Kurt Goddard - VP, IR Patrick Winterlich - EVP and CFO Nick Stanage - Chairman, CEO and President.

Sheila Kahyaoglu - Jefferies Mike Sison - KeyBanc Robert Stallard - Vertical Research Richard Safran - Buckingham Research Gautam Khanna - Cowen Ken Herbert - Canaccord Drew Lipke - Stephens Noah Poponak - Goldman Sachs Chris Kapsch - Loop Capital William Lee - Wolf Research.

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Hexcel Corporation Earnings Conference Call. At this time, all participants are a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operation Instructions] As a reminder, this call maybe recorded.

I would now like to introduce your host for today’s conference Mr. Patrick Winterlich, Chief Financial Officer. Please go ahead, sir..

Good morning, everyone. Welcome to Hexcel Corporation’s fourth quarter 2017 earnings conference call on January 25, 2018. 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.

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 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 Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our fourth 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. Our fourth quarter results capped off another strong year for Hexcel and we remain well positioned as we enter 2018.

As you saw in the last night’s release, our record fourth quarter sales of $512 million were up 5.8% year-over-year and our adjusted earnings per share grew more than 9%.

Our adjusted EPS was within our previously provided guidance on sales that were lower than forecasted which illustrates the favorable impact of our focus on manufacturing efficiencies, capacity utilization, and our continued vigilance on managing costs.

We are particularly pleased with the free cash flow generation of a record $151 million which was 50% higher than our initial guidance.

As we reiterated at our December investor briefing, we expect to generate $1 billion of free cash flow over our five year planning period of 2016 through 2020, as we entered the peak years of our cash generation cycle.

I’m now going to give you some insight into each of our end markets and then Patrick will get into the details for the quarter and year end. As usual, year-over-year comparisons will be expressed in constant currency.

Starting with Commercial Aerospace, as most of you know our Commercial Aerospace end markets remain strong and we are benefitting from this growth. Global passenger and cargo air traffic growth continues to track at record levels, load factors remain above 80% and OEM backlogs are new all time highs.

Hexcel benefitted from the ramp up of various programs in 2017 including the A350, A320 Neo and 737 Max. Not only did we realize record internal production levels for these programs, we also met all OEM production and timing expectations.

That said, our 2017 growth was more than offset by supply chain adjustments in connection with the ramp down of various legacy widebody programs and accelerated reduction in build rates on the 777 and previously communicated chipset reductions on the A350.

As we look into 2018, we expect to generate high single digit Commercial Aerospace growth fueled by the accelerating ramp up schedules on our key programs as well as double digit growth in other Commercial Aerospace, as we were seeing some recovery in the regional and business jet market.

In late 2017, we announced an extension of our contract with UTC Aerospace System to 230. This contract represents more than $1 billion of future revenues over its term.

Turning to Space and Defense, we began the year expecting generally flat sales, then as the year progressed we saw stronger than expected performance in certain key programs including the Joint Strike Fighter, the V-22 Osprey and the Black Hawk helicopter particularly in the fourth quarter, dragging full year growth to 6.9%.

For 2018, we see some underlying positive trends with the U.S. defense budget offset by the headwind of the recently announced production cut of the Airbus A400M, so we are expecting generally stable sales for the year. Finally turning to Industrial, overall Industrial sales were down 13% year-over-year driven by wind energy.

The mix of blade sold in 2017 contained less composite material as Vestas, our primary energy customer, is transitioning to new hybrid blades which contain more composite material and this gives us confidence for our 2018 sales projection.

We also recently announced an expanded supply agreement with Vestas and we would like to note that the production tax credit was left in place in the recently announced legislation. We did realize significant growth in other areas of the business particularly automotive where we grew about 25%.

We remain confident to see double-digit growth in our Industrial sales in 2018. Before handing it over to Patrick, I'd like to remind you of our key three strategic priorities that form the pillars of our success.

First, driving innovation and growth, we invest significantly in R&T and manufacturing innovation, both internally and through acquisitions and collaborations to drive the development and adoption of advanced material technologies and to continually broaden our technical solutions for our customers.

Advanced composites are the materials of the future, providing the best strength to weigh ratio of structural materials and positioning us for sustained growth. For example, we concluded two acquisitions in 2017 that enhanced our technology portfolio.

Structil expands our prepreg product offerings particularly in aerospace while Oxford Performance Materials broadens our capability to include additive 3D manufacturing. With the acquisition of OPM, we are now world leader in high performance additive 3D printing of parts for aerospace, space and defense markets.

This technology enables more complex design in parts for better performance and lower weight, while consolidating the number of pieces within a part to enhance strength and durability. While each of these entities is of modest size today, they both of the potential to become material contributors to our top line overtime.

Second, driving operating excellence, operational excellent provides us the discipline to both react rapidly to variations in our market and achieve targeted efficiencies and productivity throughout our supply chain. This discipline enables us to achieve the margin returns we did in 2017 despite sales softness.

Operational advancements and improvements enable us to fund CapEx for growth and increasing investments in research and technology to drive next generation enhancements. It has 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 disciplined 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.

We continue to invest in the business.

We completed the Morocco facility in 2017 and in 2018 our capital spending priorities include completing the new PAN and fiber lines at the Roussillon, France facility, completing the addition of a fiber line at the Salt Lake City site and beginning to previously announced multi-year expansion of our Decatur, Alabama facility to add a precursor line and a carbon fiber line.

Before moving on, I’d like to say a few words about the recent tax law changes. We’re very encouraged by this legislation and expect to realize significant earnings benefits of this year and going forward.

The benefits that we expect to see will support organic growth, innovation, accretive M&A and shareholder return, which includes returning at least 50% of our net earnings to shareholders through dividends and share repurchases. In summary, we delivered solid results for the quarter and the full year, and I’m proud of what the team accomplished.

We remain highly optimistic as we look out to 2018. Our sales growth is poised to accelerate, and we expect to generate record free cash flow greater than $230 million.

We are solidly on track to deliver our long-term 2020 targets while at the same time we remain committed to expanding our technology and our market leadership position to generate sustained long-term growth in shareholder value creation. With that, I’ll turn it over to Patrick to provide more color on the numbers..

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

The majority of our revenue is denominated in dollars; however, our cost basis is a mix of dollars, euros and British pounds as we have a significant manufacturing presence in Europe. As a result, when the dollar strengthens against the euro and the British pound, our sales translate lower as do our costs.

So our incoming increases and therefore our margin expense is improved. Sales of $511.7 million in the fourth quarter of 2017 were up 4.1% year-over-year setting a new fourth quarter record. This was our strongest quarter of the year which is countered to our typical seasonal patterns and sets us up well for 2018.

Our full year results were $1.97 billion, a decrease of 1.6%. Our adjusted diluted EPS for the fourth quarter was $0.70, an increase of 9.4% versus 2016 and for the full was $2.68, an increase of 3.9%. Turning to our market, Commercial Aerospace accounted for 72% of our total 2017 sales.

For the fourth quarter, these sales increased 2.2% to a record $361.1 million as compared to the fourth quarter of 2016, but were down 1.5% for the full year versus 2016.

While fourth quarter sales benefitted from the A350 ramp, the new narrowbody aircraft and an increase in regional and business jet sales, the full year was adversely effected by the scheduled widebody build rate cuts particularly the 777. Soft A380 demands the previously disclosed A350 shipset reduction and other supply chain headwinds.

Space and Defense sales accounted for 17% of our 2017 sales. For the fourth, these sales increased 19.6% to $96.4 million, as compared to the same period in 2016 and were up 6.9% for the full year. Strength in the Joint Strike Fighter, V-22 Osprey and Black Hawk helicopter programs drove most of the improvement.

Our composite solutions are widely adopted on U.S. and western European military aircraft, so we are closely watching new potential programs, such as the U.S. Army's Future Vertical Lift project. Industrial sales comprised 11% to 2017 sales.

For the fourth quarter of 2017, sales were $54.2 million reflecting a 6.2% decrease compared to the fourth quarter of 2016. For the full year, Industrial sales were down 13.3%. As Nick discussed, the weakness was due primarily to wind energy sales which were down more than 20% in the quarter and more than 30% for the full year.

We did however see double-digit growth in automotive. Consolidated results, on a consolidated basis, gross margins for the fourth quarter were 27.8%, as compared to 28% in the fourth quarter of 2016. For the full year, gross margin was 28% as compared to 28.2% in 2016.

Strong cost controls and productivity improvements largely offset the impact of approximately $10 million in training and startup costs at our new facilities in Roussillon, France and Casablanca, Morocco. The Casablanca facility was completed in the third quarter of 2017.

We are pleased with the quality of products being produced and the productivity levels. Construction continues for our larger investments in a PAN line and a carbon fiber line at Roussillon, France. It is expected to be completed in mid 2018.

Depreciation was $3 million higher in the fourth quarter and $11 million higher for the full year, as compared to the same period in the prior year with the increase reflecting recent cash flow expenditures.

SG&A expenses were roughly 4% lower in the fourth quarter, and 3% for the full year, as compared to 2016, reflecting tight discretionary cost controls across all support functions.

Research and technology expenses were about 5% higher in the fourth quarter and 6% for the full year, as compared to the same period in 2016 as we continue to invest in innovation to support new technologies, products, and process improvements.

For the fourth quarter, adjusted operating income increased 7.1% to $93.2 million or 18.2% percent of sales as compared to $87 million or 18% of sales for the fourth quarter in 2016. For the full year, adjusted operating income was down 2.6% to $350.6 million or 17.8% of sales as compared to $360.1 million, 18% of sales in 2016.

Exchange rates negatively impacted 2017's fourth quarter operating income percentage by approximately 10 basis points, as compared to 2016, but contributed approximately 40 basis points to the full year's operating income percentage.

Our composite material segment generated a 22.3% operating income margin for the fourth quarter as compared to a 21.5% margin in 2016’s fourth quarter. For the full year, composite materials operating income margin was 21.6% compared to 23% in 2016.

Our engineered product segment comprised of our structured and engineered course businesses generated an 11.7% operating income margin for the fourth quarter as compared to a 14.2% margin in 2016’s fourth quarter. Learning curves and program timing can meet the quarterly fluctuations in the margin.

For the full year, the segment generated a 12.9% operating income margin as compared to 12.7% in 2016.

As a reminder, although margins across the businesses in this segment are lower than those for composite materials, the engineered product segment employees a much lower level of capital and therefore the return on invested capital for this segment continues to be very attractive.

The tax provision in the fourth quarter was more complicated than usual as I am sure you will understand. Therefore, I will spend a little bit longer talking about tax than I normally would. The tax provision with a credit of $1.8 million for the quarter reflecting an effective rate of minus 2%, which compares to 27.9% in the fourth quarter of 2016.

The quarter included substantial adjustments relating to the recently passed Tax Cuts and Jobs Act. The tax law change resulted in a net benefit to the fourth quarter tax provision of $22.1 million, a positive impact of $0.24 on our GAAP EPS.

Hexcel has deferred tax liabilities primarily related depreciation including bonus depreciation for tax purposes. The revaluation of these deferred tax liabilities resulted in a credit to our P&L of approximately $70 million.

At the same time, Hexcel has overseas earnings and profits which impacted by the transition tax charged at 15.5% on cash balances and 8% on non-cash balances. This resulted in a P&L charge of approximately $50 million.

We believe most of the impact for Hexcel from the tax law change has been taken in the fourth quarter of 2017, but there could be true ups and further adjustments in the coming quarters as the relevant authorities continue to provide guidance to help tax base understand the impacts of the tax law changes.

The projected one-time net cash taxes due in relation to the transition tax law change of the foreign tax credits and other credits to reply is approximately $21 million. The Company will make an election pay these additional taxes over eight years.

The total net cash impacts we expect to see in 2018 because of the new tax rules is a benefit of approximately $8 million.

The fourth quarter also included other more typical tax benefits including deductions associated with share-based compensation payments as well as non-recurring discrete benefit of $2.3 million worth $0.02 per diluted share from the reversal of provisions to uncertain tax positions.

So remind you, the first nine months of 2017 including an additional $13.3 million of non-recurring discrete benefits. Excluding these non-recurring discrete benefit items and the impact of the tax law changes, the effective tax rate for 2017 included in our adjusted net income was 24.8%.

Based on our initial reviews, we estimate the effective tax rate for 2018 will be around 25%. Please note, our guidance provided in December was based on an effective tax rate of 29%. Following on from the tax law changes, I want to touch on our expectations for cash repatriation.

Hexcel has historically done a very good job of funding our investments for growth outside of the U.S. from profits generated in those regions. Therefore, although the new tax environment should facilitate simpler repatriation of overseas profits back to the U.S., we do not expect to see a substantial change in the flows of cash into the U.S.

in the near term. As Nick mentioned, free cash flow for the year was a record, a $150.6 million more than double our 2016 levels of $73.3 million and significantly higher than the $100 million we initially forecast. Working capital improvements contributed $20.3 million compared to the use of $18.6 million in 2016.

Accrued capital expenditures were $284.4 million for the year, which compared to $320 million in 2016. As previously announced, we expect to see much lower spending in 2018 and beyond. We spent a $150.3 million in 2017 on share repurchases and have $242.5 million remaining under our share purchase reprogram.

Before turning it back to Nick, I'd like to review the 2018 guidance we provided in December. We continue to expect consolidated sales of $2.1 billion to $2.2 billion or 9% growth at the midpoint. Within that number, we anticipate Commercial Aerospace growth in the high single-digit.

Sales remain relative stable in Space and Defense and double-digit growth in Industrial, primarily driven by wind energy sales. In line with regulatory guidance, Hexcel is adopting the new revenue recognition accounting standard from January 1, 2018. Hexcel is using the modified retrospective approach for this adoption.

This new standard will result in us recognizing revenue for certain customers prior to goods being shared. We do not think the ongoing effect of this standard will be material to our financial statements, and believe that the impact could vary up or down quarter-to-quarter by $0.01 or $0.02 per share.

For 2018, we expect EPS of $2.96 to $3.10 which reflects an effective tax rate of 25%. This represents an increase from the previous guidance provided in December of $2.80 to $2.94 which assumed an effective tax rate of 29%. Capital expenditures are expected to be in the range of $170 million to $190 million.

Free cash flow is forecast to be greater than $230 million. I would like to reiterate that we anticipate returning greater than 50% of our net income to shareholders through dividends and stock buyback. With that, let me turn the call back to Nick..

Thanks, Patrick. 2017 was a strong year for Hexcel despite the lower than expected sales. We saw a robust earnings and a steep increase in free cash flow and ended the year with the best fourth quarter on record for the Company. As we enter 2018, we have tremendous momentum particularly in commercial aerospace and wind.

We continue to expect a record year in sales in 2018, which coupled with our diligent execution, should drive enhanced earnings, increasing cash flow and long-term shareholder value. As such, Hexcel remains an incredibly attractive investment. With that, we’re ready to take questions..

[Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open..

I guess first, and Patrick, you touched on this a little bit with tax reform. Hexcel is a company that continues to invest.

Does this change your capital deployment strategy at all? And just, how are you thinking about the M&A pipeline from here?.

Good morning, Sheila. It doesn’t fundamentally change our capital deployment strategy which remains around organic growth, M&A and then shareholder return through dividends and stock buyback.

Obviously, as announced in the revised guidance where we’re taking the tax law changes down to EPS, fundamentally we would argue, we’ve always invested both in R&T and capital projects as required and then we haven’t constrained the Company and we will continue to do that. In relation to M&A, we will continue to be very disciplined.

We will look for attractive targets that are accretive and enhance our technology portfolio and consolidate additional revenue where that’s appropriate. So, obviously, we welcome the tax law changes, but I think the simple answer to your question is it does not fundamentally change our strategy..

And then on other commercial you mentioned some pickup in recovery in bizjets.

I guess, what are you gearing from your bizjet OEMs? Is it on any class or cabin, if you could elaborate on that at all?.

Yes, so Sheila, we’re seeing strong growth from Bombardier from Gulfstream and even Embraer and projecting those sales to hold strong through 2018. New programs have been launched and our content hasn’t increased on those programs. So, we’re seeing a nice recovery and certainly strong growth in 2018 for the other commercial aerospace segment..

Thank you. Our next question is from Mike Sison of KeyBanc. Your line is open..

In terms of just a quick question on auto. Seems like lot of folks highlighted carbon fiber at the Detroit Auto Show a couple of weeks ago.

Can you maybe talk about some of the momentum you're seeing and some of the new projects that you’re working on?.

Well, certainly momentum continues to pick up in automotive. It such a big market and we continue to work with those like BMW, Lamborghini, Mubea on various specialty platforms where structural strength, aesthetics or a real need for composites offer us an opportunity to differentiate.

So I think as Patrick said, we saw growth in the 20 plus percent range. I have no doubt we’ll continue to see growth going forward.

I think the real challenge is to continue to identify a processing means and technology that fit the application and the need that the auto makers are looking for, and specifically our target markets are those where there is a sustainable competitive advantage, and it's not defined as a commodity.

So, our real structural need or a way takeout where metals just will do the job are the areas that we're focusing on going forward Mike.

And then quick follow-up, Commercial Aerospace encouraged to see that turn positive in terms of organic growth in the fourth quarter, how do you see that accelerating as the year unfolds?.

Well, we certainly expect to see the new narrowbodies, the Neo and the Max continue to grow, not only with the increased secular penetration, but the rate increases that are coming. A350 will continue to grow. Out in another year, the 77 will go to 14, so the growth programs are going to do well.

Certainly, everyone is looking at the ramp rates on the Neo and the Max, and everyone recognizes the steep curves and are a bit cautious on execution there. But I am rooting for both Boeing and Airbus to deliver. On the widebody, we still see some pressure as the 777 is going to ramp down to 3.5.

So there maybe a little more adjustment in that supply chain, maybe a little more in A380. But net and net, we believe the bulk of the supply chain adjustments on those widebody reductions has happened. Clearly, there'll be efficiencies and increased push to optimize the supply chain, but we think most of that behinds us Mike..

Thank you. Our next question is from Robert Stallard of Vertical Research. Your line is open..

I was wondering, if you could follow up on that comment about the Neo and the Max? And where your capacity sits at the moment because obviously Airbus and Boeing had another strong year for order intake and there has discussion of raising rates even higher.

I was just wondering what your capacity is to do with that?.

Well, we certainly have capacity in place or plans in place to deliver their announced rates approaching 60. If they go above that, we'll have to evaluate that. So for example -- and we communicated this many times, our carbon fiber assets are fungible.

So when programs fall off, we consume that with growth programs so that we optimize our capital utilization. Right now, the narrowbodies, I don't see any impact or need for further investment to deliver and achieve what the OEs are saying, they are going to do.

Now having said that, we still have programs like the A350 and JSF, and some of the other blade platforms that will continue to require fiber and that's part of our investment and announced strategy indicator Alabama for another PAN line and fiber line..

And then secondly, staying on Commercial Aerospace.

How would you characterize the pricing environment at the moment with the OEMs?.

The pricing environment is always our customers, are always trying to optimize their performance and their competitive position and their margins. And we view that as an opportunity for us to help them achieve their goals and be the low cost provider while maintaining our margins.

So, we drive productivity, we drive efficiency, we drive innovation to identifying new ways to do things, to help them deliver their goals. So, the fact that they're defined and highly communicated cost takeout programs, cost takeout have been around for a long time, and as far as I’m concerned, they’ll be around forever.

Maybe even tax legislation will contribute to the request, but again it doesn’t change our direction on how we’re going to solve the challenge and meet our customers’ needs..

Thank you. And our next question is from Richard Safran of Buckingham Research. Your line is open..

I guess Patrick this first question is for you. So I wanted to ask you about your global footprint and your comments on how tax impacted you. So given the reduction in U.S.

rates, I wanted to know how you’re thinking about your manufacturing footprint? Particularly and I know you have -- you have new facility starting up, you have facilities in France and Germany. There is a new tax law incentivized you to change your footprint perhaps consider more work in the U.S.

Is there something that you might consider in ’18?.

So I think the way I'd answer that, Richard, is that I mean, I think our legacy footprint, we’re well established, very deliberately to be local to our customers both in the U.S. and in Europe, and I think we value that customer locality very strongly.

I think that’s strength of Hexcel, it's been a strength for many years and that relationship sides, but I think it's very unlikely we’re going to move any of the existing footprints. I think probably as you’re alluding to as we model out investments in the future, clearly a U.S. financial model that includes a 21% tax rate is going to help that model.

I don’t have anything specific to attach to that today, but obviously a 21% rate is potentially good for the U.S. justification case. So understand the question and I think in general, we’re not going to change the past and we’ll evaluate with discipline as always our investments in the future..

Now, if you answered this already and I didn’t hear it. I missed a part of it at the beginning I apologize, but I ‘m just interested in rotorcraft.

Was the improvement all Sikorsky? Was there any V-22 in there? And just in general, if you could comment, has that business really turned?.

So, I’ll take a shot at that and Patrick can correct me. But it was broader than just Sikorsky. V-22 did show strong growth in the fourth quarter and it was pretty much driven by military rotorcraft.

Commercial, it was you know not flat, but not up enough to say anything has changed and that’s pretty much the way we see 2018 plan out and that’s commercial rotorcraft is holding pretty much steady. So, it was broader than Sikorsky though Richard..

Thank you. Our next question is from Gautam Khanna of Cowen. Your line is open..

To follow up on Richard’s question.

Was there just sort of non-recurring orders, lumpy orders in the fourth quarter at defense and space? Or is there something where you have visibility now to improvement in sustaining in Q1 and beyond?.

So, what I would say Gautam is, I don’t think there was anything particularly that it jumps out, as Nick said, we were fairly strong on the V-22 on the Black Hawk in the quarter. JSF remains steady. It doesn’t really change our guidance for 2018 where we’re positive certainly around programs like the Joint Strike Fighter which continues to grow.

Obviously, you will recognize that Airbus had called out the A400M now, which was a headwind I guess we were aware of and was included in our guidance. So we see some pluses and minuses, but our stable outlook for space and defense remains as our guidance..

And as you guys -- Nick you mentioned some of the programs that may have some variance over the next year, 777 and alike.

Is there any lingering destock attached to any of the programs, right now? Or are we through the destocking and so we should just kind of model to the actual rates at this point?.

Well, we certainly see some additional softness coming on the 777, both due to the rate coming down to 3.5, and there'll be a little bit of inventory adjustment there, which we built into our forecast, maybe a little on the A380.

But again, we think the bulk of that is behind us, nothing to the impact that we saw in the first half, in the first three quarters of 2017. Having said that, we always work with our supply chain, our customers and our suppliers to optimize the supply chain and take waste out of the system.

So that's an ongoing effort, but it should move the needle from your modeling perspective..

Thank you. Our next question is from Ken Herbert of Canaccord. Your line is open..

Just Patrick maybe first on the strong fourth quarter free cash and full year in particular, I mean really nice on working capital that you called out.

Was any of that a pull forward maybe some of what might be implied in '18? And I guess specifically, how should we think about working capital and the opportunities for perhaps other incremental improvements in 2018, as part of the free cash flow guide?.

None of it was a pull forward, it was all 2017 performance. I mean in simple terms, our EBITDA was down because of revenue, but we did a very good job in relation to receivables and inventory and our working capital. We had through existing tax strategies. R&D credits to please bonus depreciation et cetera.

We were able to reduce our tax cash in 2017 and that really drove the 150 million free cash flow results, which we are extremely pleased with. As we look forward to 2018 where we forecast obviously the greater than 230 million free cash flow, we've got lower CapEx which is obviously a significant factoring in that step up.

In relation to tax performance, I think I that called out our net cash tax impact from the tax reform changes is under $10 million. So, it's not hugely significant. We do get some benefit. There's some puts and takes on the rate coming down, but then we have some cash tax outflows to do with the transition tax.

So, it doesn't change the picture dramatically. We think the 230 is a good target and that's what where we're still aiming for this point in time..

And as you -- can you remind us when the peak is in terms of spending for the capacity additions in Alabama, the two lines or multiple lines you're putting in there? And how does that alter your view of sort of maintenance or sort of base CapEx, or capital spending requirements moving forward?.

I don't think it -- just to jump to your last point, it really is going to move the needle on our, if you maintenance CapEx which is always such a difficult question to pinpoint. I think I would say sort of in the $70 million range as a number, one new facility won’t move that massively.

We announced the expenditure on the PAN line and carbon fiber line indicator in December. That expenditure will take place through ’18, ‘19 and ’20 when the lines will be completed. As far as I know, that this spending will be fairly even through that period..

Thank you. Our next question is from Drew Lipke of Stephens. Your line is open..

I am curious, what sort of impact should we expect from new lines startup cost in the first half of ’18 here? And then maybe as we think about that new facility in Alabama breaking ground?.

Okay. So in relation to 2018, we still have some -- so, we called out the headwinds of roughly $10 million in 2017 for Roussillon and Morocco. Morocco has been sort of up and running since quarter three 2017.

Roussillon is going to take a couple of more quarters to complete, and so based on a similar run rate, we will have some headwinds in terms of cost through quarter one and into quarter two. That could be the magnitude of $4 million or so with all the headcounts and training that’s going on.

The Alabama path is a little bit premature, but -- again, it’s a new fiber line and a new PAN line. However, it’s at an existing facility and it will be a smoother transition. There will be some cost headwind in terms of training and headcount before the plant is fully productive, but perhaps not the quite for the same extent as Roussillon, France..

Is that 4 million quarterly or for the full year?.

I’m saying for the full year which is already the first half of the year..

Okay. So you called out that 10 million cost in ’17, and absent that, margins would have been up 20 basis points on sales being down as we see the acceleration in sales throughout the year.

Should we think about any kind of change in incremental margins going forward as we anniversary new end start up cost?.

Obviously, if you take away headwinds and that's going to help, but I mean it's built into our guidance. But for the year already, we obviously have puts and takes in terms of margin. We’re obviously trying to push for the best incremental margin we can. We’ve called out sort of mid-20s as a target.

It will depend on the mix of business but we’re trying to take as much to the bottom as we can. At 18% or so we think that strong performance is what we will continue to push..

Thank you. Our next question is from Noah Poponak from Goldman Sachs. Your line is open..

So I wanted to go back to the commercial aerospace end market growth pace cadence, I guess from kind of staring at the model here, it’s the first half of ’17 had the widebody inventory destock and the second half largely didn't.

I guess I’m sort of wondering why the second half growth wasn’t faster or wasn’t closer to the high single digit that you’re projecting for ’18 or maybe what the bridge is from second half ’17 growth to ’18 growth because the 777 coming down, but that to kind of a small piece of the revenue, A350 I think has been reasonably smooth and on plan for you, and the reengineer bodies a decent part of the mix in 2017 for the OEMs.

Obviously, they still need to mix up, but presumably you’re leading them. So I would imagine those would hope started to be a healthy mix of the revenue in the back half of '17.

So what am I missing in that bridge from kind of how things moved kind of close to flat back half of '17 to the upper single in '18?.

I might repeat some of what you've said. But I mean our take is -- I mean the way we look at it is narrowbodies continues to grow. We're going to enjoy the mix transition from the legacy both for Airbus and Boeing to the Neo and the Max. The A350, I would guess it'd be probably at about rate 8 or 9.

And as you say, it's going to go up to 10 probably by about midyear 2018 for us. A380 is probably going to go down to about 8 per year and we'll see that's going to decline. 777, is probably close, but maybe still working its way down slightly.

The 787 towards the end of this year is going to step up, we might see that in quarter four for the March '19 move to rate 14. So, we're expecting to see steady I think we called out high single-digit growth in 2018 for commercial aerospace, and we stand by that so I am not quite sure where the gap you see is, but we stand by that outlook..

It would seem like the most likely explanation to that would be the reengined narrowbodies just being a much larger portion of your absolute dollars and of our growth rate in '18 versus the back half of '17.

I mean any ability to quantify in that for us, like how much was that for you in revenue in '17 and where does it go in '18? Or what was the rate in '17 versus where it goes in '18?.

There's no question, the Max and Neo drive significant percentage of growth next year. And our shipset content depending on what platform, either a 100,000 or 200,000, or a 100,000 or a 150,000 increase when you ship from the legacy to the new platform. But we really don't want to get into specifics.

We don't call out how many Neos we ship versus legacy. And again, it's a complex supply chain, so we have an estimate on that. But your point on Neo and Max increasing next year is certainly spot on..

Thank you. Our next question is from Chris Kapsch of Loop Capital. Your line is open..

So, this is sort of a follow-up on the last one. I had -- so given your commercial aero guidance for high single-digit growth, it doesn't seem like you can get there without the A350 program being at least high single-digit growth and maybe above that.

And yet in the fourth quarter, it looks as though and I think based on what we discussed last evening, it sounds like A350 was flattish in the quarter.

So just wondering, can you elaborate a little bit more on why that might have been flat in the quarter? And then to see a reacceleration in the growth comps for that program, over what timeframe would you expect to see that? Do you -- should we expect the bounce back in the growth rate for the A350 in the first quarter? Or is it going to ramp up over the course of 2018?.

Yes. So, Chris, we do expect to see high single-digit, low double-digit growth for the A350 in 2018. I think the quarter-over-quarter comparison what really stands out to be honest is quarter four 2016 was exceptionally high. It was a bit of an oddball in the run rate. And so, that made it comparative to this quarter a little bit off.

So I wouldn’t read too much into that. For whatever reason, it was slightly lumpy and quarter four 2016 was just very high rather than 2017 being offbeat. I think 2017 was where we expect and we do project the growth to continue into 2018..

Would the growth in -- the implied growth in A-350 be double digit for revenue growth for that platform in ’18 or just more consistent with the overall?.

Low double digit, Chris..

And then, you talked a little bit about your sensitivity to the currency and obviously Hexcel is a little bit unique given that you sell a lot of the material in dollars, and so the euros strong and even breaking out it looks as we speak and just curious about your guidance for the full year.

What's the assumption in terms of the dollar-euro relationship? And just how hedged are you in ’18 at this point? And have you started hedging at all for ’19?.

We've hedged out 10 quarters and we’ve done that for some time. So, yes, I have hedging out into 2019 perhaps 30% and even out into 2020. We’re probably about two thirds, 70% hedged for this year at this point in time. I mean you’re right to sort of acknowledge that the dollar weakening is a bit of a headwind for us right now.

I wouldn’t call out that it will materially change our results at this point but yes the weakening dollar is a bit of a headwind..

Thank you. Our next question is from William Lee of Wolf Research. Your line is open..

How should we think about how fast research and technology expenses will grow in 2018? In the past, I believe you target about 10% year-over-year growth. We tracked below that over the last year.

So should we expect to see some catch up in 2018?.

I think consistently, we say 10% double digit. We basically spend what we need to spend. We spend what we identify opportunities for and we hire when we find the right talent to make sure we have the capability. So it is a little lumpy based on qualifications, based on critical projects.

So, maybe, you’ll see it come down a little bit, but don’t expect a 2x or a big catch up. It's just based on what we have in for your modeling 10% in that ballpark is directionally right..

Thank you. Ladies and gentlemen that does conclude today’s call. You may all disconnect. Everyone have a great day..