Patrick Winterlich – Executive Vice President and Chief Financial Officer Nick Stanage – Chairman, Chief Executive Officer and President.

Myles Walton – Deutsche Bank Gautam Khanna – Cowen and Company Sheila Kahyaoglu – Jefferies Mike Sison – KeyBanc Robert Stallard – Vertical Research Noah Poponak – Goldman Sachs Chris Kapsch – Loop Capital Markets Richard Safran – Buckingham Research Group Kristine Liwag – Bank of America.

Good day, and welcome to the Hexcel Corporation 2017 Third Quarter Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Patrick Winterlich, Executive Vice President and Chief Financial Officer. Please go ahead, sir..

Good morning, everyone. Welcome to Hexcel Corporation’s third quarter 2017 earnings conference call on October 19, 2017. Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call.

Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings and last night’s press release.

Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast 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 Kaye Veazey our Vice President of Corporate Communications. The purpose of the call is to review our third quarter 2017 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. As you have seen in last night’s release, our third quarter sales were $492 million, 2.4% below our third quarter 2016 sales in constant currency.

While sales were below our original expectations, our diligent focus on operational excellence and cost control initiatives, enabled us to deliver third quarter operating income of approximately $89 million, which was a same as last year’s third quarter with an operating income margin of 18.1%.

Our adjusted diluted EPS of $0.71 was $0.06 above last year’s third quarter. Free cash flow for the first nine months was a source of $87 million versus $55 million last year, a $32 million improvement. Now let me quickly give you some insight into the drivers for the quarter.

Starting with Commercial Aerospace, our sales growth from the A350, A320neo and 737 MAX were in line with our expectations reflecting solid growth for these aircraft programs. However, growth in these new programs continues to be tempered by legacy widebody rate reductions and the related streamlining of the associated supply chains.

Sales to other Commercial Aerospace, which includes regional and business aircraft, were down about 6.5% from last year’s third quarter. The decline was primarily in business jets. Turning to Space & Defense. We saw an increase in sales driven by growth in several of our key programs.

The Joint Strike Fighter ramp up continues, and sales in the first nine months exceeded our sales for the entire year in 2016. Rotorcraft sales were in line with third quarter 2016 with sales to military rotorcraft up about 6%, while commercial rotorcraft sales were down substantially.

As a reminder rotorcraft accounts for just more than 50% of Space & Defense sales with more than 85% coming from military sales. The segment continues to be a leading adopter of advanced composites and we benefit from our diverse portfolio of applications that support more than 100 active programs.

With regard to Industrial, wind sales continued to be challenging during the third quarter as expected. However, as we have previously communicated, we expect wind energy sales in 2018 to exceed 2016 levels as various legacy blades with lower composite content transition to longer, higher efficiency blades with higher composite content.

And rest of the Industrial business, we experienced continued growth in the automotive and recreational markets. Our strategy to extend our global leadership in advanced composites technology is paying off. We remain focused on three main areas, first, driving innovation and growth.

We invest significantly in R&T and manufacturing innovation to drive the development and adoption of advanced material technologies and continually broaden our technical solutions for our customers.

Advanced composites are the materials of the future providing the best strength to weight ratio of structural materials and positioning us for sustained growth.

For example, as announced earlier this week, our innovative new state of the art prepreg system have allowed us to expand our supply agreement with Vestas to provide composite materials for new generation wind turbine blades. Second, driving operational excellence.

Operational excellence provides us the discipline to both react rapidly to variations in our markets and achieve targeted efficiency and productivity through our supply chain. Operational advancements and improvements enable us to fund CapEx for growth and increasing investments in research and technology to drive next generation enhancements.

It is become fundamental to our processes and it has enabled our material entitlement to expand, while continuing to help our customers achieve their objectives.

And third, achieving discipline deployment of capital through organic growth by investing in research, technology and manufacturing capacity to support expected demand, M&A opportunities by focusing on consolidations, technologies and adjacencies and returning cash to shareholders through dividends and share buybacks.

For 2017, we now expect sales of just under $2 billion. We expect 2017 Commercial Aerospace sales to be slightly lower than our 2016 results due to the headwinds that we discussed during our second quarter earnings call relating to widebody build rates, inventory adjustments and usage efficiencies at our customers.

Our Space & Defense sales continue to be better than initially expected and are forecast to be up low single-digits compared to 2016. This increase, however, is not expected to fully offset our industrial sales, which are affected by lower projected wind energy sales.

As we enter the fourth quarter and taking into consideration, our lower sales outlook for the year, we are narrowing our EPS guidance to a range of $2.64 to $2.72, a reduction of $0.02 in our midpoint compared to our prior guidance.

We’re benefiting from various tax initiatives and our 2017 estimated adjusted effective tax rate is expected to be 26%, which compares to second quarter guidance of 27%. Cash flow was a great story for us and it continues to be positive in 2017. We’re confident and delivering our target of more than $100 million of free cash flow for the year.

I’d also comment that looking beyond 2017. We expect our cash generation to grow significantly. Now, let me turn the call over to Patrick to discuss some of the quarter’s financial details..

Thank you, Nick. Let me start by providing a quick review of our markets. As usual, I will discuss year-over-year comparisons in constant currency. As you are aware, currency movements influence our reported results and some of this impact is not intuitive.

But the bottom line is that when the dollar strengthens against the euro and the British pound, our sales translate lower, whilst our income increases. So our margin percentages improve. Commercial Aerospace now accounts for 72% of our total sales.

And for the third quarter, these sales were 2.5% lower than the third quarter of 2016 and 2.7% lower for the first nine months versus 2016 equivalent period. The good news is that the A350 and the narrowbody programs continue to do well with growing build rates, as well as increasing shipset content for A320neo and the 737 MAX.

The widebody programs including the 777, the 747 and the A380 continues to be impacted harder than initially expected, due to build rate and supply chain reductions. Space & Defense sales for the quarter were about $83 million, just above third quarter last year.

In Industrial markets, sales for the third quarter were just over $56 million, which is 6.5% lower than the third quarter of 2016 due primarily to wind energy sales, which were down almost 28% relative to the third quarter of 2016. On the positive side, we have seen growth in other industrial product lines, particularly automotive.

For the quarter on a consolidated basis, gross margin was a solid 27.6% as compared to 27.1% in the third quarter of 2016. Strong cost control and productivity performance went a long way towards mitigating the impact of the lower sales and offsetting training and startup costs at our new facilities at Roussillon, France and Casablanca, Morocco.

As we expected, we had about $8 million of training and startup cost in the first nine months at these two new facilities. Casablanca is now completed and the plant is operational. Construction continues for our larger investment in a PAN line and fiber line at Roussillon, France.

In addition, depreciation and amortization for the first nine months was $8 million higher than the first nine months of 2016 on a constant currency basis. For the first nine months of the year, SG&A expenses were roughly 6% lower in constant currency than the prior year, reflecting tight cost control across all support functions.

Research and technology expenses were $36 million in the first nine months or about 7% higher in constant currency as we continue to invest in innovation to support new technologies, products and process improvements.

As Nick mentioned previously, for the quarter operating income was $89.1 million or 18.1% of sales, as compared to $89.1 million or 17.8% of sales in 2016. Exchange rates contributed about 40 basis points to 2017 operating income percentage as compared to 2016. For the first nine months, exchange rates contributed about 50 basis points to our results.

Overall, we have done an excellent job of managing headcount. Our total headcount is lower than last year-end and one year ago, even including the more than 120 people, we’ve hired to startup our new French and Moroccan facilities.

Our Engineered Products segment comprised of our structures and engineered core businesses, delivered 13.1% operating income margin for the third quarter as compared to 12.6% margin in 2016 third quarter.

To remind you, although margins across businesses in this segment are lower than those for composite materials, the Engineered Products segment employs a much lower level of capital and therefore the return on invested capital for this segment continues to be very attractive.

The tax provision was $13.5 million for the quarter for an effective rate of 16.5%. The quarter included benefits from tax credits identified during the quarter, as well as deductions associated with share-based compensation payments.

The third quarter also included $4.2 million nonrecurring discrete benefit related to the reversal of provisions for uncertain tax positions, which we have not included in our adjusted EPS. Please remember, we had a first quarter nonrecurring discrete benefit of $9.1 million from the release of the valuation allowance in Luxembourg.

Excluding these nonrecurring discrete benefits, Hexcel’s first nine months adjusted effective tax rate was 24.2%, and we now expect the full year adjusted effective tax rate to be around 26%. Please note our underlying effective tax rate, excluding all of these adjustments, continues to be 30%.

Nick mentioned earlier that free cash flow for the first nine months was a source of $87 million as compared to $55 million in the first three quarters of 2016. Working capital decreased $12 million in the quarter, resulting in a source of $5 million in the first nine months of 2017 as compared to a $38 million use, in the first nine months of 2016.

The primary driver was an improvement in receivables due to continued strong collections. Cash payments for capital expenditures was $221 million for the first nine months. The midpoint of our capital expenditure guidance for the year is $280 million.

Our major capital expansion program in the recent years is nearing the end as we bring up the final two PAN lines and final carbon fiber lines in this wave of investment. As previously announced, we expect to see much lower spending in 2018 and 2019. On October 2, we completed the transaction to acquire the Structil business in France.

This acquisition further enhances our technology portfolio with new adhesive, prepregs and pultrusion technologies. Revenues and earnings from Structil will be consolidated into our results from the beginning of the fourth quarter. Year-to-date, our stock buyback program totaled $122 million.

We now have $271 million remaining under the authorized share repurchase program. With that, let me turn the call back to Nick..

Thanks, Patrick. By staying aligned with customer demand while keeping costs under control and operational excellence at the forefront, we delivered a solid first nine months for 2017.

Despite some of the top line headwinds we have faced in our Aerospace and Industrial segments, we are committed to achieving our earnings and free cash flow outlook for the year and remain on track to generate significantly higher levels of free cash flow over the next few years, as we transition from a cash investment cycle to much higher cash generation.

Our long-term prospects remain strong, fueled by the ongoing launch of next generation aircraft programs as well as various secular trends and dynamics that will drive broader adoption of our innovative solutions. Kathy, we’d now like to take questions..

Thank you. [Operator Instructions] And we’ll take our first question from Myles Walton with Deutsche Bank..

Thanks, good morning..

Good morning, Myles..

Good morning..

Could I ask about the cash flow first? So in terms of the CapEx, pretty good step down here in the third quarter.

As you look to the full year, is there an anticipated step back up? Or is the greater than $100 million in free cash flow just overly conservative to unknowns? Is it looks like it could be considerably above that level?.

So Myles, as you know, our CapEx investment is really to support our sales in 2018 and beyond. And it tends to be lumpy, a little bit front-end loaded. We still believe we’re going to fall within our range, $270 million to $290 million, and we are going to see a step up in Q4. So nothing really changes there.

Obviously we’re pushing for more free cash flow than $100 million, but at this point in time, we’re happy stating above $100 million..

Okay. And then on the repurchase, you clearly reacted in the first half.

You took a quarter off here more or less, is that a sign of pivoting of capital deployment towards M&A? Or is there anything else underlying the – kind of the pullback on repo?.

Well, again as a reminder, we have a very disciplined capital optimization strategy. And we’re always balancing our internal investments, our existing leverage, which I would remind you is at about 1.8 these days, with the target to stay below 2.5. Then we’ve got the M&A that we’re focused on. And we’ve got an active pipeline.

And then return to shareholders through stock buyback and dividend, which we increased the dividend earlier this year. As you know, we closed the Structil deal. So that was a use of cash. And our M&A pipelines is continuing to be a very active. So nothing to read into it beside that. We’ll be opportunistic as we go.

And we’ll continue to balance the options that we have based on what we see in our pipeline..

Okay. We’ll take our next question from Gautam Khanna with Cowen and Company..

Yes, thank you. Maybe to expand on that last point, were you blocked out of repurchasing stock in the quarter because of Structil? And then, I think, these all – there’s like a mosaic forming here.

You guys also, a couple of weeks ago, had an 8-K filing that showed some employment contracts that would allow for change in control, termination payments and the like.

Why did you feel the need to make that at this point in the cycle, if you can just talk about that?.

So Gautam, I’ll answer a couple a couple of those, and I don’t think we’re really going to respond to a part of that. The bottom line as we announced the Structil early this year, and we were not blocked out in Q3 because of Structil by any means.

Having said that, it came down to balancing our cash position, balancing what priorities we had in the pipeline, and really just looking at our dividend strategy and our share buyback as real point in time. So nothing more behind that. The employment contract item, I really am not going to get into. We can do that off-line..

Okay.

And maybe you could also just respond, in terms of any changes, given the Airbus control of the C Series? Does that present an opportunity on the margin to take some business from Sitec or whoever? And have you guys done an assessment of your content on the new narrowbodies and the A350 again? Has there been any changes? And specifically to that point, I know you’re selling – could you give us some framework on Albany International buys your fiber for, some of you guys on the composite fan blades of the LEAP, they promised an 80% cost reduction for Safran over four years.

And I’m just curious, do your content numbers actually reflect that full mature learning curve? Or is that a downside risk? Thanks.

Okay. So I’ll – come back to me if I missed one of these. I think there’s about three to four questions in there. Let me take the first one. And as you know, we had very strong positions with Airbus on our whole portfolio of material base.

We also have very good relationships with Bombardier and growing opportunities and positions with them not only in engines in nacelles, but we’re working on primary and secondary structures.

Now having said that, giving – given the direction of the Airbus and most likely, some of the optimization around supply chain opportunities, we view it as definitely an opportunity for us to offer innovative solutions to increased our growth. So that answers the Bombardier portion of your question.

Shipset content, we go through our platforms on an annual basis in detail. That’s part of our strat process, which we’ve gone through. We did take down the A350 to 4.8 from 5. We continue to look at that and to date have no other material changes.

I would tell you, we view productivity and helping our customers as a key strengths we provide, and let me expand on that a little bit. By making our materials more producible in more product shapes and forms, providing a bigger value is long-term growth opportunity for Hexcel, and we always work to do that.

So when we can find a new technology to introduce into a legacy platforms that may position us to grow or expand into a new platform, whether it’s an engine to sell, wing or a new NMA, we’re going to do that.

There may be some short-term shipset impact, but over the long haul, it will be a net benefit for composites, advanced materials and our growth. So I’d also say there’s productivity initiatives, efficiencies that tend to drive some of the demand down. But there’s also a new opportunities and we see areas where demand goes up. So it goes both ways.

And whenever we find and identify a material change, we’ll communicate that.

Let me see, the last question was related to what?.

New narrowbody engine..

Narrowbody, again that’s – yes we really – we have no changes on the NEO and MAX. We’re very comfortable with where we are. We’re very comfortable with the growth rates. We’re obviously continuing to look at the 320neo and the conversion and how quickly engines will ramp up.

And that’s part of the process we’re going through as we develop our 2018 plan..

Thank you..

You’re welcome..

And we’ll take our next question from Sheila with Jefferies..

Hi, good morning, Nick and Patrick, it’s Sheila Kahyaoglu from Jefferies. Just on the widebody….

Sheila, can you speak up a little bit? We can barely hear you..

Yes, sure.

Can you hear me now better, somewhat?.

Little bit..

So, on the legacy widebodies, the decline there. Maybe can you talk about how much of it is tied to destocking? When do you see the impact of the declines and the production rates? Are you sort of anniversaried through that? And I know you don’t provide profitability by program, but maybe if you could talk about the drag on margins that’s creating..

Yes. So again, one of the biggest changes to our forecast this year versus where we started the year with our December guidance has been really in the widebodies. And in the widebody supply chain adjustments.

And again, as a reminder, after we provided guidance, I think the day after or the afternoon that we provided guidance, Boeing took down the 777 rate and they, basically, expedited the ramp down. So that was an instant headwind we had which we made adjustments for, which we took actions against.

The A380 continue to drop which we had much of that built into our forecast. But as you know, Airbus just came out and took it down again in 2019. And we’ve seen surprising impact on the A380 coming out of 2017 and especially in the third quarter. So the A380 and the 777 were two big drivers.

And I’d also point out, we talked about this in the second quarter, we still, in third quarter, had a 787 supply chain adjustment down over $5 million. And again, as you know, Boeing has taken the rate up to 14 in 2019. So it really comes down to the fact that Boeing has been at 12 per month for multiple quarters. The supply chain has gotten efficient.

There was a little excess inventory in that supply chain and through efficiency, that is being bled off. Now we think we’re – for the most part, through most of those. We think we’ll see – continue to see some 777 as it ramps down next year. We’ll continue to see some A380.

But we believe the 787 should most likely start to pick up in readiness for the 14 per month rate..

Thank you. That’s very helpful. And just, I guess, on that last point on the 787 as the rate picks up.

How does that factor into your current capacity and capital expenditure plans?.

So it really will not impact our CapEx requirements. It’s part of what we have today. So I don’t see any problem there.

And again, we’re – going back to your last question, which I do want to get to, and that is margins, and we’re not going to talk about specific programs, but we have a pursuit to drive productivity and efficiency to expand our margins.

We do that by working with our customers and helping find ways to take real cost out of the supply chain, and we’re going to continue to do that and we’re going to continue to expand our margins.

So again, I can’t speak for Albany and what they proposed, but I can tell you we’re working with all of our customers to make sure that they’re successful, and at the same time, we are as well..

And we’ll take our next question from Mike Sison with KeyBanc..

Hi, guys..

Hi, Mike..

Nick, when you think about 2018, I know it’s early to give specific guidance, but when you think about Commercial Aerospace and the Commercial Aerospace segment, what do you see now that gives you maybe some confidence that, that segment will get back on the growth path as you head into next year?.

Yes. Mike, so it is a little early. We are rolling up our plan. We are feeling confident on organic growth next year with the addition of Structil adding a little inorganic growth as well. Some widebody pressures, no question, will persist.

But at the same time, we’ve got rates going up, we’ve got the secular penetration on the narrowbodies and we’ve got a 77 rate going up, so we feel very good on the commercial side. Again, I don’t want to hint to any numbers in growth rates, but I’m looking forward to sharing that with you on the December time frame..

Okay, great. And then shifting gears real quick, it sounds like auto is starting to pick up a little bit.

Where are you now in terms of how big that business is? And how much momentum could you potentially see as you head into next year?.

Well, automotive has done very well for us. I mean, if you look at our growth rates, and we don’t give specifics in there, but it’s been double-digit growth rates last several quarters, and it continues to be. The team has done very good in positioning our materials for applications with various customers, and one of the leaders being BMW.

So we’re very excited about automotive. I would remind you, Mike, that it’s still a very small portion of the business when you look at the total mix of automotive in the Industrial and then in the scheme of Hexcel consolidated total. Having said that, we’re going to keep working it hard.

Maybe in December, we’ll get a little more specific on sizing that market for you, but I foresee that growth to continue going forward..

And we’ll take our next question from Robert Stallard with Vertical Research..

Thank you so much, good morning..

Good morning, Robert..

A couple of things. First, was you made some comments about the M&A pipeline being pretty active.

In terms of things you’re looking at, is it the similar sort of technology-style companies that you’d been acquiring over the last couple of years? Or are you looking at some things slightly more broader than that?.

Formax being a pure acquisition; Oxford Performance Materials, an investment in a technology; Luminati, carbon conversions on the recycling front; now Structil is a full acquisition that gives us great positions on engines, nacelles, airframe structures and roughly a third of that business is industrial.

So again, it’s – I would say, fundamentally, we’re targeting technology within our core space. And within that, I certainly – we certainly expect to be able to drive stronger market positions in our existing customer base and to expand our customer base. So I look for growth.

We look for the technology and we look for greater customer penetration around the globe..

Okay. And then, secondly, on the CapEx front. There’s been some talk that once Airbus gets to 10 a month from the A350, it may contemplate moving that rate higher so much as what we’ve seen on the 787.

How much spare capacity do you have in your system to tolerate and move to, say, 12 a month on the A350?.

Well, we’re evaluating that as we speak. We are getting very close to being fully capacitized to do the Airbus, in essence 121 a year. Now going above that 24 planes a month, would we have capacity in place to do that? Absolutely not.

So the question is, what’s the potential increase? When would the potential increase happen? And then how would our productivity initiatives within our manufacturing processes enable us to do that, partially with existing equipment and partially with capacity expansion?.

And we’ll take our next question from Noah Poponak with Goldman Sachs..

Hey, good morning everyone..

Good morning, Noah..

Is the annual outlook reduction from wind or from Space & Defense?.

The annual – are you referring to 2017?.

Yes. I’m referring to the reduction in 2017 guidance..

Well, it’s – certainly, there’s a component in it that, the net of wind and space, and that’s about $20 million down. Space & Defense is up slightly. Wind is down slightly more. The – we had, at the end of the day, I think at the end of Q2, we talked about a forecasted $20 million headwind on FX.

Now since then, the dollar has weakened and we see the FX impact for the year closer to $10 million. We’ve communicated A350 shipset move where we lowered by 200,000 per plane. So you can think of that as about $20 million. The 777, we’ve talked about, it’s about $15 million.

And then the balance is with the other supply chain adjustments we’ve talked about..

Okay. The reason I ask the question is just the – you’ve identified the components of what’s moved around in aerospace. It sounds like, clearly, wind you knew would be challenging this year, but it’s been a little more challenging than you thought. But then the Space & Defense segment, I don’t hear you specifying anything.

But unless I’m reading my notes incorrectly, it looks like the growth rate projection was actually reduced this quarter versus what it was last quarter..

Well, just, again, as a reminder, we thought the year – our initial guidance we had, Space & Defense being pretty much flat. We saw a little bump. We were optimistic because our key programs were all running at or above our forecast.

Now third quarter came in just slightly higher than last third quarter, and we do see some potential risk on a couple of programs. A400M is being evaluated by Airbus on potentially a rate change. The other programs, again, continue to operate and perform as expected or above. Rotorcraft has bounced back, it was up this quarter. Military side about 6%.

Having said that, the civil commercial rotorcraft was down pretty significantly. That pretty much offset the gain on the military side. So we still feel good about Space & Defense being up for the year. Might it push mid-single digits? Perhaps. But we’re a little more cautious, and that’s why we came in with low-single digits..

And we’ll take our next question from Chris Kapsch with Loop Capital Markets..

Yes, good morning. I had a follow-up on the discussion around the potential for the 787 rate increasing. Yes, I think you said that you envision being at or fully capacitized based on your current investments.

Just wondering how the incremental investments you have around the PAN line and more fiber relate to the growth in that program? In particular, if you could provide some color about what programs that capacity is dedicated to and what time line do you expect that capacity to be qualified and online and contributing to your results?.

Yes. So I guess I’ll address that this way. So remember, on the 787, the primary position on that program is owned by Toray. So they provide the fiber for the 787 for the wings, the fuselage, the empennage, they have the primary position there. Our content is, therefore, not heavily related to precursor or carbon fiber.

So the assets we’re putting in place with respect to PAN and carbon fiber in our Roussillon plant as well as our Salt Lake City and Decatur plant, heavily influenced by the A350, which is our fiber sole source position for the same applications that I talked about on 787. It’s for LEAP blades. It’s for JSF.

It’s for a wide array of other programs that we put into the mix for our fiber. Remember our fiber capacity is not dedicated. Our lines are flexible. They’re fungible. So as demand drops off for various programs, we just put into the mix. We lower our CapEx or we adjust our CapEx to run those assets filled. So Chris, I….

I meant – I did mean the A350 and the potential for the A350 increase. And so the – but the lines that you have coming on is that, well, the – you’re going to be addressing the A350 program growth through the impending capacity additions of PAN and fiber.

Is that correct?.

Yes. I would assume that the new capacity coming on in France is fundamentally supporting the A350 and existing programs, that is correct. Up to the 120 rate that we talked about, yes..

It will – the Roussillon facility will also support a significant portion of Safran business..

But existing programs..

Existing..

Okay. And then if I could just follow-up on your comments around free cash flow. You sort of reaffirmed for the full year. But if you go back to, I guess, early 2015, in Salt Lake City you talked about doing, I think, cumulative free cash flow of $1 through 2020.

Now that we have better visibility on various inflections in different commercial aero programs, is there – do you have any comment on your material changes to that sort of free cash flow forecast through the end of the decade?.

So we did give out that number, and we said the same sort of number last December at our Investor Day 2016. I think we’re not going to reaffirm that. We’re not sort of giving anything new. As Nick said, we’re rolling up forecast right now. But we don’t see anything materially different from that ballpark of free cash flow for the period forward..

Okay. And then just, finally, one quick one on the sensitivity to FX.

Could you just talk about – can you provide the specific leverage you have to a change in, say, the dollar vis-à-vis the euro? And then what percentage of your exposure are you hedged for 2018 at this point? I know you kind of have tended to layer in hedges on a rolling forward basis.

Could you update us on where you are for 2018 and the sensitivity, please?.

Yes. Absolutely. I mean, through the end of 2017, we’re virtually 100% hedged at this stage through – against the dollar and the euro. As we look forward to 2018, and I think you’ve heard in the past, we do it on a 10-quarter rolling basis. We’re probably 75% to 80% hedged at this point in time as we look at 2018..

And we’ll take our next question from Richard Safran with Buckingham Research Group..

Good morning.

Good morning, Nick, Patrick, how are you?.

Good morning..

Good morning, Richard..

So first question is, I guess, Nick, I want to know how you’re thinking about headcount. And the reason I ask is that we’re seeing improvements in end markets, on some of your end markets. Assuming that the inventory destocking issues ends, you start shipping at higher volumes.

I’m just wondering if you’re thinking about a step up in headcount as we look towards next year?.

Well, I’m very proud of the organization in being very responsive to what the market dictates. So for example, and those of you that have followed us for a while, you’ve seen our wind market go up and down over the years, and we’re in a decline this year and a pretty significant ramp-up next year.

I’m very proud of the fact that we make our adjustments downward as well as upward very quickly, and while always trying to drive productivity through the process. So direct headcount is fairly easy. Indirect headcount, Richard, we’re always looking at productivity.

I’m always looking at how we can drive efficiencies through our system, how we can utilize some of the investments we put in place like our AX supply chain management tool to help us get more efficiency and to do more with less, and that’s one of the tenets behind our operational excellence.

And our margin expansion plans is productivity, leveraging our assets, leveraging our capital and providing and producing more with less headcount..

Okay. And then – thanks for that. And then next, I just would like to ask about a couple of your end markets and how you are thinking about your outlook from here based on what your customers are telling you. So on – you talked about business jets and retail jets down 6%.

Do you think that if, for example, business jets are pretty close to a bottom here as we look towards 2018 and then on your comment about rotorcraft, given what we’re seeing on the budgets and stuff and things like that, do you think that military rotorcraft continues to grow next year? And do you think civil rotorcraft, which you’ve been calling out declines on, kind of bottoms?.

So I’ll give you a perspective on a couple of those points. With respect to civil rotorcraft, that’s an easy one to start. I don’t see that picking up. We don’t have that forecast to pick up, certainly, this year. We’ll look at next year’s number and go through the details.

But I, for one, based on wind in the marketplace, where I see oil and oil going, I’m not looking for a rebound there. On military rotorcraft, I think that will continue to do well. The programs we’re on are very good programs.

Even in the out years, when you look at a program like a CH-53K, where we have great content, we’ll be very excited when that program comes in. But I see some strength on the rotorcraft as we see some strength in defense spending and budgets, which is hard to put numbers around that.

But there’s a positive sentiment that, I think, at some point in time, will translate into potential growth in those segments..

And we’ll take our next question from Ronald Epstein with Bank of America..

Hi, good morning guys. It’s Kristine Liwag calling for Ron..

Hi, Kristine..

So my question is the partnership between Airbus and Bombardier would now give Airbus access to the C Series aluminum lithium fuselage.

With advancements in alternative airframe materials like aluminum lithium, how do you think about the penetration of carbon fiber on future aircraft? And a follow-up on that could be how much do you spend on R&D to develop future advanced materials and how do you expect to spend – how much do expect to spend in the next few years?.

So I’ll take a stab at both of those. So first, our R&T is virtually all invested in future programs both from a material capability, a new material form or a manufacturing process. We’ve been growing that at roughly 10%-plus per year. Again, I’m not going to get into guidance for into guidance for next year, but I doubt it will be much different.

And talking about aluminum lithium versus composites, the bottom line is composites are still 25% to 30% less dense, lighter and still stronger.

So where the trade-offs are between aluminum lithium versus new advanced materials, we are making advancements around new composite forms that cure faster, that are faster to lay down, that make them a stronger value proposition going forward. And bottom line is I really like our position.

The strength, the weight, the durability, it doesn’t corrode, I wouldn’t trade that position with anyone..

That’s helpful. And maybe a follow-up on CapEx. So you said that you can meet the 787 at 10 per month – sorry, the 787 at 14 per month and can meet the A350 at 10 per month.

So with Airbus discussing the rate ramp up to 13 per month in the A350, since this is your primary fiber, how much more in CapEx would you have to spend if they do go to 13 per month? And when would you have to spend that?.

Well, those are discussions we’re having and really not appropriate to have on a public call. So we’re going through that. I can tell you our assets are getting more efficient. We’re getting better at it and we’re driving productivity.

So it’s going to be a combination of what would the timing be, what would the rate be and how does it net off of our productivity plans..

Okay. And this concludes today’s question-and-answer session. I’d like to turn it over to today’s speakers for any additional or closing remarks..

No remarks. Thank you, everyone..

And this does conclude today’s call. Thank you for your participation. You may now disconnect..