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

Mike Sison - KeyBanc Krishna Sinha - Vertical Research Partners Sheila Kahyaoglu - Jefferies Robert Spingarn - Credit Suisse Gautam Khanna - Cowen & Company Ron Epstein - Bank of America John McNulty - BMO Capital Markets Noah Poponak - Goldman Sachs Christopher Kapsch - Loop Capital Markets Myles Walton - UBS David Strauss - Barclays.

Good day, ladies and gentlemen and welcome to the Standard Webs titled Explaining Hexcel Third Quarter 2018 Earnings Conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

I would now like to introduce your host for today’s conference, Patrick Winterlich, Chief Financial Officer. Sir, you may begin.

Good morning, everyone. Welcome to Hexcel Corporation's third 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.

They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings 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 third 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. Our third quarter results demonstrate a continued momentum and supports our positive outlook to finish 2018 strongly. As you all have read in last night’s release our third quarter sales were $540 million a 10.4% increase over our third quarter 2017 sales in constant currency.

We delivered third quarter operating income of almost $97 million, which increased 8.3% from last year’s third quarter resulting in an operating income margin of 17.9%. Our adjusted diluted EPS of $0.80 was nearly 13% above last year’s third quarter.

Free cash flow for the first nine months was $128 million versus $87 million for the same period last year, representing a $41 million improvement. Now let me share some insight into the key drivers for the quarter. Starting with the commercial aerospace, sales increased 6.1% in constant currency for the quarter compared to 2017.

Narrowbody programs both in terms of build rates and the higher shipset content on the Neo and the Max, continue to be key drivers. Year-to-date our commercial aerospace sales are 8.4% higher in constant currency, reflecting solid and continued growth for the A350, 787, 777X and the Narrowbody programs.

In recent quarters, we have also seen resurgence in regional and business aircraft. Sales this quarter in other commercial aerospace were up 15% driven by a number of Bombardier, Embraer and Dassault programs. You will remember that in 2017 sales in this sector were down 6.5%, so we are seeing a strong recovery in this market space.

Turning to space and defense. Sales of $90 million reflect an increase of just under 10% in constant currency for the quarter as compared to the third quarter of 2017. Higher sales in military and commercial rotorcraft more than offset the previously announced lower Airbus A400M production rate.

Key ongoing programs for Hexcel include the F-35 Joint Strike Fighter, the V-22 Osprey, the UH-60 Blackhawk and we are beginning to see the ramp up for the CH-53K heavy lift helicopter. As a reminder, Hexcel enjoys strong positions in the space and defense sector which continues to be a leading adopter of advanced composites.

We benefit from our diverse portfolio of applications that support more than 100 active defense programs. Finally, to our industrial market which accounts for 13% of our year-to-date sales, total industrial sales of $77 million in the third quarter represents an increase of more than 38% in constant currency.

As a reminder, last year we reported debt sales were challenging in this market and that we expected to see an improvement in 2018 as legacy wind energy blades transition to higher composite content blades.

As you can see from our results this quarter, I am pleased to report that improvement is taking shape with wind energy experiencing a period of substantial growth. The fact that the world continues to adapt clean and affordable wind energy is a tailwind for Hexcel and we are excited to see continued strong demand.

During the third quarter, Hexcel performed in line with our expectations by almost every measure and we are proud of our results, supported by our key initiative of operational excellence. Despite the headwinds of unfavorable exchange rates, higher than expected AN and wind resin pricing and new tariffs in the U.S.

which negatively impacted margins, our team improved yet again, they are the strength within delivering another disciplined first class performance. As we look to finishing out 2018 strongly and on target to hit our guidance, I want to remind you of Hexcel’s commitment to driving shareholder value.

The first being investing in innovation to win future programs and expand composite penetration. Over the last three months, we showcased that commitment by driving innovation and growth, let me share some examples.

Earlier this month, we celebrated the grand opening of our Roussillon plant in France, which will help us meet the growing demand for advanced aerospace composites, admittedly getting Roussillon ready for business has been somewhat of a headwind over recent quarters, yet we expect it to quickly switch over to a tailwind and produce a great return on our investment beginning in early 2019.

Remember that, Roussillon becomes our first plant to produce both pan precursor, as well as carbon fiber, in an optimized supply chain configuration. This co-location of assets is further evidence that from raw materials to flyaway parts, Hexcel is committed to being the most vertically integrated, advanced composite company in the world.

In September, our Acousti-Cap sound reducing honeycomb completed a successful joint NASA-Boeing flight test on a 737 Max test platform. This solution provides approximately 40% noise reduction compared to the Legacy Platform.

Also in September, Northrop Grumman conducted its first ground test of the GEM 63 motor for the Atlas V rocket using our carbon fiber, reinforcements and prepreg.

And in industrial, the new Lamborghini Aventador SVJ supercar was introduced, and it includes Hexcel composite materials throughout including the safety critical monocoque, the rear spoiler and the roof. As the advanced composites leader, innovation and technology are at the heart of what we do at Hexcel.

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

Our second commitment is exploring M&A opportunities, which includes pursuing with vigilance and discipline adjacent technologies that would complement our existing portfolio. We believe this provides another strategic avenue for us to grow. These investments will be supported by our continued journey from cash investment to cash generation.

The first nine months of the year our free cash flow was $128 million compared to $87 million in 2017. We remain committed to achieve greater than $230 million in free cash flow in 2018 which would be a record year for Hexcel.

Investment in innovation to win new programs and expand composite penetration, significant growth and free cash flow and continued stock repurchases and returning cash to shareholders through dividends, all demonstrate our commitment to creating value for our shareholders.

In summary, we are proud of yet another strong quarter, thanks to our teams focus to deliver on our commitments. As a result, we are narrowing our guidance ranges for 2018. We now expect full year sales between $2.14 billion to $2.2 billion and adjusted diluted earnings per share of $2.99 to $3.07.

We target sales to achieve high single digit increases in commercial aerospace and space and defense and we expect a strong double-digit year-over-year increase in our industrial sector. Now let me turn the call over to Patrick to discuss more of the quarter’s financial details..

Thank you, Nick. Let me 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 headwind to 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 continued strengthening of the dollar as 2018 progresses is favorable to Hexcel although the impact is moderated by our hedging program. Consistent with the last quarter, we continue to expect a $0.04 to $0.05 headwind with full year earnings per share with about $0.01 impact falling into third quarter 2018.

Sales of $540 million in the third quarter of 2018 were up 10.4% year-over-year, making another solid quarter for growth. Our adjusted diluted EPS for the third quarter was $0.80, an increase of 12.7% compared to the third quarter of 2017. Now turning to our markets. Commercial Aerospace represented 69% of total third quarter sales.

Commercial Aerospace sales of $373 million increased 6.1% compared to the third quarter of 2017. Narrowbody aircraft production rates combined with the transition to the latest generation Neo and Max configuration was the largest contributor to the year-over-year sales growth.

Other commercial aerospace continues to strengthen, particularly due to continued demand in business jets related to Bombardier, Embraer and Dassault programs. Space & Defense represented 17% of sales. For the third quarter, Space & Defense sales totaled $90 million, an increase of 9.7% from the same period in 2017.

A number of military and civilian rotorcraft programs contributed to the sales uptake, offsetting the expected declines in the A-400M program. Satellites and launches also grew strongly, reflecting greater activity in the space sector. Industrial comprised 14% of third quarter 2018 sales.

Industrial sales totaled $77 million increasing 38.2% compared to the same period in 2017. Wind energy continues to strengthen with the adoption of new generation of blades by our largest wind energy customer, which is consistent with our prior forecast. We remain confident in this strong outlook through our wind energy sales.

On a consolidated basis, gross margin for the third quarter was 26.5% as compared to 27.6% in the third quarter of 2017. Depreciation expense increased year-over-year due to continued investment in the business to support growth.

As Nick briefly mentioned, the third quarter of 2018 was also impacted by headwinds called out after the second quarter including the cost of acrylonitrile, which is the base raw material for our carbon fiber and is indirectly impacted by oil prices.

Additional tariffs were imposed during the third quarter that would impact Hexcel that we are actively pursuing methods to trying to minimize the impact over time. Last quarter I called out a resin headwind for our wind energy business due to the temporary pollution control measures enacted by the Chinese authorities.

This issue is some during the third quarter 2018 and while pricing is still elevated compared to a year ago, the magnitude of the difference is lessening as pricing is moving back down. And we don’t expect this headwind to continue into 2019.

Total depreciation expense increased $4.5 million from the third quarter of 2017 reflecting continued capital investment. As we have previously mentioned we expect our appreciation expense to be higher year-on-year by approximately $20 million.

Our continual focus on disciplined cost control led to approximately a 7% reduction in selling, general and administrative expenses year-over-year, while sales grew during the same period.

Research and technology expenses increased $2.1 million or approximately 19% year-over-year as we continue to invest in innovation and prepare for future aircraft platforms and other composite applications that will be the driving force behind Hexcel’s long-term growth objective.

For the third quarter operating income increased $7.4 million to $96.5 million or 17.9% of sales as compared to $89.1 million or 18.1% of sales for the third quarter in 2017. The year-over-year impact of exchange rates was effectively neutral due to our currency hedging program.

The composite material segment represented 80.1% of total sales and generated an operating income margin of 20.6% for the third quarter of 2018 as compared to 21.7% margin in the prior year period.

The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 19.9% of total sales for the third quarter. Engineered Products generated an operating margin of 14.4% in the third quarter 2018 as compared to a 13.1% margin in the third quarter of 2017.

The year to-date margin is now 13.5%, while the operating margin is lower than composite material segment, Engineered Products requires a much lower level of investment generating returns on invested capital that are as attractive as those as the composite segment.

The effective tax rate for the third quarter of 2018 with 9.1%, this effective rate was favorably impacted by changes related to the 2017 tax cuts and jobs act or tax reform, changes in tax accounting methods, the release of a valuation allowance related to one of our foreign jurisdictions and ongoing business development that affected our transfer pricing which will have a favorable impact on our ongoing tax rate.

We are now guiding to an underlying effective tax rate of 24% for the fourth quarter of 2018. Free cash flow totaled $128 million year to-date compared to $87 million for the comparable prior year period. Working capital was the use of cash during the third quarter reflecting the growth in revenue in 2018.

Strong focus continues in this area and as we have seen in prior years we expect working capital to be a source of cash in the fourth quarter of 2018. Capital expenditures were $43 million for the third quarter on an accrual basis, in comparison capital expenditures in the third quarter of 2017 were $48 million.

Year to-date 2018 capital expenditures are in line with our 2018 financial guidance. We repurchased $102 million of common stock during the third quarter bringing our year to-date repurchases to $283 million. We have $460 million remaining under our share repurchase program.

We expect the Roussillon, France facility to gain aerospace qualification early in 2019 and once this is completed production will ramp quickly. Roussillon, which was a headwind in the first half of 2018 is transitioning in the second half and will contribute to margin early in 2019 following aerospace qualifications.

In conclusion, I will address our updated 2018 guidance. Whilst there were a number of headwinds that developed during 2018, we are benefiting from continued market growth, operational strength across our business and a lower tax rate.

We are forecasting full-year sales to be between $2.14 billion and $2.2 billion, previous guidance was a range of $2.1 billion to $2.2 billion. We are forecasting full-year adjusted diluted earnings per share to be between $2.99 and $3.07. Previous guidance was a range of $2.96 to $3.10.

We continue to forecast generating free cash flow in excess of $230 million for the year. We are forecasting accrual based capital expenditures of $170 million to $190 million which is unchanged.

I would like to remind you that our capital expenditures continue to support investment for grow over the next several years both the aerospace and industrial applications.

Our capital allocation priorities continues to be investing in organic growth followed by targeted and disciplined M&A and we are committed to returning greater than 50% to our net income to shareholders through dividend and stock buyback. With that, let me turn the call back to Nick..

Thanks, Patrick. Hexcel delivered a solid third quarter and continues to be on-track to meet our full-year guidance.

At Hexcel our team consistently demonstrates the ability to deliver on commitments to a strong focus on operational excellence constantly striving to achieve higher levels of productivity and efficiency while leveraging cost as our sales grow. Our markets are strong with continued long-term growth expected.

Our focus throughout the remainder of 2018 continues to be driving innovation and operational excellence to achieve strong sustainable financial results. The transition from an investment cycle to a cash generating cycle is clear.

Our disciplined capital deployment priorities remained unchanged and we are delivering our commitments to our shareholders. Revenue passenger traffic is robust, backlogs are strong and Hexcel has not been affected by any bottlenecks in our customer supply chain which we expect to continue to be the case.

Sales growth in commercial aerospace will continue as existing program strengthen and as new program such as the 777X begin to ramp up and as new engines and nacelles where we have substantial composite content are adopted across next generation program.

Our composite shipset for engines and nacelles are growing considerably with new narrow body engine and nacelles content increasing three-fold and wide-body engine and nacelles content going up 50%. Anticipated revenue growth from engines and nacelles over the next few years is in the high single-digits.

We also expect solid growth to continue beyond 2018 in Space and Defense programs such as the JSF, the CH-53K and medium lift helicopters.

And our industrial market provides a multitude of opportunities ranging from wind to automotive and energy, electric vehicles to energy storage where advanced composites have a key role to play in solving future light-weighting challenges. It should clear; growth remains a key strategic focus for Hexcel.

As we have said before, advanced composites are secular growth story providing the best strength to weight ratio of any structural materials. The advantages of composite are evident, lighter, stronger, greater durability and there are enormous opportunities in front of us on new more composite intensive applications in aerospace and beyond.

We’re confident in our position as a global leader in advanced composite technology and expect to continue generating sustain long-term growth and creating shareholder value. Ashley, we’ll now turn it over to you and like to take questions..

Thank you. [Operator Instructions] And our first question comes from the line of Mike Sison with KeyBanc. Your line is now open..

Hey, guys. In terms of commercial aerospace, Nick, and you think about 2018, I know, you don’t give specific guidance yet, but it still sounds like there’s a lot of momentum in engines and nacelles and such. So, when you think about the growth rate heading into 2019 relative to let’s say, 2018.

Should it mirror 2018? Should it get better? Should it be about the same, little bit less?.

Well, Mike, you're right in your first assumption that, it’s a little early for us to give specific guidance, but I will say, if you look at the fundamentals and if you look at revenue passenger growth, if you look at the backlog, if you look at even order intake during Farnborough Show this year, you’ll look at the fact that the 787 is ramping to 14 in 2019 and you’ll look at the fact that 2019 we should see a full year of rate 10 [ph] per month, all of which translate into strong growth for us.

And then certainly the narrow-bodies which really were the biggest driver in Q3 continuing to ramp up both the shipset content, benefit as well as the rates climbing upwards to 63 and 57 in 2019..

Great. And then, for wind you talked about moving more composites on the blades, from the legacy wind blades this has been a banner year for that.

Does that have a lot of legs heading into 2019 and 2020? Is it sort of all done or to be still have a lot of opportunity there in terms of adding more composites?.

Yes. So, again, just as a reminder, 2017 was really soft and we guided back at the end of 2017 that 2018 would be – we expect it to be at or better than 2016 levels, which it has been. Having said that, our key customers are still ramping up and we expect the growth to continue well into 2019 and beyond..

Great. Thank you..

Thank you, Mike..

Thank you. And our next question comes from the line of Krishna Sinha with Vertical Research Partners. Your line is now open..

Hi. Thanks. Just to talk about the margins real quick. You called out three separate components there that are headwinds. You call them at last quarter, but sounds like tariffs last quarter you said would be a $2 million to $3 million annual impact.

How much do you think it’s going to be an impact now that they’ve increased and in worst case scenario going forward how much can we expect for that to take out of margins? And then same questions for the acrylonitrile price cost issues you’re having.

And then resin sounds like it’s going away, but can you just kind of size that for us as well?.

Yes. Hi there. So in relation to the tariffs, we called out a $2 million to $3 million impact sort of following second quarter earnings. What we’ve seen in the third quarter would push us to probably say, $4 million to $5 million. What I would say, and that’s $4 million to $5 million on an annual basis.

What I would say is we’re working hard to get exemptions on part of that, hopefully just over half 50%, 60% of that that we can mitigate and we can avoid as a unique sort of supply chain that we may be able to offset those tariffs. But obviously we’re watching the tariff space closely and we’ll do what we can to mitigate it.

But all else aside, if we can’t do anything it is $4 million to $5 million which after tax and dividing is probably $0.04 to $0.05 of EPS. In relation to AN and the wind energy resins we obviously haven’t and we don’t intent to put exact dollar amount around those.

The wind resin – the price is easing a little bit and through our contracts we have an opportunity to sort of rebase as we go into 2019 to overcome that, so as a I said, we don’t see that as a headwind in 2019. The acrylonitrile trial is the base for our carbon fiber. That has gone up as a result indirectly of oil prices.

We have some oil closes in a number of our commercial contracts that allow us to move our pricing periodically, so some of that impact will be mitigated. What I would say is to just to put a perspective on this, AN is sort of right at the front end of our vertical supply chain is not our biggest raw material.

So, for example epoxy raisins that go into our films, we have long-term contracts on and so we're protected from the price of oil where that would be a bigger impact for us. And our commercial contracts running through 2030, we have supply contracts also through 2030 that protect us there..

resin and tariffs? Can you just size that for us?.

Well, I mean you're obviously putting the right pieces together. I mean, so we have the headwinds, we got the quarter and nine trial, we got the FX which we've consistently set against our guidance is about $0.05. We got the tariffs which we just talked about. We got the wind resins which continue through this quarter.

So, those have all been headwinds and in the first part of the year we had Roussillon the new plant in France which is now transitioning and will become a tailwind as we go into 2019. So, those are headwinds which the guys operationally are teams that worked very hard to overcome as much as possible.

And then with the help of tax, we're getting ourselves to deliver our guided EPS. The tax rate I would say is 24% now our underlying effective tax rate and that's what you'll see in the fourth quarter. So, the average for the year is clearly I think we got 21.3% during the first three quarters, 24% in the last quarter.

I guess, I'm saying about 22% or so for the year. And 24% is I say yesterday is my best due forward on tax.

So, it's a combination of working hard to overcome the headwinds a lot of which is going to sort of disappear as we go or certainly less than as we go into 2019 and with a little bit of help with the tax we're going to deliver our initial full constant numbers..

Okay. And just one more follow-up then. Can you bridge to the, you didn’t change your free cash flow of guidance and so does that kind of imply that CapEx will come in towards the lower end of your range in order to kind of help you. You reiterated a 170 to a 190 of CapEx.

Do we see a little bit of a CapEx pull back in the fourth quarter in order to kind of help you hit that $230 million or more of free cash flow?.

I would expect this to come in in that range and we've obviously delivered. The mid-point is what it is deliberately, let me say that..

Thank you. And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open..

Hi, good morning Nick and Patrick..

Good morning..

Good morning..

Trying to avoid saying the word accrual in my job but I guess it's going to happen. How do we think about that raw material, are there any raw material other price increases that you're seeing outside of that and the resin. And the timing of when the contract catch up.

Patrick, you seem to suggest that a step up in a long term commercial contracts and how we could think about when they match up?.

Yes. Hi, Sheila. So, most of our key role materials certainly are major epoxy much functional resin as I was saying covered by long-term contract. So, we do a very good job to mitigate that impact. Acrylamide trial flows is related to a propylene formula we buy on which is related to the price of oil ultimately. And we have had some headwinds for that.

Now, we're not going to quantify that exactly but it has been headwinds. It's hard to -- we have different commercial contracts that you can imagine and there's structure different label. We have a number of them we close is which will allow us to recover some of the oil price movements as a proxy for the AN.

And obviously over time that will lessen the impact. So again, we would be more positive as we go into 2019 but the elevated price of oil may well continue and I mean that's anyone's guess. But we believe we will continue to do a better and better job in overcoming that impact..

Okay, thanks.

And then just on Roussillon as it comes on line and you receive Aerospace qualification, what's the cadence of capacity that's coming online and how do we think about just capacity utilization in that facility next year?.

The line so as we've said, the line should be qualifying towards the end of this year and we would expect it to ramp out with the Aerospace qualification starting in 2019. It will get the capacity very quickly. On one set its qualified facility is running, it will fail.

We need that capacity as Nick said, we will have rate 10 on the A350 next year and Implant it will support that and it will supports other type brand and Aerospace program. So, that capacity will fill quickly starting in 2019..

Right, thank you..

Thank you. And our next question comes from the line of Robert Spingarn with Credit Suisse. Your line is now open..

Good morning. Nick, thanks for the color on the growth that you had a little while ago. I wanted to dig into that a little bit further. I guess a lot of people are focused on this.

But based on your current book of business, most of your commercial aero programs achieve maturity rate next year, so is it fair to conclude that that part of the business plateaus on a revenue basis in H2 19 perhaps with the exception of what you talked about on the engines and the sales and the 777X?.

Yes. So Rob, there is still going to be continued growth on the narrow bodies, they're going to continue to ramp up. The 777X will be starting in at the end of the century and going into 2020. So, given the other engine and the cell programs we still see good growth going forward.

We haven’t changed our long-term guidance that we provided and we continue to work on new opportunities and applications including the finalizing our ship set content on the 777X which were getting very close to being able to do and I hope to do that by the end of the year.

The other thing is really getting a full year of full rate on the 787 at 14 and the A350 at 10, that's going to provide continued growth as well..

Well, understanding, yes that won't hit till 2020 but I wanted -- you're calling on narrow bodies continuing to grow.

You're talking about the possibility that Boeing Airbus go above the current targets?.

Going above the targets that they've said, the 63 and 57 are the latest that they communicated and we're not going to go beyond that but we're certainly doing trades to ramp up above that..

Okay.

And then, have you been able to quantify, you said 777X you'd give us more information soon but can we get some sense of what the content is relative to the 777?.

It's going to be higher and in my term significantly higher. So, we're happy with that, again we got a couple of other packages that we're working on and rather than get ahead of those, I want those to get awarded and then we'll communicate..

Okay. And then just on the fourth quarter, the way the guidance reads, Patrick, is you could be down 30 million or up 30 million in sales. Is that all simply timing and if it is what is it the timing on.

And then my last question is on the win growth of 50% this year you talked about the easier comp but how do we think about that 50% in terms of volume versus pricing and content? Thanks..

Okay. A couple of questions there. So, and we will get some movement in our sales, in our sales mix and then you've obviously got a little bit of FX which can move on number about and we all see tightened the range, perhaps we didn’t tighten it enough for you. But --..

Both up and down, which is sequentially which is the --?.

Yes. So, we see 217s here with the mid points of what we said, you can obviously do the math with where we're kind of guiding to for that. It's just about where we guide it too at the beginning of the year. And you can get some pull-ins pull-outs.

We, I mean we have a complex supply chain that we're putting material into and we think that's a reasonable range. We're obviously aiming for midpoint. In terms of wind energy, the growth is good at good margins. I mean, obviously we talked about the wind energy raising headwinds which has been a headwind this year.

So, our margins are a little bit depressed because of that but is and going into 2019, we'd see continued growth in wind energy and with that those headwinds it should be a strong market space for us..

Thank you. And our next question comes from the line of Gautam Khanna with Cowen & Company. Your line is now open..

Yes, thank you. I have two questions. First, I was wondering if you could comment on downstream yields have changed if at all among your many customers on the A350 or any other programs.

So, should we are the revenue per ships that disclosures that you've given in the past still tracking to what you're seeing?.

Yes, hi Gautam. I would say that close, I mean we look at this I think we have explained before where we continually roll as we roll on strategic plan. We dig into the supply chain which can be complex for us because we ship to multiple OEMs, multiple sub contract is of the OEMs and many delivery locations themselves.

And so, we are continually trying to assess those ships that's on the planes. And we stand by what we put out today though we're certainly in those ballparks close just below just above. We will revive them periodically.

In terms of the efficiency and yields of our customers, as rates go up, certainly as you go through a growth curve or a learning curve for the new platforms, we would expect our customers will improve. And what I would remind you is the ships stats that we put out attempt to be at the final full build rate.

Now the early planes the first one 510 planes takes far more material, the buying to fly ratio is much higher. Above we built that really into what we put out. So, at the moment the A350 is getting close to 10, we don’t expect to see a lot of movement there. The 787, rate 14, sort of rate 12 14 is being at that elevated level for some time.

We don’t expect to see a lot of movement. So, any new program, we do go through a curve but as it say the ship set value we put out we're trying to estimate that final position from the beginning. So, we try to avoid adjusting the ship sets as much as possible..

I appreciate it. And my follow-up question was given the CapEx number was down obviously year-over-year in 2018, what does that potent for DNA next year.

Does, how much does DNA rise?.

So, we saw will see about a $20 million this year. We will see an increase next year; it won't be as large as that. I haven’t sited any exactly yet and frankly we're still rolling that out. But it will be less than 20 but more than 10; I would safely say it will be in that range..

Thank you, very much..

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

Good morning. Just to take in a couple of quick ones. As you transitioned or into this cash generative mode and you think about the point in that cash, particularly as we go into the 19 and 20 that sort of thing.

How are you thinking about that?.

Well, we've been pretty consistent. First we're looking at internal organic opportunities to position our materials for the next generation aircraft engines and the sales or wind turbine blade. So, organically investing and investing in capital and capacity to meet that demand.

Second, looking at technology plays in and around our core space around advanced materials, material science composites that will help us offer a broader and even better solution to our customers for those next generation programs and or to gain incremental ship set content in Aerospace or industrial markets.

And then lastly, it's just returning value to shareholders through dividends and stock buyback while maintaining a depth leverage that we're comfortable with. We've shared we kind of like the 1.5 to 2.0 range and all the way up to 2.5 if required..

Okay. And then, I think in your commentary if I understood that there is still maybe some packages on 777X that you could win.

If you were to that require additional investment or can you give that in your current capital take?.

No, those packages we have assets available today..

Okay. And then, finally when you think about the potential for the middle of the market airplane.

Do you see that as requiring I guess this is really premature but the last thing that I might, do you see that as required bit CapEx new guys or does it really just kind of depend on what you win and how it plays out?.

Well, that's exactly right, Ron. If we're successful in what we're going after, I would be delighted to come and share with you that we're going to have an incremental CapEx stand to meet that demand which would be very profitable growth, great return on invested capital. So, again we're working on engines and the cells.

We're working on secondary structures, we're working on primary structures and clearly it's too early to declare but time will tell. After the program gets launched and after we continue to demonstrate our capability with respect to technology with our various customers..

Okay, great. Thank you, very much..

Thanks, Ron..

Thank you. And our next question comes from the line of John McNulty with BMO Capital Markets. Your line is now open..

Yes, thanks for taking my question. When you think about the M&A opportunities out there on the technology platforms you're looking for. I guess, are you seeing from your perspective is are the targets or the number of targets out there increasing given kind of what's been going on in the markets and also with rates going up.

Because I guess I would understand that a lot of these are smaller private companies that may have to work on funding through debts.

I guess, how should we be thinking about that whether it's a target rich environment for you or not right now?.

Yes, John. Well, our space fairly well and I'm not going to say there's 100s of targets out there but the fact that scale is becoming a factor, there are some private opportunities that are presenting themselves. There are some technologies that fit very well that we continue to look at.

Obviously some of them are actionable, some of them are not and some of them may become actionable. So, the fact that there is some dynamics within the M&A that too can create opportunities for possibly non-core components of bigger breakups or bigger acquisition that may afford an opportunity for us to add that into our advanced science portfolio..

Okay, great. And I appreciate the color. And then I guess one last question on the raw material front. It sounds like you can make up at least some of the issues around acrylonitrile with crude related escalation priced costs or what have you with some of your contracts.

Can you work around the rest of the impact because it doesn't sound like you're going to make it all up there? Like, can you either reformulate, improve efficiency. I assume the reformulation parts a little bit difficult.

So, I guess how do you if oil stays here and acrylonitrile stays here, how do you actually catch up entirely on it or can you?.

Yes. So, for future programs that are not qualified, we have opportunities to do formulation. And as you could imagine we are working that aggressively to help mitigate future costs and actually to drive more productivity under the business.

We're also working hedging, strategy on AN, which we've initiated this year which will help provide some stability. And then on the resin systems again as Patrick mentioned, we do have contract protection and long-term contracts that mitigate a good portion of that impact..

Got it. Thanks very much for the color..

Thank you, John..

Thank you. And our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open..

Hey, good morning everyone..

Good morning, Noah..

Good morning..

Nick, in your prepared remarks you specified anticipating revenue growth from engines and the cells over the next few years in the high single digit. And I guess I was a little surprised by that specification because I would expect that to be one of the faster growing pieces of the Aerospace business.

You had an outstanding multi-year upper single digit target for your entire Aerospace business.

So, I mean should I read that as you're expecting the aggregate to be slower than engines and the cells or is the Aerospace X engine in the cell, does that have as much growth opportunity and you were just kind of highlighting that today?.

Well, now we hadn’t provided a ton of clarity around how strongly our position is on engines and the cells. With fan blades, cases, and the cell materials, and the fact that there are always derivative programs even after planes are launched, there are many more derivatives than there are new aircraft launches.

So, if you look at our strategic plan which we just rolled up for the board, engines and the cells and the opportunities we have in the near mid and long-term are certainly very strong. Now, I don’t want to get into updating our longer-term guidance.

It too is strong and I'm not going to differentiate which is stronger or what the overriding commercial aerospace growth rate is. But engines and the cells are a strategic target for us. We've invested in that. Our investment in Morocco was another area where we are par laying and the site is doing quite well.

So, it was just to give you a little more color around the areas we're focused on to continue to drive growth beyond 2020 and until the next new programs are launched..

I see, okay.

And then, Patrick, do you expect your segment operating margin to be up year-over-year in 2019?.

Well, if we take away a number of the headwinds and we believe we got strong continuing growth opportunities, then the answer to that is yes. I mean, what I with certainly composite materials, engineered products tends to bounce around a little bit and we're sort of in the 12% to 14% range here to-date. I think we're 13.5%.

But certainly for composites, yes, and we would look to maintain what I would say is a pretty good engineered products performance. So, overall definitely yes..

Thank you. And our next question comes from the line of Christopher Kapsch with Loop Capital Markets. Your line is now open..

Yes, good morning. I had a follow-up question on the Roussillon facility. And just generally, are there any, has there been any surprises thus far in your efforts to qualify that integrated production facility. And then, assuming the timeline is remains intact, is there any way to quantify the anticipated margin benefit for '19.

I'm just wondering if we should be thinking about as that is qualified and ramps or are we talking about just a better absorption of those fixed costs or is there any knock on benefits maybe in the form of like better product mix or maybe even optimizing your global manufacturing footprint?.

$250 million investment. It was a little later than we expected, there were a little more headwinds than we expected. Having said that, it is the first collocated site which will translate into an optimized supply chain which will afford us opportunity to drive even more productivity.

Our proximity to our customers and shipping materials directly to Safran and Airbus and others versus bringing materials from the state or in some cases going from Europe to the states back to Europe. It's clearly an opportunity to improve our supply chain. So, at the end of the day we're excited. The site is running very well.

We're going to through the qualification process which is just a matter of doing various lots; running them through the test cycles; working with our customers to get the approvals; and multiple levels of fiber technology; and turning the equipment on and letting it run.

With respect to the tailwind, we're really not going to get in and calibrate you but I could just tell you we're totally excited to put that behind us. The team is motivated and we think 2019 is going to be a very strong year on the carbon fiber front.

And Patrick can you add?.

The only thing I would say, Christopher, is as we've said before, on carbon fiber assets major investments and carbon fiber drives good strong margins and we would expect to see those typical good strong margins come out of that facility as they do all other ones.

So, it will be a normal carbon fiber margin at benefit to the overall mix of the company..

Okay, that's helpful and good stuff. And just on the, just as a follow-up, there the step up in DNA that you experienced this year and that you called out for '19. How much of that is tied to the routine on integrated facility? Thank you..

Well, without wishing to be too precise, I mean it was a $250 million investment we called out, we depreciate, those sort of assets over about 20 years. So, you can see certainly a chunk of that plant, it's going to come into next year, yes..

Thank you. And our next question comes from the line of Myles Walton with UBS. You're line is now open..

Thanks.

I was just curious, were you at rate 10 on A350 in third quarter?.

Hey Myles, you need to speak up, we can't hear you..

Sure, thanks.

So, were you at rate 10 on the 350 in the third quarter or is that more of a fourth quarter impact, I'm just looking at the composite materials commercial aerospace sales declined sequentially?.

Well, it's hot. Well, I mean, that's the third quarter European close down. Third quarter can be a little bit funny. In terms of the A350 specifically, we know Airbus are aiming to get to rate 10 by the end of the year; we're supplying all that material. We've obviously seen the ramp-up in the year.

We deliver as we've said to whoever in the past to over 40 different addresses. It's very difficult for us to say exactly we're at rate eight or nine or 10 and even higher potentially if there's a mix issue somewhere or a catch-up I should say.

So, we're in that range, we know we're giving them the materials I need to get to rate 10 by the end of the year. We're not seeing anything massive between Q3 and Q4 if that's your question in terms of the A350.

But we know it's going to keep going up and obviously if its rate 10 all of '19, then they've got to fill their supply chain ready for that, so..

Thank you. And our last question comes from the line of David Strauss with Barclays. Your line is now open..

Hey, good morning guys. It's actually Mann on for David. Just a real quick on buybacks, I guess you guys have been buyback a fair amount of stock.

Should we expect that piece of buyback is kind of continue and how willing are you guys to sort of lever up give more buybacks?.

Yes. I mean, on capital deployment priorities remain the same; sort of organic growth; M&A; we're paying dividends; and all these stock buyback is I think mix that early and I reiterate. We want to maintain our discipline; leverage; position between 1.5 and 2.0 where at the sort of top end of that range.

We're not going to give specifics out on as and when we're going to buy back stocks. We're going to look at it from multiple perspectives. We certainly believe in the value of the stock. We’re going to potentially be opportunistic at times but we believe in the long run growth in Hexcel and so we will continue to do it.

I would think it’s part of a return to shareholders for the foreseeable future..

Okay, thanks.

And then I guess just to confirm the 24% tax rate for Q4, is that the rate level think about for 2019?.

It's the best thing I can say now. We will reaffirm what that will be. We will provide guidance with our earnings in January 2019 and at that point we will firm up what the tax rate for 29 is but 24% is the best number I can give today..

Okay, thank you..

Thanks, David..

Thank you. And I'm not showing any further questions at this time. I will now like to turn the call back over to management for any closing remarks..

No closing remarks. Thanks everyone for participating today..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day..