Good day, ladies and gentlemen and welcome to Hexcel Corporation's Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now introduce your host for today’s conference, Mr. Patrick Winterlich, Chief Financial Officer. Sir, you may begin.

Good morning, everyone. Welcome to Hexcel Corporation's second quarter 2018 earnings conference call. 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. The involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings and last night’s news release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be 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 Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our second quarter 2018 results detailed in our news release issued yesterday. Now, let me turn the call over to Nick.

Thanks Patrick. Good morning, everyone and thank you for joining us today. We posted a solid quarter of revenue growth earnings per share and free cash flow. The business has demonstrated continued cash generation with free cash flow year-to-date increasing approximately $42 million compared to the first half of 2017. For the second quarter, sales of $547 million increased 10.3% year-over-year on a constant currency basis with growth across all three of our markets. Adjusted diluted EPS of $0.75 increased 11.9% year-over-year. Our commercial aerospace market remains strong and continues to grow based on increasing global demand for passenger airline travel. Defense budgets seem likely to continue their upward trajectory led by the U.S. and the world continued to adopt clean and affordable wind power which strengthens our industrial business. The combination of our strong markets and our broad portfolio of leading edge advanced composite materials along with world class innovation positions us well for future growth and free cash flow generation. Now I’ll share some insight into each of our markets and then Patrick will provide financial details for the quarter. As usual, year-over-year comparisons will be expressed in constant currency. Beginning with Commercial Aerospace, key macro trends continue to be favorable including air passenger traffic growth and continued order flow for commercial aircraft which support increasing production rates by our two largest customers Airbus and Boeing. While rising oil prices have generated some concern that there may be increases in airline fares and tamper air passenger traffic growth, high oil prices have historically led to the retirement of older, less fuel efficient aircraft, which then leads to demand for new more fuel efficient programs and that's good for Hexcel. Our advanced composites play a leading role in making aircraft lighter and more fuel efficient. Considering that about a…

Thank you, Nick. I’m going to begin with a review of our markets. As usual, I will discuss year-over-year comparisons in constant currency. As a reminder, currency movements influence our reported results and some of these impacts may not be intuitive. The majority of our revenue is denominated in dollars. However, our cost base is a mix of dollars, euros and the British pound as we have a significant manufacturing presence in Europe. As a result, when the dollar weakens against the euro and the British pounds, our sales translate higher, but our costs also translate higher, resulting in a net headwind to our margins. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategy that lays in hedges over a 10 quarter horizon. As a result, there is a smoothing impact to currency rate fluctuations. The recent trend of moderate dollar strengthening has lessened the expected currency headwind in the second half of 2018 to a smaller degree and is now expected to be 4% or 5% headwind to EPS, a modest improvement from our estimates shared last quarter. Sales of $547 million in the second quarter of 2018 were up 10.3% year-over-year. Our adjusted diluted EPS for the second quarter was $0.75, an increase of 11.9% compared to the second quarter of 2017. Year-to-date the impacts of ASC 606 revenue from contracts with customers is less than $100,000. While there is the potential for fluctuations that may impact quarterly EPS by up to $0.01 or $0.02, as previously stated, we do not feel that the ongoing impact of this standard will be material to our financial statements. Turning to our markets. Commercial Aerospace represented 70% of total second quarter sales. Commercial Aerospace sales of $383 million increased…

Thanks Patrick. We post a solid financial results for the first half of the year and we remain confident for the remainder of the year to reaffirm our financial guidance. Our markets remain strong and we continue to innovate and execute operationally. The transition from an investment cycle to a cash-generating cycle is clear. Our disciplined capital deployment priorities remain unchanged and we are delivering on our commitments to our shareholders. With that, Sabrina, we’ll now take questions.

[Operator Instructions] Our first question will come from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Just on coming out of Farnborough just a lot of press surrounding the M&A. Can you maybe elaborate on potential material for the fuselage and wing and your thoughts for the investment case for composites and just applications as it regards to Hexcel?

Thanks for the question, Sheila. Lots of excitement at Farnborough with from what we perceive as orders exceeding expectations. Obviously, lots of moving parts on the M&A and lots of articles some questioning the market size, some questioning the design configuration. I'm not going to take a position to predict what direction Boeing will ultimately take to position the aircraft. What I can say is we continue to work with our customers Boeing included providing materials and solutions next generation solutions for primary structures, for secondary structures engines and nacelles. And again we remain confident if and when a new plane is launched, we will get more than our fair share and it will be more composite intensive than the legacy aircrafts that are flying today.

I asked Patrick about that I try to you get on the line. And then in terms of aerospace, can you just elaborate on what's going on in the other aerospace subdivision a little bit more with regard to regionals in biz jet?

Well, again, the business jet market has been very robust as we saw last quarter and this quarter was no different. Bombardier, Dassault, Gulfstream very strong specifically the G600, G500, and the Global 7000, those were probably the three biggest drivers. But I’d have to say it was pretty strong across the entire segment.

And the next question will come from the line of Krishna Sinha with Vertical Research Partners. Your line is now open.

So, can you talk a little bit about the material input costs rising and your long-term agreements? Can you just talk a little bit about the expected margin headwind from that and how the pricing recovery works under your long-term contracts?

We've got the headwinds I mentioned. So, I guess just picking up your last point there. The wind energy resin is sort of directly related to the actions taken by the Chinese authorities. It has been called out by some other sort of blade manufacturers. It caused a tightness in the supply chain for these resins, which is sort of put pressure on the price this year which is impacting us. We do have indices in our contracts. And so, as we sort of move towards the end of this year and into 2019 we will recover those movements, but it is a headwind this year. I mean, if you think the wind energy is 5% to our total sales, I don't want to overplay the headwinds, but that there is some headwind for us. The other headwinds we're seeing is, as I mentioned, oil, and I know I've said this to lots of you before we buy acrylonitrile related to a polypropylene formula with which is sort of driven by oil price movements. That’s moved it up. It's right at the front end of our supply chain and in the scheme of things is not enormous for Hexcel but we are seeing some marginal headwinds there. Within our commercial contracts, we do have protection if we see wild swings in oil price movements. So, if that were to happen, we would be able to pass some of that impact through. The other thing I guess I would also call out just for completeness is around tariffs. At the current time, we see a tariff impact on an annual basis of about $2 million to $3 million. Now, obviously that could change depending on where things move on the tariff front. But that will impact the second half of 2018. That's related for material we're bringing in from China and to some of our aluminum suppliers.

And just one more follow-up on the Roussillon plant. You've talked about that being instrumental in sort of the A350 ramp. But you've also talked about some other programs like narrowbodies and the Joint Strike Fighter going into that plant. Can you give us a timeline on when you expect that plant to hit full Aero capacity utilization?

So, that plant should be should be running on aerospace qualification really from the beginning of 2019. As I think I called out we see the sort of cost neutral as it goes through the aerospace qualification is making material but going through the qualification in the second half of this year. What I would say is that plant will be primarily focused towards the A350 making the carbon fiber for that program a little bit for say blade programs. Just to sort of reaffirm, on the narrowbodies most of the material going on to those planes is engineered core and honeycomb, so separate from our carbon fiber facilities.

The next question will come from the line of Richard Safran with Buckingham Research. Your line is now open.

Nick, first off, I wanted to follow up about your comments about narrowbody rates. To the best you can because I recognize you're not going to get out in front of your customer, would you be wanting to comment on where you are with OEM discussions on higher rates? And by that, I mean, is this something where you're still just supporting study efforts, or are there discussions about contracting for higher rates? And finally from your opening remarks, do I take it - I think I should take it that Hexcel’s current capacity and the new capacity you are investing in actually covers, for example, what Airbus has been talking about that rate 70, as well as the potential for higher rates on the MAX.

So I'll take those starting with the narrowbody. Obviously, whether or not the narrowbody rates go higher than what have already been communicated will be a function of positioning in the market space, which I know you recognize that both Airbus and Boeing are trying to position their platforms to get more than their share of the growth. It'll have to do with the backlogs, which continue to be strong and the order intake continues to be strong. And then it will have to do with the supply chain readiness. So I can say we have been asked to look at various studies. We've done that. We continue to do that. I would also, again, remind you and Patrick mentioned it, but remember the A320neo and the 737 MAX are, in essence, metal airplanes. They’re legacy airplanes with new engines and new nacelles, and the majority of our content are on the engines and the cells which is driving our capacity requirements and I would tell you that type of product coming out of Hexcel has a much lower capital intensity level. And we can put it in place very quickly. So, we do not worry about rates that you brought up in the order of 70. We could be well positioned for that when the OE is needed.

Patrick, I’ve heard your remarks about when for the rest of 2018 and I know you’re not going to be issuing a 2019 guide on this call. But I did think that you might comment generally directionally about when in 2019? When this has been pretty strong thus far you're guiding to continued strength for the rest of the year. So, I thought maybe a comment on what - how you think that might work in 2019? And also if you could comment on the adoption rate for these new blades, I just wanted to know if they're still tracking the plan?

Sure. I mean, as we – as I called out 2018 is doing exactly what we expected to. We forecasted to be above the 2016 rates which is obviously a substantial double digit step up from 2017. So, we're very pleased to see that. I’m very confident through the rest of the year. And what I would say based on the backlog of our key customer, Vestas, we’re confident at this point for 2019 without getting into the specifics. So, yes, as we look out for the sort of 18-month period where we're feeling pretty strong right now, and in terms of adoption as I say I mean, the backlog, at best, is at record level. So I have to believe the market is liking the new products that contain our material. So again that helps us to be positive.

And the next question comes from the line of David Strauss with Barclays. Your line is now open.

When asked about your guidance for the Space & Defense in the first quarter you had a very good quarter. The second quarter you're still showing some growth. I think the forecast for the full year have been flat. Are you now ready to move off of that halfway through the year?

Yes, I think we've seen the A400M come down. It didn't come down in the first quarter the way we expected. The second quarter is getting more aligned. And as you see our second quarter growth was much lower than the first quarter. So given the performance today, David, clearly, we think we’ll be in the low single-digit growth for 2018 versus our original guidance of stable or flat.

I wanted to ask about Airbus A330. So you have a fair - a significant amount of content on A330 Airbus has moved that or in the process of moving that down from 60, 65, a year down closer to 50. How does that – is that impacting you yet? Is that more a 2019? And how does that impact your longer term 6% to 9% guidance for commercial banks?

Yes. So Airbus A330, obviously, there's a lot written about Airbus A330neo orders and positioning of that aircraft. We've had the step down build into our forecast and it doesn't change our long-term forecast of 6% to 9% David.

Where you today on that Nick on the A330?

We’re in pretty low rates at the moment to be honest David. It's not a significant program for us now. Obviously, it's going around through 2019 and 2020. But on the A330neo which I think is what you're asking about. We're still at a pretty low rate?

And the next question comes from the line of Mike Sison with KeyBanc. Your line is now open.

Nick you’ve mentioned that you feel good about getting your fair share and potential new launches. Can you maybe talk about on a technology basis what's giving you an edge versus the competition? Are you coming up with new carbon fiber grades, resin structures and what characteristic do you think the OEM is really looking for a newer composites trance, lighter weight manufacturing costs maybe just give us a quick thought there?

So, I think the primary factor that gives me confidence is the breadth of our portfolio to your point on coming up with new fiber grades that are more productive more efficient for the applications, we're working those. Working materials solutions that require out of autoclave or quick cure cycles to enhance processing, we're working those. Looking at engineered core and engine in nacelle and fab blade materials We're working at next-generation materials that give us confidence that will retain positions we have and we’ll win incremental business going forward. And then in the Parts business we continue to look at areas where it's high value, complex where we provide a value to the marketplace. So I think it’s – our portfolio. I think our positions with customers. And again, it's offering and developing multiple solutions, so that regardless which direction the customer ultimately decides to go, we're in a great position to get a portion of that business.

And then, you mentioned that there's some supply constraints in the Commercial Aerospace kind of supply chain and you haven't been affected. Any particular reason that you haven't been asked to delay shipments and is that normal that carbon fiber composite tends to stay on track despite other areas of constraints?

Well, I think it's a function of our customer’s confidence in being able to catch up. So, as you know and it's been well-publicized that there are finished airplanes sitting without engines. And obviously our materials are going into those airplanes to some extent and our materials are going into those engines. So I think the engine manufacturers have done a great job. And my sense is that they're on the recovery path to catch up and get on schedule. So I think it's a look at the entire supply chain and the fact that the OEs understand to reduce volumes, increase volumes, reduce some and to whipsaw the supply chain is not good for anyone.

The next question will come from the line of John McNulty with BMO Capital Markets. Your line is now open.

With regard to the Roussillon facility, it sounds like things are kind of going as expected in terms of the cost, the ramp up and such, and it becomes kind of a neutral in the second half of the year if I understood that. What was what was the headwind in the first half and I guess how should we think about that reversing as we look at 2019?

So, the headwinds for each of the first two quarters $2.5 million. So, $5 million in total for the first half of 2018. And effectively, we're going to cover the cost and overhead in the second half, and then we should be running sort of standard margins, good carbon fiber margins through that plant in 2019. So, that $5 million essentially that we've had in 2018 should not be there in 2019 in simple terms.

And then, I guess so when I think about the margin pressure that you saw a little bit year-over-year in 2Q, this obviously looks like it's part of it. I guess how would you bucket out the rest of it whether it's raw materials or look I mean in some cases I guess the wind power business has slightly lower margin so it could be mix as well, I guess how should we think about that and modeling out the margins as we look forward?

I mean the headwinds as we've called out, Roussillon headwind, depreciation step up was a headwind, FX against our guidance is a headwind. In the second half of the year I mentioned the tariffs, the wind energy resin cost a relatively small part of our business but there are some marginal headwinds there. And then, as I say we've had some margins again. I don't want to ever play it, but there's some marginal headwind on acrylonitrile for our carbon fiber business. So those are being the headwinds year-on-year that that we've called out.

Is there a negative mix with wind being as strong as it is or is the incremental margin there may be bigger than what we've expected?

There is a small dilution, John. I mean, overseas, wind grows at a lower margin. But I have to say a good return on invested capital but at a lower margin because it's only 5% of sales of the total company. The dilution is there, but it's relatively small.

And the next question comes from the line of Ron Epstein with Bank of America. Your line is now open.

At Farnborough, you've discussed a little bit thermal plastics and what you could do there. I was wondering if you could kind of maybe give us some more color on where thermal plastics could be an opportunity for you guys or the future generation airplanes. So when we think about Boeing 797 or Airbus A322 where our opportunities for substitution for thermal plastics that are metallic’s today?

So thermal plastics, we're excited about thermal plastics from a couple of aspects. And you've obviously seen our acquisition of Oxford Performance Material which is additive manufacturing using a thermal plastic PEKK system with carbon-filled, which we're discussing with our customers. We're getting a lot of poll for new applications, new opportunities. That's one aspect. The other one is you probably also recall our announcement in collaboration with Arkema. Arkema is a world leader in the manufacture of PEKK, which is a thermal plastic resin system that we're partnering with to develop prepreg solutions that can go into next generation aircraft. So, if the images of thermoplastics, they can offer faster out of autoclave manufacturer for certain types of parts. I'm not a believer, it will take over all aircraft components or all composite materials, but there is a niche where it will become very attractive for clip's, brackets, smaller parts, parts that possibly the customers may want to consider welding, in-situ welding where you're prevented to do that with epoxy resin systems. You can do that with thermoplastic solutions. So, we're really excited about the next generation. Again, it's going to be a relatively slow adoption, but given our portfolio, we want to make sure that's part of it. So, that we have a full offering to support those new programs and customers.

And maybe just some one or two more follow-ons along that same vein, what do you think about ceramic matrix composites, is that an area you guys would want to go, I mean the products you make now or you used in the big blades of engines, ceramic matrix would be, I don't know, if you would call it. The little blades of engines any desire to go that direction?

Well, first thing, you have to recognize is that CMCs, the manufacturing process is really quite different. So, there's very little synergy with respect to factories or technologies. Now, we always love advanced materials and materials solution space. So, I'm not going to say it's of no interest, but it really does not fit today into our manufacturing footprint or product offering.

And then maybe just one last question. We were talking with a large metallic materials company recently and they suggested that they would like to move into nonmetallics, right. So, I mean, how do you think about your – I mean, this is a big, big question. But how do you think about your competitive environment in that? Do you worry about others trying to come in and eat your lunch, be it that the materials that you have right now are really kind of desirable? I mean, it seems like that's where the industry is going for the most part, right? I mean, how do you defend yourself?

Well, I think if you look at carbon fiber composite solutions they stand on their own. They're lighter. I don't care how you cut it between any kind of aluminum, the density factor is lighter. So you always have a weight advantage. The corrosion resistance is superior. Crack propagation and micro cracking is nonexistent. So as the composite technology continues to evolve from a manufacturing standpoint, from a processing standpoint as our customers become more familiar with it. They're becoming more productive. And I think the composite material is hard to say. You want to go back to something that’s heavier versus a lighter solution.

I understand that one thing. We all do. But just the metallics guy is actually getting into your market doing nonmetallics, meaning they see the writing on the wall, right. I mean, nobody is going to want to go backwards, right. So do you worry about an Alleghany or PCC or whoever trying to do more nonmetallics as the industry moves away from metallic?

I think if you look at or if you've ever been in our Salt Lake City site and you look at our technology and the barriers to entry, I'm not going to say they can't do it. I'm not going to say it would take them too long. But I can assure you that the reason there's only a very few players in the world that do this is because of the intellectual property and we're very protective of that. We're not giving that away. They would have to gain that. They would have to ramp up. They would have to prove it. That is many, many years down the road. And to answer your question, I don't worry about that specifically.

And the next question will come from the line of Chris Kapsch with Loop Capital Markets. Your line is now open.

You had a little commentary on regional jets. But my question, one of my questions was around the alliances between Airbus and Boeing with some Bombardier and Embraer respectively. Traditionally, those jets have been sort of in terms of composite content, they've been sort of under penetrated by the composites industry. I'm just wondering if given these new alliances, if that portends over time the adoption of greater material on those platforms, how do you see that developing over time and over what time period do you think something like increased content on those platforms could materialize?

Chris, so you're right. There's less secular penetration in those markets. But I would tell you it's been growing. We have very good position in the business jet market and that includes positions with Bombardier and Embraer, which as you know Boeing will take advantage and help drive new solutions, more range, and hopefully more composite penetration to make the aircraft more competitive. Similarly, we've got a great relationship and position with Airbus and we're optimistic about the combination with Bombardier and look forward to even more opportunities at Bombardier throughout their business jet platforms and the Bombardier C Series.

And then if I different subject, maybe Nick you could just sort of update your strategic thinking on the role of carbon fiber composites in the auto industry and how you may address that longer term opportunity on terms of either a technology play or maybe moving into that in a bigger way if you think it's an exciting opportunity longer term. Thanks.

So, I have always said that automotive is an opportunity for us. I like the space as long as we treat it appropriately for Hexcel and that is we're looking at the applications that are sustainable that are growth platforms and not getting into the commodity space. So, clearly we're focusing on advancing our material solutions to make them more productive so that adoption can be increased. That will happen over time. We've seen nice quarter over quarter growth in our automotive space. We're working on multiple new programs to position ourselves. But again there are differentiated positions in special areas similar to what we did with BMW for their ruffs for B Pillars working with Lamborghini and it tends to be on the high end vehicles that really drive those sustainable opportunities. So, we're investing in it. I'm excited about it. It will continue to grow. Having said that it's not going to in the near term change the makeup of Hexcel and drive the business wildly over to the industrial or automotive side as a percentage of sales.

And then just one follow-up on the qualification and ramp of the facility in France. As you're in qualification mode and presumably producing fiber, are you currently - I assume you're selling that currently into industrial markets. So the question is did that contribute to - materially to the growth in the industrial segment and or was presumably adverse mix associated with those sales did that affect the - was that contemplated in that $5 million headwind that you called out in the first half of 2018? Thanks.

So, as you mentioned, as we qualify and as we're running the lines, as you know, we have a wide portfolio of fibers we offer to various customers. So that material is used to sell into industrial markets or other markets. The qualification effort is underway. As you can imagine, qualifying for the Airbus A350, qualifying for the LEAP fan blades there's numerous product forms that we have to get qualified on and it just takes time for us to proceed through that. But, in essence, our goal is to virtually scrap zero amount of that fiber and feed it into the market. So that planning and those forecasts were all rolled up into our headwind that Patrick summarized earlier.

And the next question will come from the line of Noah Poponak with Goldman Sachs. Your line is now open.

Patrick, what's the right long-term incremental margin contract now? You've had the 25% for a while. Obviously, the first half wasn't there with some of the new moving pieces. And I guess, on the one hand, you had those moving pieces. On the other hand, I guess maybe you could keep having step ups and depreciation given what's happened with CapEx. So just curious for your latest thoughts on the moving pieces and the kind of two to three year view on your operating leverage opportunity.

I mean, the way we look at it, we're always looking to drive our margins through productivity and yields and efficiency improvements. And as you know, over the last several years, we've moved our operating income up from sort of 11%, 12% up to 17%, 18%. So we've seen significant improvement through the period. And we're going to continue to keep trying to push that and grow that over time through the normal initiatives, working with our customers, driving our lines faster, and continuing to push our gross margin and our operating income up. So we believe we've got revenue growth ahead that will allow us to drive that. And so we're going to continue to push.

Are you still committed to the 25%?

As I’ve said, we're going to continue to drive our margins. We've pushed them over the years from 11%, 12% to 17%, 18% and that's what we're going to continue to do.

So should I interpret that as you are no longer specifically targeting 25% as a specific number?

I would say, we're not going to communicate a number but we're pushing our gross margins, our income margins, and our incremental leverage. Basically, our sales - we view translating that - basically, we start with 100% right down through the plant. So that’s why we're very stingy on when we need to add people or new plants. We try to leverage that top line through the bottom line. So, really to talk about a number as we're going through this growth curve, we really don't want to put that out there. But I can assure you we're not limiting ourselves to a 25% number.

And then Patrick on the tax rate, I was not entirely clear I guess because the press release pointed to the second half number. I guess maybe it's cleaner in my brain if you just could tell me the new full year number versus the old full year number in the guidance for the tax rate?

Well, I'm not going to tell you that number as such because we don't sort of redo our guidance. But what I would say is you've got the rate for the first six months that average for the second six months used 25% and you can do the math. So, that's clearly going to come in as an average under 25%. But the basis for the second half is still 25%. But the average for the year will be lower than that now because of where we have - what we've seen in the first half.

And one final one on A350, it seems like it's the case that you're pretty close to 10 a month and I guess it’s not clear where Airbus plans to go with the rate if anywhere else. And I know you’ve said in the past that if it were sort of one unit a month higher you could fit that through but if it where two, three, four you would need to invest for that. Is that something you could just turn on pretty quickly once they make the decision or I guess how do you plan the business around, I don’t know how much visibility there is into that happening?

So, we talk with Airbus and our customers frequently and they give us insight into what they're thinking. So to your point, if they were to increase one, we have to have some capacity in our supply chain given that we have sole source positions. So, you have to be at least a little bit long to handle surge capacity. We could manage that. If they went up 3 or 4, they're not going to do that in a 12-month period. It would be over a period of time and we would compare that to our existing capital and capacity planning. We wouldn't compare it to our productivity improvements which we're working aggressively on to get more throughput through the existing assets. And at that point in time, we evaluate if and when we need to invest in more high cost capital required for fiber.

And as a reminder, this conference will end at 11 o’clock Eastern Time. Our next question will come from the line of Robert Spingarn with Credit Suisse. Your line is now open.

Not to belabor the incremental margin question, but Nick, you just said you want to limit yourself to 25%. So, does that imply that you're going to get to go higher or when at least will you hit 25% again?

So, again, we are not reiterating any number. My point was we're not limiting ourselves. We continue to leverage our business, leverage our spending, making sure we invest in the appropriate R&T going forward. Clearly, there's lumpiness as you've seen historically over the years. And as we ramp up these new plants, so, as the plants fill up both Roussillon and Morocco. As the volume continues to grow, we'll balance that against the capital investments. And basically our guidance is we're going to push margins as hard as we can, while positioning the business to grow as fast profitably as it can.

And I just wonder how that all balances with the fact that both A350 and 787 will hit rate in the next 12 months, let's say, and then those lines will be relatively flat if they don't raise rates beyond, as was just suggested might happen with A350. In which case, do you then have the growth to leverage the incrementals once you've done all this work, at least, in that business?

Your summary is spot on. Now, that doesn't include an M&A getting launched and requiring potential investment down the road, or new engine derivatives and applications coming along or a new wing replacement. So there's a lot of moving parts. If you just look at the market today based on what's been communicated, to your point, if the A350 hits rate and 787 hits rate, then it's really about narrowbodies and new derivatives and new platforms going forward.

And then, on the other side of the margin question. On SG&A you've done well there percentage of sales, particularly in this quarter. Patrick, is that sustainable? Is this the way to think about overhead going forward?

I mean, it’s going to be occasionally a little bit lumpy, but we're certainly going to do and I think you will see us leverage SG&A over time continually, yes. As our revenue grows, we will manage our SG&A cost. And you should see good leverage in that space. So a little bit lumpy. I'm not going to say every quarter is going to be the same, but we should be able to do that. Yes.

And then just lastly on capital deployment. Obviously, the dividends off the buyback very strong. You've already hit your target I believe for the year on capital deployment. So how do we think about this going forward?

So, I would clarify. We never gave a target on capital deployment other than balancing our three priorities which we continue to do constantly, looking at new opportunities, new applications, looking at M&A, bolt-on, or acquisition opportunities to enhance our portfolio or market positions, and then return to shareholders through buyback and or dividends and or both.

Well, I guess I should focus it on the latter there the return to shareholders. You've already - maybe you didn't have a target there, but I believe you're at least ahead of where you’ve been traditionally.

Yes. So obviously, this year we're probably going to comfortably exceed our what we call - formally called out last year to return greater than 50% of net income. But that was our target. We said we were going to deliver more than 50%. We didn't tie ourselves down. So yes. So, we’re doing well so far.

Is Q2 a harbinger of things to come with the things like the buyback?

Again, I appreciate you're testing us, but we've always said we're not going to provide any guidance on how we forecast or plan. And really, it's as simple as we truly make this every part of our everyday business in evaluating the opportunities and looking at how we optimize our capital. So, we're not going to get ahead of ourselves. We’ll always report it at or around after the fact. And that's just what we have to do to maintain flexibility going forward.

Thank you. This does conclude today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.