant currency number and it will step up a little bit each quarter. Gautam J. Khanna - Cowen & Co. LLC: Okay. So would you calibrate it like $7 million in the second half versus $3 million in the first. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yes, it's what it's going to take to get there. Gautam J. Khanna - Cowen & Co. LLC: (30:46). Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yes. I mean that's not above (30:47) $5 million Gautam J. Khanna - Cowen & Co. LLC: Okay. Okay. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: But that's in the range. Gautam J. Khanna - Cowen & Co. LLC: Thanks a lot guys. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thank you.

And next we'll hear from Ron Epstein from Merrill Lynch.

Hey. Good morning, guys. Just how about maybe bigger picture question, Nick, when you think about some of the changing technology in the world of composites, I mean how do you think things like the silicon carbon fiber and continuous ceramic fiber impact your business, and are they potentially areas where you'd want to look to do some M&A in the future? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, the materials you've referenced, CMCs are really high-temperature capable materials and we certainly are very aware of that technology and very aware of those in the marketplace that are doing that. How that influences our position? We continue to invest and focus on material capability. So driving our material so that it can tolerate higher temperatures basically allows us to penetrate further in the engine, which provides more growth opportunities. So, we certainly look at the M&A landscape and look at the technologies that could enhance our portfolio and growth profile, and those are certainly areas of interest.

Okay, great. And then maybe just one quick more follow-on kind of question. You mentioned in the press release earlier that helicopters were down about 20%, I guess, year-over-year. Was that driven by large helicopters, midsize, what segment of the market was it more sensitive to obviously to what's going on in energy markets or if you can give us any color on that? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, that 20% decline was on our civil helicopter business, which as a reminder is about 10% of our space and defense sector. So it was heavily driven by the oil and gas industry and the challenges that that segment is under.

Okay, great. Thank you very much.

Moving on, we'll hear from Steve Levenson from Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: Thanks. Good morning, everybody. Nick L. Stanage - Chairman, President & Chief Executive Officer: Hey, Steve. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: I know you're not currency traders, but have you thought about adjusting the way you do your hedges, given the strength in the dollar right now? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: We have that discussion, Steve, pretty often, to be honest. But at the end of the day, we've chosen to stick with our current plan, but it's something we do think about a lot. And it is tempting, but you never know what the rates are going to be. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: Okay. Thanks. Second, one of your peers had a problem at a honeycomb plant. Is there an opportunity for you to step in and fill some of the need there? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, there's a couple. Are you talking about the recent one or are you talking about one... Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: Zodiac. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yes. Okay. So Zodiac would be it. All right, go ahead. Nick L. Stanage - Chairman, President & Chief Executive Officer: Yes. We provide materials to Zodiac, and we're aware of the fire they had. Actually the exposure they had, didn't turn into a fire. And our teams are working with them to help them through that. So there could be opportunities. I'm more interested in helping them, make sure they can maintain their deliveries and make sure that they don't cause any issues in the space. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: Okay. Thanks. And last can you give us an update on Formax, what's going on there, if you have a timetable for buying the other half? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, Formax is -- just as a reminder, we acquired 50% of that. Our teams are integrated with them and working new growth programs. Really, not in a position to give you our plans on when we might acquire the other half, but it's certainly in our M&A pipeline and we're thinking about the right time to do that. So, we'll let you know as soon as we make that move. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc.: Okay. Thank you very much. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thanks, Steve.

Our next question comes from Ken Herbert from Canaccord.

Hi, good morning. Nick L. Stanage - Chairman, President & Chief Executive Officer: Good morning, Ken.

Nick and Wayne. Wayne, with the exception of last year, you typically for seasonal reasons, obviously, see a step down in the operating margin from the second quarter to the third quarter and then again sometimes in the fourth quarter. Are you expecting this year, I mean, it seems like the guidance would imply it, but are you expecting a similar step down like we've seen in prior years, again with the exception of 2014, as we go sequentially through the third and fourth quarters? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yeah. So historically, we've had probably, I'll say an 80-basis point to 90-basis point dropdown from the first half to the second half, and I do believe we're expecting – if you look at the guidance, it's implied, it will probably be in the similar range.

Okay, that's helpful. And as you look at the guidance, I mean, you've had obviously I know – even when I back out currency, you've had nice sort of teens, it looks like low-teens growth in earnings over the first half of 2014. The guidance implies sort of mid single-digit growth in the second half. Is there anything else – I mean obviously the seasonality is reflected there. Anything else structurally we should be thinking about that's maybe a little different in the second half or is it really just conservatism here as I think about the EPS guidance for the remainder of the year? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: So if you look at our first half to second half, one, our sales, we would expect to be a little bit lower in the second half and that refers to the seasonality we already talked about and that flows its way down plus we will see R&D expenses up a little bit more in the second half as well. Other than that, it's not something that's fundamentally different, it's just a little bit of that.

Okay. But there's no other uncertainty in the business here as you head – or anything you'd identify as any other uncertainty, I mean, you tend to have very good visibility in your market? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Yeah, correct. Yeah, I think the sales drop to the mid-point of guidance is probably, what, $25 million between...

Yeah. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: ...the first half and second half, it's in that range, so.

Okay. And then just if I could finally on the business and regional, you've highlighted I think 4% growth in those markets in the quarter. Any particular programs you would highlight as maybe accelerating or standing out as part of that growth? Nick L. Stanage - Chairman, President & Chief Executive Officer: Gulfstream continues to be strong; second quarter, Bombardier was strong, so there is not one or two programs, it really is across the business.

Great. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: And really, Ken, any one program is just not that big enough to move the needle.

Okay. So I guess Gulfstream and Bombardier explain a lot of the growth then. Nick L. Stanage - Chairman, President & Chief Executive Officer: Right.

Great. Thanks, Nick. Thanks, Wayne. Nick L. Stanage - Chairman, President & Chief Executive Officer: You bet.

Our next question today is from Richard Safran from Buckingham Research Group.

Hi, good morning. Nick L. Stanage - Chairman, President & Chief Executive Officer: Good morning.

Nick, Wayne, I thought I'd give you an opportunity here, I guess, to discuss maybe some of the details of the productivity initiatives you might have ongoing. Want to know in your answer if there's any way to quantify a benefit you're looking for here, what we might look for, and anything you could give on that would be helpful? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, I'm probably not going to make you real happy because I'm not going to give you specific numbers. We're working productivity every day and with growth and the leverage, there is even more productivity that we're after. So with respect to throughput in our production lines, whether you're talking about precursor or carbon fiber or prepreg, we're trying to run more materials through in the same amount of time. We're trying to make sure our changeover times reduce. We're trying to make sure that any scrap and/or lost material is minimized and/or recovered. And again, it's part of how we continue to deliver our 25% incremental margin and leverage on our growth. We're not going to let up on that, and I'm challenging our team every day, not only on the productivity with respect to cost takeout, but productivity with respect to inventory turns and supply chain efficiency.

Okay. And just very quickly here. So, I saw Space & Defense down slightly for 2015. My question though is just about prior comment about expecting a big pickup in the next year or two. Wanted to see if that was still on track? The F-35 program, I think order quantity is below 23% for aircraft delivery next year and then 42% for (40:16). So, given the lead time involved, I was just wondering if we should still expect a meaningful ramp here at Space & Defense, perhaps starting next year? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: So, Rich, as we've given out our long-term guidance, the assumption is that Space & Defense will be in the single-digit growth after this year. We see no reason to change that and as you say, the Joint Strike Fighter will be one of the bigger drivers of that, as well as other new helicopter program. Nick L. Stanage - Chairman, President & Chief Executive Officer: A400M as well. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Correct.

Thank you. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Okay.

Our next question is from David Strauss from UBS.

Good morning. Nick L. Stanage - Chairman, President & Chief Executive Officer: Good morning.

Wayne, I think you said you're 50% to 60% hedged on 2016. Can you give us an idea, I guess, against the euro what your average hedge rate looks like on 2016 now versus 2015? Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Better.

Right, yeah. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: It will be better, it's a good question. We'll probably give guidance on that when we give the 2016 outlook, but it will be favorable, it will be better. But at this time off the top of my head I can't remember exact numbers, but again we'll wait until we'll give 2015 outline for sales. Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, for a couple of reasons, one when we give outlook, we're closer to 70% hedged. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Right. Nick L. Stanage - Chairman, President & Chief Executive Officer: That's one. And two with the rates moving and with the hedges laid in over 10 quarters, it's not going to approach what today's euro exchange rate is, and it's going to be better than it was when we entered the year. So, somewhere in between and to give that number right now really would be premature.

Okay. Fair enough. On A350 and thinking about it from here, I mean, is it fair to think that for the most part this year you're running at a three per month rate and next year you should be at a five a month rate, at least that kind of number for the full year? Nick L. Stanage - Chairman, President & Chief Executive Officer: I think that's probably on the low side. I think if you look at this year, it would be somewhere between three to five run rate and next year would be five plus.

Okay. And 747, the rate decline there, are you now at one a month on 747, if not when would you expect to be? Nick L. Stanage - Chairman, President & Chief Executive Officer: We're pretty close to one per month; I mean, it is coming down a third of a plane and that's pretty much built into our forecast.

Okay, great. Thank you.

Our next question comes from Mike Sison from KeyBanc.

Hey guys. Nice quarter. Nick L. Stanage - Chairman, President & Chief Executive Officer: Hi, Mike.

When you think about Space & Defense, I know your thoughts that it could recover and grow in 2016, 2017, 2018. But, given the last years have been kind of sluggish, what risk do you see in that business growing out longer term? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, just to again remind everybody on this year, we had the C-17 go away which created about $13 million of headwind. It was known, it was defined. We thought we would offset it through other programs, but we're not quite there, especially given the commercial helicopter slowness. If you look at JSF, if something happens, and rates come down or they do not ramp up as scheduled, that obviously would add some headwind, as would the A400M and various other helicopter programs that we're counting on to continue the mid single-digit growth, Michael.

Great. And then one quick one, in Industrial given the backlog you talked about in Vestas, does that suggest the outlook for 2016 and beyond looks pretty good in terms of Wind staying in this mid to high single-digits? Nick L. Stanage - Chairman, President & Chief Executive Officer: Well, again, I don't want to get ahead of ourselves, and we'll provide that guidance when we give the 2016 forecast. But what we see right now, I'm feeling really good about where Vestas is and would expect to communicate some good plans for next year as well.

Great. Thank you. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thank you, Mike.

And we have a follow-up question from Steven Cahall from Royal Bank of Canada.

Yeah, thanks. The first was just on Engineered Products, with the margin down here you talked about some of the new program starts. I was wondering if you can give us an expectation as to how long those run, and when we might see the margin pick up there? Nick L. Stanage - Chairman, President & Chief Executive Officer: So, Steven, the Engineered Products business is, it's a little bit lumpy, and it's a lot different than our material business or making carbon fiber where we have continuous run operations. If you think of Engineered Products, we have many, many programs that are moving, we're working with our joint venture partner in Malaysia, we're bringing programs in as there's new ramps and we're moving some of the higher labor products out to maintain productivity and efficiency. So in that business there is a learning curve, on both bringing in new programs as well as ramping up programs, as we bring in people and put in new tooling and processes to do that. So we're comfortable at the operating income at 14%, obviously offsetting the C-17, which was learned it was at developed rates, and was a very nice margin, some of the headwind we're working to offset.

Okay. And then just one final one, I know you can't say much on a program like LRSB (46:53), but I was wondering if you could tell us if you're in discussions with both teams or if to-date you've largely been focused just with one team or the other? Nick L. Stanage - Chairman, President & Chief Executive Officer: Yeah, I really do not want to get ahead of our customers again. I guess, I would just say as we do, in Commercial as well as Space & Defense, if there is a new platform, a new opportunity out there, whether it's an engine, an aircraft or a modification, you can assume we're working it.

Fair enough. Thanks. Wayne C. Pensky - Chief Financial Officer & Senior Vice President: Okay. Thank you. Nick L. Stanage - Chairman, President & Chief Executive Officer: Thank you, Steven.

And that's all the time we have for questions today. And that does conclude our conference call. Thank you for joining us today.