Hexcel Corporation Aktie

All right. Good afternoon, everyone. My name is Kyle Wenclawiak. I work on the U.S. aerospace, defense and airlines equity research team with Sheila.

We're very happy to have Tom Gentile here of Hexcel Corporation, who served in the President and CEO role since May 2024 and as Chairman of the Board since December 2024. Prior to that, of course, spent time at Spirit AeroSystems as CEO. And prior to that, a series of President, CEO, COO roles across the GE enterprise, including Capital, Healthcare and Aviation Services.

He also holds a number of Board seats and is very involved in the community across the U.S. Chamber of Commerce, RPM International, the Board of Governors for the Wings Club and a number of other community actions, including the Smithsonian National Air and Space Museum, the Wichita State University's Business School Board, as well as the Aerospace Industries Association.

So with that, Tom, I think a good starting point is, obviously, the first half of the year has been quite strong. You have several of the aerospace programs at pretty close to peak rates that were achieved back in 2019. Margins have made a ton of headway over the past, call it, 1.5 years. So maybe when you think over the back half of this year and into 2027, where you're spending most of your time, where you're most excited about? And what are kind of the upside drivers as you think about the kind of forward years?

Well, when you look at the original equipment for commercial aerospace market, it's been a very choppy recovery post-pandemic. Production rates overall peaked in 2018 at 1,734 units overall. But for widebodies, they peaked in 2019. And since then, there has been a big drop-off, and it hasn't recovered.

So even in 2025, we were only 85% recovered in terms of total aircraft, and widebodies were only 50% recovered. So for example, in 2019, which was the peak for the A350, there was 112 units delivered. Last year, 2025 was only 57. And so as a material supplier for mostly original equipment on the commercial side, it's been a choppy recovery.

And as a result of the lower production, we had to mothball a lot of lines. So most recently, we had 4 of our 14 carbon fiber lines that were mothballed. As a result, we had a lot of fixed cost that wasn't being absorbed, and that impacted margins.

What we've seen in the last year is production rates finally start to recover in a sustainable way that we can say is going to get to the targets that the OEMs have been forecasting. So for example, Airbus has been saying they want to get to 12 aircraft per month on the A350 by 2028. We now see that happening.

In fact, what I would say is that at the beginning of the year, we thought production rates were going up. So we said we were going to hire 400 people. We've already hired those 400 people. We were going to bring 1 of the 4 lines back up into production in the back half of this year in November. We did that in March. A line that we were going to bring up next year, we're pulling into November of this year. And a line that we had started before the pandemic and stopped building, we're going to bring that up in 2028, we're pulling that into 2027.

So we're starting to see the production rates. In fact, as those production rates go up and we get more operating leverage, when the OEMs hit all of their targets, that's going to generate $500 million of incremental annual revenue for us. And then on top of that, we'll have $200 million more of defense. So that creates $700 million of growth over the next 3 or 4 years. So it's about a 10% growth rate for that time period. And that growth rate creates operating leverage for us, which drives margins and improves cash flow.

So what we've said is when we get to those levels of production, we have a path back to 18% margins, which is where we were pre-pandemic. We'll also grow into our capacity. We don't need to make capital investments for new capacity as those rates go up. So our capital expenditure is going to be less than $100 million for the next several years, 5 years or so. And that means that we'll generate $1 billion of cash flow over the next 4 years, '26 through '29. So we're set up for a really good growth period as those production rates recover, particularly on the widebodies.

Another point I'll make about widebodies is, before the pandemic, there was a need for a big replenishment cycle. That essentially got put on hold. But if you look at the fleet today, of the 5,000 or so widebodies, 40% of them are more than 20 years old. And so this replenishment cycle that got delayed is going to be coming with a vengeance. So even when we get up to the high levels of production of 12 aircraft per month in 2028, we're likely to stay there for a very long time.

And that's going to be great for Hexcel because our biggest program is the A350. We make the entire material system, it's $4.5 million to $5 million per shipset. And we're going to get to 12 aircraft per month and stay there for a long time.

And on top of that, Airbus has said they want to increase the rate even higher than 12. They want to expand the freighter, which is more material. And they're even considering a stretch version of the A350, the 2000, which would be more material. So we feel like we're in a good position. And with no widebody on the slate for replacement in the next 2 decades, we feel very good about our position on the A350 and on widebodies.

Great. That was very comprehensive. I guess, maybe my first question would be the confidence in OEM rates, it sounds like you feel like -- you feel pretty good about 12 per month by 2028 on A350. Maybe what has changed or what have your conversations with the airframers looked like 12 months ago versus today? And how has that confidence sort of built?

Confidence is building. And there have been challenges and obstacles. On the narrowbody aircraft, it's been engines. Particularly, the GTF has been slow and not being delivered for new production. But even the LEAP has had some infant mortality issues and created time on wing. Those are getting sorted out.

On the widebodies, it's been more interiors, particularly seats. The seats, particularly the first-class seats are highly customized because of the more premium travel that the airlines are seeing. And those all require certification. And with more stringent requirements and staff shortages at FAA and EASA, that has impacted seat deliveries in some interiors.

The difference, though, is before there were some structural elements for the A350, for example, that were in short supply like the center fuselage. You can't build an aircraft without a center fuselage. You can build it if a seat hasn't been delivered or if it's not certified. You can just park it and then put the seat in when it's ready and then deliver it. So that's been one of the factors.

Now what I would say is our confidence level has gone up on production for a number of reasons. One is we get the skyline for all the OEMs, which is their master schedule that looks 2 or 3 years in advance. In addition, on the Airbus side in particular, we do a bottoms-up survey of the top 20 or so locations that take material for the A350 or the A320. And we confirm what the demand is.

But then we also have our firm purchase orders. And we get, in our case, 5 months' firm purchase orders. So we already have purchase orders that are firm for the rest of the year. And that justifies our estimate, which was 80 units for this year, even maybe a little bit of upside to that. So our confidence level on the near-term production rates is quite high for those reasons.

That's great. And maybe on the kind of restart of some of the carbon fiber lines that you talked about that were mothballed over the pandemic and now you're sort of bringing online. Maybe what's either the capital cost or the OpEx that has to be put in place for those to restart? And maybe what is sort of the lead time between making that decision and when sort of first shipments come off those lines?

Right. Well, first of all, CapEx is 0 because we already made all that CapEx back in 2018-2019. So that's really low. The OpEx, there is a little bit of cost. It's not material, but there's some costs. You have to hire people.

And so those are some of the reasons why when we said in the last earnings call, for example, that the back half of the year was going to be strong, we raised our guidance. But people pointed out that if they did the math, it looks like the margins in the second half of the year were going to be slightly lower than the first half. Well, the first half was great, right? We got lots of operating leverage. We got some pricing. The margins were good.

What we said in the second half is we had the normal seasonal slowdown in August and December. We're bringing on these new lines, which takes a little bit of money. And then we're hiring more people. And so the combination of those three things does put a little pressure on the second half. But we feel that's a good investment because that's giving us more volume, more production, more operating leverage, which is going to drive higher margins and cash flow in '27 and '28.

Certainly. And maybe on the hiring point, because the 400 have already happened to date, whether that's something that will continue over the next couple of quarters and years in terms of kind of getting those lines up to speed? And maybe from a labor availability point, what kind of run-ins have you had with finding kind of the labor, retaining it, training people to become more proficient on these lines?

Right. Well, we said at the beginning of year, we're going to hire 400. We've already hired those 400. We are going to hire some more people in the back half of the year.

Interesting, Sheila and you guys at Jefferies wrote an article about all the new hiring. And you had us at 77%, which is probably accurate. We are hiring right now because the rates are going up.

The hiring is a bit easier than it was in, say, '23-'24. People are available. We pay good wages. We have great benefits. It's -- Tom Kennedy from Raytheon used to call it noble jobs in aerospace. And I've always loved that term. I think it's absolutely true.

So we are able to attract people, but it's about having enough lead time because it takes time to train people, to get them on-the-job experience. And then you have to make sure you're giving them proper development incentives so you retain them and keep attrition low. It's never easy, but we're having success with it at all of our plants around the world.

That's great. That's great. And then on that A350 discussion about potential stretch version, potential above 12 a month, what sort of implications would that have in terms of -- obviously, CapEx is sort of maintenance-based right now. But should that demand materialize, what does that look like? And what kind of stage are those conversations right now for you guys?

We're capacitized for 13 aircraft per month. That's from pre-pandemic. And we got up to 12 pre-pandemic -- or 10, actually, it was back then. So we have room. Now since then, we've made a lot of improvements in productivity with Kaizen events and continuous improvement and digitization.

So we can handle the freighter, which has more material, or the -1000 mix, which has more material. If rates went up, if we did the 2000, that would require investment in capacity in the future, but that would be not until the early to mid-2030s.

And one of the things I've said before is that it's about a 3-year lead time to plan the plant, build it and then qualify it for aerospace production. And so we would be in conversations with Airbus well in advance of any requirement for the new capacity in order to make sure it's in place.

Great. And then maybe at a program level because A350 is so important to you, how do you think about the gross margin kind of contribution of that program relative to the -- returning back to that high teens operating margin over time?

Right. Well, it's a big program that we capacitized over a number of years. So what I would say is that as the rates go up, the margins get better and better. We get more operating leverage, and we see it go up.

So now the program is profitable, and it's going to continue to get more profitable overall as the rates go up. We're so heavily levered toward production rates. And now that we're finally starting to see them get back to reasonable levels, we're seeing the operating leverage and the margins are going up.

So one of the things I will say on margins is before the pandemic in 2019, that was the peak of our production. Our revenues were $2.35 billion. We got up to 18% margins. After the pandemic, when we had to mothball all those plants, we had all those fixed assets that weren't absorbing any of our overhead. And so the margins deteriorated.

When we get up to the peak rates of production, we have a path back to the 18%. At a higher level of revenue, but we have a path back to the 18%. And so that's one of the, I think, the manifestations of increased production rates as we get operating leverage and that drives margins. And we do have a path back to our high levels of margins from the pre-pandemic when we get to those production levels.

And maybe on kind of a shorter-term conversation that investors are a little more focused on around raw material inflation, fuel. I know you guys have discussed probably ad nauseam, some of the kind of hedging that you do and some of the COGS protections that you have in place. So maybe if you can address like what you're seeing on the materials and labor cost, fuel, et cetera?

Well, first of all, I would say is one of the things that we did back when we first set up the A350 program and a lot of the programs with Airbus and Boeing is we set up a lot of back-to-back contracts with our suppliers. So our contract with Airbus goes to 2030, which is great. It's a long-term contract.

We didn't anticipate the pandemic and all the inflation. But similarly, we have back-to-back contracts with most of our suppliers for resin and chemicals that also go through 2030. So it's a back-to-back natural hedge. And that's one way that we've been able to mitigate inflation as we go forward.

Now with regard to the oil prices going up because of the war that's going on, we saw oil prices spiked to over $100 a barrel. Now carbon fiber, the major material that we use as our feedstock is something called acrylonitrile. And the way it works is you start with petroleum, then you go to propane, then the propylene, and then acrylonitrile.

We hedge propylene. And we hedge it -- for 8 quarters out, we hedge about 80% of our needs. So even though oil prices might be spiking right now, we're not seeing that because we have these long-term hedges in place. We've been very disciplined about it. It's 80%. If the prices go up higher than we expect, we have standard deviations that we measure. And if it passes through standard deviations, we might hedge more or less, depending on the direction.

So we feel confident in our hedging program. Now if oil prices stay elevated for more than 2 years, we'll see the impact of that on the back end. But it will be properly measured and spread out over these 8 quarters that we have the hedging program in place for.

Great. And then maybe the other kind of big piece in terms of that margin conversation is the pricing dynamic, particularly relevant on the Airbus contracts. But I think what you guys have done in recent history is talk more and more about kind of the rolling nature of your business. So maybe if you can just discuss how pricing works at the Hexcel level?

Right. So our contracts tend to be between 5 and 7 years, which means that every year, 15% to 20% of our contracts come due. When the contracts come due, we obviously try to reset them to reflect the current market conditions. And we want to make sure that we're getting a fair return on the investments we've made and the value we bring.

And we have been able to get price. It's very hard to change a material system once you have it in place because you have to certify the material system and qualify it, then you have to certify the aircraft with that material, then you have to get the equipment and certify that and then train the people. So it's not impossible, it's just very difficult and time consuming. So it very rarely happens. So when prices come due, we want to make sure that we're partnering with our customers and reflecting in the price that we get the investments that we've made and the value that we bring, and we have been getting that. So that's it.

Now the Airbus contracts are unique. We have 2 Airbus contracts, and that represents about 40% of our revenue. They expire in 2030, at the end of 2030. Now the big ones were signed back in 2008. Now we were a small company. We won the position on the A350 for the entire material system. We had to capitalize $1 billion of investment over the next several years. And so having that long-term contract really helped. We renewed it in 2016 and extended it to 2030. But again, we have back-to-back contracts with all the suppliers so that we're naturally hedged.

Now we didn't anticipate the pandemic and the hyperinflation. So that's put us behind a little bit. And what I've said is even when we get back to the revenue levels that we were at in 2018, in 2019, say, $2.35 billion, we'll only have margins at that point of 16%. So there's about 200 basis of headwind that we've incurred because of inflation that we haven't been able to offset yet with pricing and productivity.

Now by the time we get up to the full production targets that the OEMs have, the $700 million I mentioned, that's $2.6 billion, so '28-'29, we'll be back to the 18%. Now when we get to 2030 and we're negotiating with Airbus, again, we want to focus on getting a fair return on the investments that we've made. We want the pricing to reflect the value.

At the same time, we want to be a strong partner for them. We want to make sure the A350 is a good program going forward. It's our biggest program. We want to make sure it's competitive. And of course, we want to win more work on the next-generation Airbus.

So there's lots of different trade-offs. But at the end of the day, we have a path back to the 18%. We'll continue to drive productivity and pricing as the opportunity arises. And because we have such a long growth trajectory in front of us, we feel very good about our position.

Great. No, that's super helpful context. And I was going to go there next about NGSA and what kind of next-gen content looks like because there's obviously been a theme that composites penetration continues to evolve with each next generation. So maybe the timing of those Airbus contracts probably sync up pretty decently with when some of those supplier discussions are happening. So maybe if you can just talk about what the preliminary talks look like for you guys on next gen today and how that competitive landscape is shaping up?

Yes. So first of all, in terms of aerospace-grade carbon fiber, there's only three companies that make aerospace-grade carbon fiber: Hexcel, Toray and Teijin, the two Japanese companies. Only Toray and Hexcel are vertically integrated and do resin. So for carbon fiber composite, you need the carbon fiber and the resin, and you impregnate them.

Now Hexcel is the only U.S. company that does aerospace-grade carbon fiber. There's another company that does the resin, which is Syensqo, but they tend to use our fiber or Teijin fiber. Now -- and the way that the split is, Toray does the 787 material system for Boeing, Hexcel does the A350 program for Airbus, and that's the way it has laid out.

The 787 and the A350 are about 50% carbon fiber composite by weight. If you look at the narrowbodies, the MAX and the A320, they are 15% carbon fiber by weight. And most of that is in the engine, say, the fan blades, the fan case or the nacelles. Now the next-generation narrowbody, they're going to definitely have more carbon fiber composite. For one thing, the wing will be composite. Everybody is in complete agreement on that. In order to get the right architecture and reduce drag and increase lift, you need a carbon fiber wing. And that, by getting more range, you reduce fuel consumption.

Now going from a metallic wing to a fiber wing will take the content from 15% to 30%. Now the question becomes the fuselage. Do you go to a carbon fiber fuselage? And there's still a little bit of debate on that. Personally, I think they will because I think the lighter weight and the fact that you have less maintenance is also a factor.

Now it's not as big a factor as on a widebody aircraft, where your cycles are 8 to 10 hours. On a narrowbody aircraft, the cycles are 1 to 3 hours, so weight isn't as big of a deal. But I just think airlines have gotten used to the lightweight carbon fiber composite fuselage, especially now with fuel prices high, they like the extended range and the reduced fuel. And then the maintenance is something they're also getting used to.

So along those lines, there has been a lot of work with both of the OEMs on the next-generation aircraft, not in terms only of the carbon fiber development and the resin development, but also the production system. So in carbon fiber, we think of three different dimensions of strength. We think of tensile strength, which is how hard it is to pull apart. We think of modulus, which is how stiff it is, and we think of compression. We've been advancing all three of those.

We're also looking at the resin system, which today takes as much as 12 hours to cure, how can we do that in 3 hours? How can we increase the layup speed? How can we reduce the amount of capital required? And so there's lots of decisions not only on the exact formulation of the fiber and which mix of those dimensions that I mentioned they want for each part of the aircraft, but also, do they want a prepreg, or do they want a resin infusion system with -- that's out of autoclave doesn't require the heated pressurized oven but can use a heated oven tool? And so these are all the different factors.

One thing I would say is today, the material system for the [ 87 ] and the A350 tends to be homogeneous. It's pretty much the same material system for all the different parts of the aircraft. Some variations, but essentially the same. On the next generation, you're going to see a lot more variation. It will be optimized for each part of the aircraft, not only the material system, but also the production process.

And so because of all of that and the sophistication, I do think you're going to see a carbon fiber wing and a carbon fiber fuselage, in my view. And what that means is that the carbon fiber will be from 15% to 30% with the wing and to 50% with the fuselage. So today, on the narrowbodies, which are 15% carbon fiber, it's $300,000 -- $200,000 to $500,000 per shipset. In the future, it will be about $1.5 million to $2 million per shipset of carbon fiber.

And when you think about the production rates of 75 for Airbus, 52 for Boeing and then throw in some A220s, it's close to 150 aircraft per month at $1.5 million to $2 million per shipset. That's a lot of carbon fiber. And there's only three companies that make it.

So we're going to get our share of it. And that's why we also feel good about that. We're doing a lot of hard work in R&D right now with both of the OEMs, but that's what the range of opportunity is, very significant.

So maybe given those volumes on the narrowbody side, obviously, smaller fuselages, but is that type of volume a challenge for the industry between Hexcel and your competitors if narrowbody goes 50% composite?

Well, it would require some more capacity investments in the future. But that will be a great challenge for us to tackle, and we will absolutely welcome it. So I have no doubt we'll be able to do it.

Great. And then maybe just -- you mentioned R&D. So maybe if you can talk about the level of spending there, like where are the priorities? And then we'll talk a little bit about defense and space after that.

Yes. So R&D, historically, we're about 3%. I'd say because of all the work going on with next-generation commercial, but also looking at space and defense, amongst other things, we've upped it a little bit. So it's going to be about 3.25% is where we see it leveling out.

And it's all the things I mentioned. It's working on the fiber itself, it's working on the resin system, it's working on the production system. And it's looking at variations in the materials. So for example, most of what we do is called thermoset. So once you cure it, you can't change it. You can't reheat it and change its form or weld it or melt it or anything like that.

There's something called thermoplastics, which uses a different type of resin system, where you can reheat it and reform it. It's a little bit more expensive, but it has some other properties that make it interesting. And then you have different versions of carbon fiber that can do higher-temperature applications. So for example, carbon-carbon, which is used in hypersonic missiles and space applications, thermal protection shields. That uses our carbon fiber as the base feedstock material, but it uses a different densification and resin system to create the high-temperature material. So there's a full range of materials and production processes that we're supporting with our R&D.

Okay. Makes sense.

But it will cap at about 3.25% of revenue.

And plenty of optionality for your customers?

Yes.

So maybe on the defense and space side, the $200 million of incremental revenue potential there, maybe if you can bracket that? I know the business ranges from missiles to fixed wing aircraft into the space kind of launch market.

Well, we see space and defense as really five segments, and all of them are using more lightweight carbon fiber composites. So you have fixed wing aircraft like the F-35. And those are going up in production, although the F-35 has now reached a plateau of about 156 units a year.

Then you have the rotorcraft like the CH-53K or the Black Hawk or new rotorcraft. And a lot of those developments, including the MV-75, are either in development or just getting into higher rate, full rate production. So those are opportunities.

And then you have missiles. Now missiles typically don't have a lot of carbon fiber content per unit, but the unit numbers are just going up. They're skyrocketing right now. So that's -- no pun intended. But that's a source of demand.

Then in terms of -- drones is another opportunity. Now drones are different classes. So the smaller drones don't necessarily need aerospace-grade carbon fiber composite because they don't carry people, and they don't necessarily come back. So you have different requirements.

But we have some options of lower-grade materials that we do make. As I said, we're the only U.S. carbon fiber composite maker, so that gives us a unique position. But on the Class 5 drones, like Predator, a Reaper, bigger, more sophisticated drones, those do use aerospace-grade carbon fiber. So that represents an opportunity for us. So you have the fixed wing, the rotorcraft, the missiles, the drones.

And then space, you've got three categories. You've got launchers. You've got the space vehicles themselves and the thermal protection systems. And then you have the satellites where you have the buses and ancillary panels, which tend to be made out of carbon fiber composite.

Now in the launchers, the biggest launcher, SpaceX, doesn't today use a lot of carbon fiber. They may in the future, but the others do. And so that represents a lot of opportunity for us in the future as we continue to see the launch vehicle numbers just go up and up and up.

So maybe -- earlier this year, you mentioned that you would expect some of those defense and space orders to sort of accelerate around the back half of this year, give or take. Maybe if you can update us on what you're seeing in terms of kind of the purchasing activity on some of those fronts?

Yes. For example, space is only 10% of our space and defense business, so it's pretty small numbers. And it's choppy. The launches happen sporadically throughout the year. Blue Origin and ULA, who are the bigger users of carbon fiber composites, are in a bit of a pause right now as they address some issues. So that's impacted some of the launch activity.

The missiles, while you're reading all of these framework agreements for these huge volumes, they really haven't started yet. So that's going to come. And we don't have a lot of content per missile. It's just going to be a lot of missiles that will create it.

So I'd say we're on track to what we said, which is kind of low to mid-single digits growth for the year. That will continue to increase as we see the contracts come into play and we see the launch activity continue and we get some more consistency in the actual demand.

And maybe, I mean, you can sort of back into like the implied mix over time of aerospace growth versus defense and space growth. But when you look over like past that 2030 window, you would think that the proliferation of low Earth orbit satellites and kind of the missiles ramps that are ongoing. Do you think that there's a more material change in the business mix between aero and defense over the longer term?

I do. I mean, the next 4 years, commercial, the good news is it's going to be growing at a very high rate. So you saw last quarter, we were 18% growth. So as this recovery comes, the growth rate on commercial is going to be very high. So defense will struggle to outpace that.

Eventually, though, once commercial aerospace starts to reach its plateau and -- and maybe it never does, maybe it keeps going up as the rates go up, but it will taper off a bit -- defense will then kick in. And so we expect eventually we'll be at a 50-50 level as opposed to kind of 35-65 right now.

And is there any kind of change in like the margin profile or the way that those contracts would work on the defense side that would look so much differently than...

No. I mean, interestingly enough, we don't do military contracts in the sense of CAS compliance where you're regulated more in terms of your margins. So we sell commercial items to our defense customers, and those commercial items command commercial margins. So the margin profile for us is very similar on commercial and defense, which is a little bit different than a lot of other companies, but it is probably to our advantage right now.

Yes, totally. Cool. I think maybe on the kind of free cash flow and capital allocation, as we come up close on time, obviously, you've talked about CapEx is probably at a baseline level for the next couple of years. How do you balance that against what you'll do with kind of the cash generation that the business is [ doing ]?

Right. So as we said, because we invested in all the capacity before the pandemic, we don't need to make those investments. Now we can grow back into the capacity, which means we can keep our CapEx under $100 million, and that will help our free cash flow generation. And we're going to be generating a lot of cash as we get into that full rate of production.

And so that gives us a lot of optionality. One of the things we did last year is -- we knew this was coming. We knew these rate increases were coming. And so we did an accelerated share repurchase, and we took some leverage out to do it. So we got up to about 2.7x net debt to EBITDA. We said we would get back down to under 2x before we resumed repurchases or did any M&A. Now we'll get there before the end of the year.

And what we said regarding M&A is that we're going to be very disciplined. We are an advanced material science company, heavy focus in aerospace and defense, and we want a 15% ROIC or better. Now if there's something out there that meets those criteria, we will certainly consider it. Absent that, we're generating a lot of cash, and we'll return it to shareholders with our dividend program and our share repurchases.

Maybe just because the market is so consolidated between you and your kind of two main competitors, what would M&A even look like in that context? Is it vertical integration between like -- either the manufacturers of your equipment and tooling? Or what could that look like?

There could be some vertical integration into some of the chemical inputs, of course. There could be some horizontal integration in terms of things like resins. There aren't a lot of other fiber companies that you can buy, certainly not aerospace-grade.

Then -- but we look at -- in aerospace, we've got these five segments that I mentioned. So fixed wing, rotorcraft, drones, missiles and space. And space has launchers, space vehicles and satellites. There could be some opportunities there.

We also look at the spectrum of materials. So you think about thermosets, thermoplastics. Then there's things like sealants and coatings that are part of that advanced materials system. I talked about thermoplastics. I talked about carbon-carbons and high-temperature materials. There are things that are in that range. There are things that are close adjacencies that are materials like ceramic matrix composites, things like that. So there's variations on that advanced material science theme that could make sense. And so we'll look at those things.

But in the immediate future, our focus is on recovering on production rates. That will drive operating leverage, margin and cash flow. And absent any sort of inorganic growth that would make sense and meet all of our criteria, we've been very successful with our share repurchase program in the past and our dividends, and that's what we'll focus on.

Yes. Great. Maybe just with the last minute or 2 that we have here, maybe how you're spending your time over the next, call it, 6 to 12 months? What are your priority areas? Obviously, you have a lot of volume in front of you. So what are you most excited about?

Well, it's really just -- it's making sure the plants are ready for the volume, getting the people hired and trained, making sure we're retaining them, getting them with on-the-job experience so that we can meet the production rates. And we've been waiting for it for 8 years. Now that it's here, we don't want to miss out on any of it, and we want to execute for our customers.

Great. Thank you, everybody.

Thank you for standing by, and welcome to Hexcel's Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Kurt Goddard, Vice President, Investor Relations. Sir, please go ahead.

Hello, everyone. Welcome to Hexcel Corporation's Second Quarter Earnings Conference Call. Before beginning, let me cover the formality. I would like 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 results or outcomes to differ materially from our forward-looking statements today.

Such factors are detailed in the company's SEC filings and earnings 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 express permission. Your participation on this call constitutes your consent to that request.

With me today are Tom Gentile, our Chairman, CEO and President; and Jamie Coogan, our Chief Financial Officer. The purpose of the call is to review our second quarter 2026 results detailed in our news release issued yesterday. Now let me turn the call over to Tom. Tom?

Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's Second Quarter 2026 Earnings Call. With us today for his first Hexcel earnings call is our new Chief Financial Officer, Jamie Coogan, who joined Hexcel in early May. Jamie brings extensive financial leadership and broad experience across aerospace and defense as well as industrial manufacturing. We are excited to have him on board as we grow Hexcel. Jamie has hit the ground running, visiting our global operations and meeting with investors, analysts, banks and getting up to speed with our customers and supply chains, many at last week's Farnborough Air Show. You will hear from Jamie shortly.

As you read in the earnings release we issued yesterday, Hexcel delivered another strong quarter with solid performance across the company. With the ramp-up in commercial aircraft production across all the major programs now firmly taking hold, our operating leverage continues to strengthen from higher volumes combined with strong execution from our team, which is leading to higher margins and stronger cash flow.

Coming out of the Farnborough Air Show last week, the near, mid- and longer-term commercial aerospace trajectory looks bright. Industry fundamentals remain compelling with the backlog of commercial aircraft at more than 18,000 units according to data from IATA, including an estimated unmet demand of more than 5,000 aircraft because of the post-pandemic supply-demand imbalance.

Air traffic across most global regions continues to be strong despite the conflicts in Iran. At the Investor Day at the Farnborough Air Show, Airbus was particularly bullish on the A350, Hexcel's largest program. Against this backdrop, airlines continue to need newer, more fuel-efficient aircraft, and that aligns directly with Hexcel's value proposition. With fuel costs remaining elevated and volatile, lightweighting is even more critical in driving fuel efficiency, directly supporting demand for our advanced lightweight composite materials.

Before turning to our second quarter results, I want to briefly address the situation in the Middle East. We continue to monitor developments closely and remain in regular contact with our customers and suppliers. To date, the impact on our business has been minimal. Our hedging strategy and disciplined approach to managing key cost inputs have helped mitigate near-term input price volatility, and we will continue to take prudent steps to protect the business going forward as we all hope for a timely resolution to the Iran conflict.

Turning to our second quarter results. Hexcel generated sales of $529 million in the second quarter, up 8% from the same quarter last year. Adjusted earnings per share of $0.66. Gross margin improved again year-over-year as higher sales volume generated greater operating leverage through improved cost absorption, which resulted in adjusted operating margins of 13.9% compared to 11.1% in Q2 2025.

In our commercial aerospace market, sales were $346.6 million for the quarter, an 18.3% increase over the second quarter of 2025. Rising volumes on the A350 and 787 programs drove growth in this market, while narrow-body sales also increased year-over-year with the Boeing 737 MAX, the Airbus A320 and the 220 programs, all increasing. Sales from other commercial aerospace increased 3.7% over the same period last year, led by regional jets.

As we look across the business at this point in the year, we are clearly experiencing strong demand for lightweight carbon fiber as the recovery in OEM production rates continue. Recent production data reported by Airbus and Boeing highlights steady progress in output across the major programs, even as the supply chain environment remains dynamic. The rising production rates reinforce our confidence that the industry is moving forward toward a more sustained production ramp.

As we have discussed before, as an upstream material supplier, Hexcel is generally shipping around 4 to 6 months ahead of OEM aircraft assembly. So we manage the business based on production demand, not reported delivery. The purchase orders we are receiving, together with our bottoms-up demand planning continues to support our outlook. When Airbus and Boeing ultimately achieve their publicly stated peak build rates on the major commercial programs, that will generate $500 million in incremental annual sales for Hexcel from our existing contracts.

In addition, we expect about $200 million in incremental sales in Defense & Space before the end of the decade. This continued recovery in commercial and military production rates will create improved volume leverage for Hexcel. We have a path to 18% adjusted operating margins as the OEM and defense primes reach their target production levels for each program before the end of the decade.

On the A350 program specifically, we continue to see demand signals that support our outlook of 50 -- or excuse me, 80 shipsets in 2026. While there can be a perceived disconnect at times between our order profile and current OEM deliveries, our demand is tied to production activity in the supply chain, and we remain confident in our 2026 A350 guidance of at least 80 aircraft.

During the Farnborough Air Show earlier this month, Airbus publicly confirmed that they are producing at a rate between 8 and 9 aircraft per month. We do see some potential upside to our 80 aircraft guide based on purchase orders we've already received and in relation to the continuing dialogue we are having with Airbus. Also, we now have firm orders from Airbus through the end of 2026 that confirm at least the 80 shipsets for the A350. To meet increasing demand for Hexcel's advanced lightweight composite material in the second half of 2026, we will be accelerating hiring and bringing back online carbon fiber lines previously idled during the pandemic.

Additional volume improves utilization of our existing asset base and drives further operating leverage, supporting margin expansion and the path to 18% operating margin before the end of the decade. Turning to the Defense, Space & Other market sales were $182.7 million in the quarter or lower by 7%. This sales decrease is primarily a result of lower industrial volume given the strategic actions we have taken over the past year to deemphasize this portion of our portfolio with the divestiture of our business in Austria and the restructuring of our industrial business in Western England. As we noted in our first quarter call, the Defense, Space & Other market can be choppy quarter-to-quarter due to the nature of Defense & Space spending and production timing, particularly for high-value but low-volume platforms.

That said, Defense & Space remains a significant priority for Hexcel and a priority market for organic growth. We have existing positions on most current military programs that utilize lightweight composite materials and long-established relationships with leading global defense contractors. Also, we are continually engaging new entrants in the defense market as well as what are commonly referred to as new space entrants.

This is a burgeoning market where advanced lightweight composite materials provide the necessary performance characteristics for those platforms to operate in extreme environments. Our advanced composite materials play a critical role in enabling greater payload, extended range and enhanced performance characteristics including load survivability across Defense & Space platforms. With our vertically integrated global footprint, Hexcel is uniquely positioned to support this market across regions.

We are the only vertically integrated U.S. domiciled manufacturer of high-strength aerospace-grade composite materials for commercial aircraft and Defense & Space platforms. Additionally, our vertically integrated operations across Europe provide access to ITAR-free capabilities as well as secure and sovereign access to advanced lightweight composite materials for customers outside the U.S.

For all these reasons, we are optimistic about the long-term prospects in the defense and space market. We expect growth from Defense and space, along with regional and business jets to provide Hexcel with an estimated $200 million of incremental sales growth this decade. Longer term, we see accelerating growth in our defense and space market. With that, turning to capital allocation and guidance.

Our balance sheet and liquidity position remained solid in the second quarter, and our capital allocation priorities remain unchanged. We intend to continue paying down debt with the goal of returning Hexcel's leverage to our targeted ratio of 1.5x to 2x net debt to adjusted EBITDA. We remain committed to paying a dividend. And after we return to the targeted leverage level, we are committed to returning cash to stockholders absent any inorganic opportunities that meet our strategic thresholds and return targets.

Given the continued recovery in production rates, we announced in yesterday's earnings release that we are increasing our full year 2026 guidance for sales and adjusted earnings per share. We now expect sales in the range of $2.025 billion to $2.125 billion compared with our previous range of $2 billion to $2.1 billion. We are also raising adjusted EPS guidance to a range of $2.30 to $2.40 compared with our previous range of $2.10 to $2.30. Our guidance for free cash flow remains unchanged at greater than $195 million, and CapEx remains unchanged at less than $100 million. The sales increase reflects expected upside to some of the commercial aerospace platforms, including the A350 and the 737 MAX.

We are raising guidance with an appropriate degree of balance. The second half of the year will include typically seasonality in the third quarter as well as some increased hiring and start-up costs as we accelerate bringing additional capacity back online. Even with those considerations, the underlying demand profile and the operating leverage in front of us support a stronger outlook for the year. In addition, we will continue hiring in the second half of the year and we'll start up an additional carbon fiber line to be ready for the production rate increases that we expect in 2027.

Now turning to some notable events for Hexcel during the second quarter. Our team received recognition from a number of customers that highlight the value we deliver and the strength of our long-term customer relationships. Embraer named Hexcel its Best Supplier of the Year in its standards and materials category for the second consecutive year. Airbus recognized Hexcel with its Accredited Supplier Award, the highest distinction within the Airbus Supplier Quality Improvement Program. And IHI in Japan recognized Hexcel with the Supplier of the Year award.

We are honored to receive these recognitions from our customers. This recognition reflects the dedication of the Hexcel team and our continued focus on quality delivery and operational excellence. Also during the quarter, we made a number of significant announcements. In May, we announced the groundbreaking of the Hexcel Application Center at Wichita State University's National Institute for Aviation Research, NIAR. The new center expands our long-standing collaboration with NIAR and supports innovation in composite materials, automated processing and aerospace manufacturing, which are all foundational research and development areas to grow composite adoption across aerospace platforms.

In June, we announced a long-term industrial partnership and supply agreement with Deutsche Aircraft for advanced composite solutions for their next-generation regional turboprop, the D328eco. And last week, our team attended the Farnborough International Air Show, where we had the opportunity to engage with the industry including customers, partners and other key stakeholders. During the airshow, we made a couple of key announcements. First, we announced a series of new and extended long-term agreements with Boeing, reinforcing our collaboration with them across commercial, defense and space programs. In addition, we announced that we have completed qualification for our HexPly M91 carbon fiber reinforced epoxy prepreg system through the National Center for Advanced Materials Performance, NCAMP, an initiative through NIAR that makes this product available more broadly. The NCAMP database is particularly helpful to new A&D entrants as they can readily access the performance data to assist in their material selection.

Overall, we are encouraged by the demand we see for Hexcel's advanced lightweight material solutions across commercial aerospace, defense and space. Our broad, differentiated product portfolio, technical expertise and innovation, customer relationships and the vertical integration across multiple regional positions enables Hexcel to serve these markets well as volumes continue to rise. Against this backdrop, we are confident in the strategic priorities we have set for the company, executing on the commercial rate increases for our OEM customers, investing in innovation to secure positions on next-generation aircraft, capturing organic growth opportunities in defense and space and deploying capital in a disciplined way. Our team is well positioned to deliver for our stakeholders. I want to thank the entire Hexcel team for an outstanding second quarter. With that, I'll turn the call over to our new CFO, Jamie Coogan, to discuss the second quarter financials in more detail. Jamie?

Thank you, Tom, and I'm excited to be participating on my first Hexcel earnings call. I've been here about 3 months now, and I'm quite impressed with the team, the industry reputation of Hexcel, the innovation and most importantly, the growth opportunities ahead. I visited 4 of our sites at this point with plans to visit every facility in the near future. I've been actively meeting with various stakeholders, and as Tom mentioned, just returned from the Farnborough Air Show.

I've now personally met many of you on this call, and I look forward to our continued engagement. My priorities are fully aligned with Tom and the Hexcel leadership team as we focus on execution, strengthening the balance sheet and driving margin expansion through organic growth and cost control. Hexcel is in a period of strong cash generation, and I will be working closely with Tom and the Board to ensure a disciplined capital allocation strategy. Now for the financial results. Second quarter 2026 sales of $529 million grew 8.1% in constant currency as commercial aircraft build rates ramp.

Strong commercial aerospace growth was partially offset by lower defense, space and other sales following the divestment of the Austrian industrial business on September 30, 2025, and the winding down of the industrial business at our Leicester U.K. site as disclosed last quarter. As a side note, I will refer to constant currency percentage change for the remainder of my comments.

By market, commercial Aerospace second quarter sales totaled $347 million, increasing 19% compared to the second quarter of 2025 and comprised approximately 66% of our total quarterly sales. Growth was led by wide-body A350 and 787 platforms, while narrow-bodies, A320, 737 MAX and A220 all increased year-over-year as well. Overall, we are pleased to see the stability and growing demand from our commercial aerospace customers.

Sales for other commercial aerospace in the second quarter increased 4% year-over-year from growth in regional jets. Defense, Space & Other second quarter sales totaled $183 million and represented approximately 34% of sales. Second quarter sales decreased 8% on lower industrial sales following the divestment of the Austrian industrial business last year. And as I mentioned in my previous comments, we have now ceased industrial operations at our Leicester U.K. site effective June 30. Annual sales at this site were around $15 million, and this site will continue to work on aerospace R&D projects.

In terms of our Defense & Space business only, second quarter 2026 sales were unchanged compared to the second quarter of 2025. Strength in fixed wing, both in the U.S. and internationally, along with strength in international helicopters and growth in satellite sales were offset by temporary softness in some other programs, including launchers and rocket motors. Remember that production volumes of many defense and space programs are low, so some quarters can be impacted by temporary timing issues and customer schedule shifts.

The Other category for industrial sales now comprises just under 5% of our total sales. Gross margin of 26.1% in the second quarter of 2026 increased from 22.8% in the second quarter of 2025 on improved operating leverage and price realization. We continue to grow back into our existing capacity. And as we restart idle assets, the overhead absorption benefit is meaningful as illustrated in our second quarter results.

Prior portfolio pruning actions were a modest tailwind to margins and unlike the first quarter of 2026, which saw favorable onetime benefits, there was no meaningful onetime contributors to call out for the second quarter. In terms of higher oil prices and their impact on the business, our purposeful strategy of reducing the volatility of input prices through our hedging and procurement contracts has generally insulated the business during the second quarter. Sequentially from the first quarter of 2026 to the second quarter of 2026, the combined spend for utilities, including natural gas and electricity, plus the spend for acrylonitrile, or AN, the primary raw material used in the production of carbon fiber increased only minimally.

However, if oil prices remain elevated, the impact to energy and AN costs will be layered into the business over time. As a percentage of sales, selling, general and administrative expenses were 8.9% in the second quarter of 2026 compared to 8.8% in the comparable period in the prior year, increasing nominally on higher employee-related expenses. R&D expenses were 3.3% in the second quarter of 2026 compared to 2.9% in the second quarter of 2025.

Foreign exchange remains a headwind due to the weaker dollar. Second quarter 2026 operating margin was negatively impacted by approximately 90 basis points from foreign exchange. In contrast, the second quarter 2025 had a favorable impact of approximately 10 basis points from the foreign exchange. Adjusted operating income in the second quarter was $74 million or 13.9% of sales compared to $54 million or 11.1% of sales in the comparable prior year period.

Turning to adjusted EBITDA for the 6-month period. Adjusted EBITDA totaled $216 million for the 6 months ended June 30, 2026, and an adjusted EBITDA margin of 21%. This compares to $173 million for the 6 months ended June 30, 2025, and an adjusted EBITDA margin of 18.2% -- this is a 25% increase in adjusted EBITDA, whereas year-to-date, sales increased just 9%, illustrating the operating leverage within the business.

For comparison, in our peak year of 2019, adjusted EBITDA totaled $585 million with an adjusted EBITDA margin of 24.8%. As we target returning to prior adjusted operating margin of 18%, we are also targeting a return to this prior adjusted EBITDA margin of approximately 25%. And as a reference, trailing 12 months adjusted EBITDA through June 30, 2026, was $390 million. Now turning to our 2 segments.

The Composite Materials segment represented 80% of total second quarter sales and generated an adjusted operating margin of 16.8%. This compares to an adjusted operating margin of 14.1% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 15%. This compares to an adjusted operating margin of 10.9% in the prior year period. Moving to cash flow. Net cash provided by operating activities in the first 6 months of 2026 was $97 million compared to a use of $5 million in the first 6 months of 2025. Working capital was a cash use of $72 million in the first 6 months of 2026 compared to a cash use of $125 million in the first 6 months of 2025. Capital expenditures on an accrual basis for the first 6 months of 2026 was $37 million compared to $32 million in the comparable prior year period. Free cash flow in the 6 months ended June 30, 2026, was $52 million compared to a use of $47 million in the 6 months ended June 30, 2025.

Following our first quarter earnings call and just before I started, the team completed the issuance of $400 million of unsecured senior notes maturing in May 2031 with the proceeds used to pay off $400 million of unsecured senior notes maturing in February of 2027. This financing improves our debt maturity profile with our earliest debt maturity now in 2031. Leverage, defined as net debt to last 12 months adjusted EBITDA, was 2.3x at June 30, 2026, which compares favorably to our December 31, 2025 leverage of just under 2.7x.

Although our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase, we have made meaningful progress year-to-date to reduce leverage, and we reaffirm that we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2.0x during 2026. Given our focus on debt reduction, we did not repurchase any shares of common stock in the second quarter of 2026. The remaining authorization under the share repurchase program as of June 30, 2026, was $381 million.

The Board of Directors declared an $0.18 quarterly dividend yesterday. The dividend is payable to stockholders of record as of August 10 with a payment date of August 17. Before handing the call back to Tom, I would like to add some additional commentary regarding the revised 2026 guidance. Remember, the third quarter sales seasonality as some of our customers enjoy extended summer holidays, the seasonally lower third quarter sales impact operating leverage and margin as well.

Implied second half adjusted EPS is somewhat lower than the first half, reflecting the Q3 seasonality, higher employee costs, including more hiring in the back half of this year to support production rate increases in 2027, some conservatism around oil prices and the impact they could have later in the year and expenditures related to restarting one of our carbon fiber lines at the end of this year rather than in 2027 in preparation for the 2027 rate ramps. We continue to forecast interest expense in the low $50 million range as faster revolver repayments than originally anticipated in the first half of the year has been offset by the higher rate on the refinanced senior notes. We modeled our tax rate in the back half of the year at 20%. And lastly, cash conversion should exceed 100% in 2026 and for a period of time thereafter as capital expenditures are expected to remain subdued, subject to significant new contract wins. With that, let me turn the call back to Tom.

Thanks, Jamie. Overall, we remain encouraged by the continued strengthening in commercial aerospace production rates and the strong demand fundamentals we see across commercial, Defense & Space markets. Airbus was especially bullish on the outlook for our largest program, the A350, in their remarks last week at Farnborough. As production rates increase, our focus remains on disciplined execution, driving operating leverage and delivering consistent performance for our customers and stockholders. With our strong market position, broad differentiated product portfolio and global manufacturing footprint, Hexcel is well positioned to capture the opportunities ahead of us. With that, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Gavin Parsons with UBS.

In the prepared remarks, you talked about the potential to recover the 18% EBIT margin before the end of the decade. Should I think of that as aligned with the time line for the $500 million of aero recovery and $200 million of Defense revenue? And then how are you thinking about your ability to offset cost inflation as you get to that 18%?

Right. So that's exactly right, Gavin, is we are targeting the 18% in line with getting up to the target production rate. So that's the $500 million on commercial and then the $200 million on Defense and Space and other. And in terms of offsetting the cost, in this industry, I would say you have to run fast to stand still. That's normal routine business.

We have to always offset the increase in costs through our productivity initiatives. And we have a very extensive, what we call our next-generation factory initiative, along with a margin improvement program that's designed to do exactly that. And it's pricing as our contracts come due, but it's also driving a continuous improvement and then driving and implementing digitization improvement plans throughout our operations, engineering and administrative functions. So it's a combination of all those things to offset the cost inflation that we're going to see, which is normal course of business.

Got it. And then you called out Airbus talking about potentially going higher in rate on A350 above the 12 per month they previously talked about. When would you need visibility to support that higher ramp? And what's your facility capacity currently?

Right. Well, if you go back to the 2018, 2019 time frame, we were capacitized to support 13 aircraft per month for the A350 program. And obviously, that capacity is still there. and we can grow into that. Now in practice, with the increase in mix of the A350-1000s and also the freighter, those take more material. So that puts a little bit of pressure. But at the same time, we've driven productivity. So we can still do 13. Above that, we would have to be considering capacity. Its about a 3-year lead time. And we would work very closely with Airbus on that and to determine how we put that capacity into place. But one thing I want to make absolutely clear is the A350 is our biggest program. Airbus is a great partner, and we will absolutely support them with whatever decision they decide to make with regard to the A350 production rate.

Your next question comes from the line of Ken Herbert with RBC Capital Markets.

Jamie, maybe I just wanted to follow up on your comments regarding the '26 guide and second half because the guide implies, as you referenced, lower EPS and a significant deceleration or step down in the incremental margins. I mean you called out headwinds around hiring oil prices, restarting at least one line and some conservatism. Maybe how do we think about those? Or can you get any more granular on the respective impact? It sounds like hiring and restarting the line probably bigger headwinds, but may be any incremental detail as you walk through those would be helpful.

Yes. I think you hit the nail on that. We're trying to be thoughtful as we think about back half performance and positioning the business to be able to execute on the sort of expected increase in rates as we move into 2027. And so we put our hiring plans together here. We're looking to pull that line in. That is going to be sort of a bigger driver of the overall sort of margin headwind. Some of the conservatism around the Middle East, we're just watching the situation very closely, and we baked in some minimal incremental expense in the back half associated with that.

And then it's also important to remember the seasonality. We just -- given the lower sales volume that we typically see in the third quarter as our European partners here take some extended time away, that does sort of go the other way for us on the operating leverage and it's historically done so as we look back at the way that seasonality impacts the business. All in all, though, we're very well positioned, right, to execute and finish the year strong. We -- I think that our guide with the raise in the guide, we see the potential incremental margins actually step up from our prior expectations as we move into the full year results, and we want to make sure we're positioned to be able to execute going into 2027.

Okay. And as we think about the revenue guidance increase, is it fair to assume that you've basically added, call it, 3 to 5 A350 units with maybe some incremental or higher MAX shipments in that as well? Is that really the right way to think about the guidance increase?

Ken, I would say, yes. We think there's a little bit of upside on the A350 guidance we had of 80. Lars Wagner in Farnborough said they're producing at 8 or 9 a month right now. We've been pulling at kind of around 8 in this last quarter, and that continues to step up. And so we have purchase orders, firm purchase orders now that support the 80 plus for the rest of the year. And then the other one -- the other major program, I'd say that's increased is the 737. We saw that pulling at just above 42 for the quarter. And Boeing has said themselves that they're expecting now 500, and that's kind of what we're expecting as well.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Great quarter. Maybe if I could just ask about following up on the margin question. I appreciate the seasonality driving the second half margin ramp down by 100 bps. Tom or Jamie, can you maybe talk about where you are in your hiring process of the 400 heads and the incremental carbon fiber line, can you just remind me, Tom, is that in Salt Lake? How much capacity does that take on? And as a follow-up to this, how do we think about incremental margins going forward once you've kind of taken on these start-up costs?

Well, we had kind of 400 for the year originally. We've already hired 300 of those as of right now. And we'll complete the 400 in the back half of the year and we'll add to that because we do see the demand picking up, and we want to make sure we're ready for it. And the carbon fiber line is one that we had in Salt Lake City. We have 14. We had idled 4. We had already brought back 2. So we're bringing now 1/3 back. So we still have one that will be down. But we're bringing that third -- that was supposed to come online next year. We're pulling it into this year because we see the demand picking up so much in the back half of this year and through the first part of 2027.

So that's where it is in Salt Lake City. It's the 13 to 14 lines, and the hiring is to support that. Now in terms of incremental margins, you saw for the quarter, it was 49%. For the year, at the midpoint, what we're seeing 37%, which is up from kind of low 30s in the original guidance. And we expect margins to continue to improve as production rates go up and we get operating leverage. And that's what really helps us in part get to the -- on the path to the 18% by the end of the decade. But it really is about operating leverage. And as production rates go up, we're going to continue to see margins improve, including incrementals. And that is exactly what we see in the first half of this year. We expect more in the second half and certainly into 2027 and 2028 as production rates increase and we get more operating leverage, our margins will continue to increase towards that 18%.

Got it. So this is the 30% to mid-30s is a good incremental margin going forward?

Yes.

Your next question comes from the line of David Strauss with Wells Fargo.

This is Josh Korn on for David. I wanted to ask about FX and the impact you see in 2027 as compared to this year.

Yes. So as we think about FX, through the 6-month period here, we've seen the dollar weakening. It's been a bit of a headwind to margins. We had about a 90 basis point impact here in Q2 explicitly. We do have some hedge programs in place, which is moderating some of the volatility that can occur in that FX environment. We haven't put together and discussed yet our plans on 2027. We're going to be in the process of pulling our plans together for 2027, where we'll think about what that looks like going forward. Obviously, continued dollar weakening is not -- doesn't benefit us as we move forward, the strengthening of the dollar would provide some benefit as we move into '27.

Yes. So stronger dollar is better for us and it just is what happens in the macroeconomic environment will determine that. But we haven't put our plans together for '27, but the stronger dollar helps us, we'll see where that goes.

Okay. And then on the A350, are you currently profitable?

Yes. So as we think about the A350 program, right, we -- our asset utilization levels and our production and our operating leverage that we're receiving, that program is profitable as we move ahead as we continue to see an increase in the ramp rate, the rate of ramp increase over time for that program that will continue to improve profitability on a go-forward basis.

Yes. So at the current production rate, profitable on the A350.

Your next question comes from the line of Richard Safran with Seaport Research Partners.

So I was particularly interested in your comments about defense positions on many platforms. You're no doubt aware the government is looking to accelerate aircraft and missile production. So I'm just going to ask one 2-part question. How are you expecting defense to trend as a percent of sales longer term, considering growth in defense and commercial? Second, are you still selling to defense pretty much on commercial terms? And so as defense grows, should we expect margins for defense to be pretty much comparable to commercial?

Okay. Well, in terms of defense as a percent of sales, right now, it's about 35% Ultimately, I'd love it to be 50%. The challenge is commercial for us is going to be growing so fast in the next 3, 4 years as production rates fully recover, defense will struggle to keep up. But that said, I think defense will continue to grow. And ultimately, we're going to be at 40% to 50% in terms of our defense spend relative to commercial because defense will continue to grow. Now yes, we do sell our defense products at commercial terms. And so as we go forward, that will not be dilutive to our margins because we sell a commercial terms. So that won't be dilutive.

Your next question comes from the line of Myles Walton with Wolfe Research.

I was wondering if you could speak to the rolling of LTAs. Maybe first on the non-Airbus side, you had an announcement about extending agreements with Boeing. And maybe the broad thought here is, are we at the sweet spot of LTAs that were sort of just on the cusp of the price escalation that we saw in the '22, the high inflation period rolling over, and we're getting the benefit of that. That's one question. The second one is, if Airbus does decide to pull the trigger on the A350-2000 by the end of the year, which seems like something they're thinking about seriously, is that going to pull forward your negotiation for price for your overall contract given you have to put more CapEx in the ground maybe to next year?

Okay. So on the first one, what I would say regarding long-term agreements is our agreements tend to be for about 5 to 7 years. So every year, 15% to 20% of them come due. Now obviously, the Airbus ones, which represent 40% of our business expire at the end of 2030. So those don't come due. But when the other contracts come due, we are negotiating and we are seeing price increases in the renegotiation. And it really reflects the value we bring and the investments that we have made.

And so that's been something that we see is that we are seeing strong price realization on renegotiated LTAs. So -- and that will continue. And in fact, this quarter, we benefited from some of that price improvement on LTAs. So that's a positive, and it will continue and continue to be reflected in our performance. Now on the A350-2000, it's going to be a stretch. And so the good news with that is a longer aircraft requires more material, and we provide the entire material system for the A350. So that will be a big positive for us. And that's something that we will work closely with Airbus to support. Now you asked about whether it would pull forward any of the pricing discussion. I don't think the 2 are related. So I don't anticipate any connection to that. What we will work on, though, is understanding what the impact will be on capacity and how we put capacity into place for the future. And we will, at the right time, talk with Airbus about how we do that in the most constructive way.

Your next question comes from the line of Scott Mikus with Melius Research.

Just a follow-up on Myles' question on the A350-2000. If that aircraft were to be powered by the GE9X engine, what could your shipset content be on that variant?

That's a lot of speculation. So we -- what I would say is the A350-2000 will be a longer aircraft, so more material that will benefit us. We obviously have a very significant position on the 777X and on the GE9X engine, both in terms of the fan blades and the fan case and parts of the nacelle. I won't speculate on whether those things will go together, but both of those things would be beneficial to Hexcel.

Okay. And then, Tom, you talked about kind of driving productivity. You closed down a couple of facilities in Europe, but you also expanded your footprint in both Morocco and Decatur, Alabama, where energy costs aren't as high. Are there other footprint optimization efforts underway to reduce costs or shift production to lower-cost locations?

Well, we're always looking for those, but the big ones are done. We sold our Neumarkt facility. We closed our Belton facility. We've expanded in Morocco, as you said. We've also really closed down our industrial operations in Western England, and we sold off a 3D printing plant we had in Hartford, Connecticut. So those are the big ones. We'll look to continue to optimize. But as you say, by shifting more work to Morocco, it's a very competitive workforce, very highly technically trained, lower energy costs.

And in Alabama, we're introducing now our first carbon fiber line, which should save on some logistics and also benefit from lower energy costs as well. So those are all things. And these actions that we've taken on, what I would call portfolio pruning have really helped drive some of our margin improvement. And you see that reflected in the Engineered Products margin this quarter. So overall, the portfolio pruning helped, but we also drove productivity in some of those engineered product plants as well as getting pricing on some of the LTAs. So a combination of those 3 things, portfolio pruning, pricing and productivity is driving margin enhancement, particularly in our Engineered Products segment.

Your next question comes from the line of Kristine Liwag with Morgan Stanley.

So Tom, can you just level set us in terms of what production rates you're able to support with the capacity increases included in your plan if you're able to restart all 4 idle carbon fiber lines? And I guess, are there areas that you need to grow CapEx in some of your more value-add noncarbon fiber manufacturing portion to meet what Boeing and Airbus want to build in 2030?

Right. Well, the answer is we have sufficient capacity in place already. Now we have to bring some of it back online, and we have to complete the 2 plants that we started in Decatur. So we started one, what we call polyacrylonitrile plant, which is a precursor and carbon fiber line. Both of those have to come online. But with all that capacity, we have enough capacity to meet all of the peak production rates that Boeing and Airbus and the defense primes have articulated for their various programs. So that's why we've said that our CapEx over the next several years can remain under $100 million. Now if Airbus decides to go above 12, for example, on the A350 or there's a big new win on next-generation narrow-body, that would require additional capacity, and we would work with our customers on that. But to meet the current targets that they have for peak production across all the programs, we have sufficient capacity in place for coming online to support it.

Super helpful. And if I could follow up, when you're restarting the idled carbon fiber lines, how operationally challenging is it? Is it as easy as turning on the lights and dusting off the cobwebs? Or is there more heavy lift? And also, as we think about volumes going through the lines, how do we think about margin trajectory? At what point -- how quickly does that line get filled up? And when does the margins from that line become accretive to overall segment margins?

Right. Well, the start-up is not routine. I mean it takes a couple of months of planning and preparation. And then -- but once they've gone through that, they're doing a lot of maintenance and lubrication and cleaning, it only takes a couple of weeks. The team is able to bring the line up and get it to production. And from there, maybe a couple of months before it's at full productivity. And so we've done this a lot over the years, either starting up a new line or restarting a line, particularly following the pandemic. So the team is fairly experienced at it. And it takes a couple of months to get up to full productivity. Now in terms of margin, again, we've been suffering from the lack of fixed cost absorption because we've had idle lines. So as those lines come on and we're producing and we're getting absorption now, fixed cost absorption and operating leverage, we will see the margins go up. So bringing the lines on early will be a net benefit for us in terms of our margin enhancement.

Your next question comes from the line of Mariana Perez Mora with Bank of America.

Welcome Jamie. So as a starting question as a welcome question, you talked about capital deployment in the prepared remarks, and you talked about being disciplined, but also considering like inorganic opportunities if they were to match this criteria. Considering that you have this operating leverage, there is capacity and you're getting to a net leverage in line with the overall ranges. How are you thinking about inorganic opportunities that could meet the criteria? Is it exposure to right end markets? It is like a material capabilities? Like how are you thinking overall?

Right. Well, when we think of inorganic, and we're continuing to look. It's not on our current agenda because we're paying down debt. But what we've said is we're focused on advanced material science, heavy aerospace and defense focus with a return on invested capital and ROIC of 15% plus. So those are the basic criteria. And we're going to have a high bar because we've got a lot of opportunity to execute on the current production ramp, and that's going to create a lot of operating leverage, improve margins and drive cash flow. And so we're not going to get distracted from that. We're laser-focused on execution. If the absolute best opportunity comes inorganically that meets those strategic thresholds I mentioned and the return criteria, we will consider it. But absent that, we'll focus on our dividend and share repurchases.

Right. And then when we think about the margins that mostly incremental cash margins as we think about like going into 2030, how should we think about that?

Yes. So over the long run, we sort of in that mid-30% range is incremental margin opportunity for us as we move ahead. We're going to see better leverage overall as we benefit from productivity initiatives, pricing and bringing our business back up to line to be able to absorb the fixed cost base that we have here.

Tom noted, we've got between the commercial aerospace peak rate recovery, there's $500 million worth of incremental sales there. We're going to continue to grow the space business, adding around $200 million. And all of that gets us to the sort of 18% operating margin performance by the end of the decade. As we move beyond that, we'll have repricing opportunities on our A350 contract going into that next decade into that period that's going to provide incremental uplift opportunities. And in the interim, we're going to continue to look at the cost base, right? So we're going to try to control costs as we move forward. We're going to look at ways to expand margins in the near term to the best of our ability while continuing to support the rate ramp. So we feel really good about the growth opportunity ahead, and we feel very strongly that there's margin expansion opportunities and really strong cash generation for us over the next couple of years.

Yes. What I would add to that is that once we get up to the peak production rates, '28 and into '29, we're likely to stay there for a very long time because the backlogs are enormous. It's close to 10 years of production, particularly on the widebodies, which favors us. And while there's discussion of the next narrow-body sometime in the future, which we're working on, there's no discussion of a replacement for the current wide-bodies like the A350 or the 787 or the 777, all of which are big programs for Hexcel. So we see a continued sustained opportunity to be at those high levels of production for a long period of time, getting great operating leverage. And while our target is 18% by the end of the decade, we're certainly not going to stop there. We're going to be driving productivity and pricing initiatives to continue to benefit from the investments that we've made and the value that we bring to our customers.

Great. And one last one, if I may. So you talked about the pricing opportunities, especially getting into next decade. But then by the time you'll be having those pricing discussions, the new narrow-body, the new wide-body replacements will be also part of the conversation with the OEMs. How are you thinking about positioning to this negotiation on a stronger way than the prior wave?

Right. Well, look, it's always a negotiation on all these things. We want to maintain great customer relationships. As I always say, we want to make sure we get a fair return on the investments we've made and the value we bring our customers. And that will guide us in terms of our negotiation. And we want to make sure that the platforms we're on today continue to be successful. And of course, we want to be on the next-generation platforms which -- and the one that's currently in focus is the narrowbody at some point in the future. The widebodies, there haven't been any discussions about those.

We're going to continue to see as we go through pricing relative to the current cost environment. And as we move ahead and think about where that cost environment is, we need a return on the investments that we've made in the business to support the customers. And I think it's really important that as we go into those negotiations that we recognize that we do provide meaningful value as part of those conversations, and we'll be willing to have the right conversations with those customers in support of their long-term initiatives, but ultimately making sure that Hexcel receives the benefit as well for the value that we provide given the current cost that we're seeing for these programs.

Our final question comes from the line of Gautam Khanna with TD Cowen.

This is Anton on for Gautam. I just curious on the MV-75, there's been some funding challenges. Is there any potential impact from this baked into the 2026 guide? And just what's your exposure there?

We're -- so the MV-75, which is the follow-on replacement for Black Hawk is a great program. We've been in discussions with Bell, continuing to determine what our final positions will be on it. It's still in early phases of development. And so it has no impact on 2026 guidance. But it's a great program, and we look forward to continuing the discussions with Bell about how we can support it. It's a really outstanding program. It is moving forward overall, I think, from original projections, but no impact for us on 2026 guidance.

Got it. And then just quickly, if I can. The Boeing contract was announced at Farnborough, how is that any different? Or what's the difference between that and the old contract?

Well, it's just a renewal. We have extensive operations with Boeing on their commercial and defense platforms and space. And so in the normal course of business, when those contracts come due, we renegotiate them, and that's what this was. So it was just a normal renewal for the long-term agreements that we have with Boeing, which are quite extensive.

There's a number of LTAs, not a specific one-to-one match there, right? So there's a number of LTAs that were aggregated together as part of that just to reinforce that relationship and the strength of that relationship.

That ends the Q&A portion of today's call. Ladies and gentlemen, this concludes the Hexcel Second Quarter 2026 Earnings Call. Thank you all for joining. You may now disconnect.

Good morning, and welcome to Hexcel's First Quarter 2026 Earnings Call [Operator Instructions] as a reminder, this conference call is being recorded. I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Hello, everyone, and welcome to Hexcel Corporation's First Quarter Earnings Conference Call. Before beginning, let me cover the formalities. I would like 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 earnings 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 express permission. Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our Chairman, CEO and President; and Mike Lenz, Interim Chief Financial Officer. The purpose of the call is to review our first quarter 2026 results detailed in our news release issued yesterday.

Now let me turn the call over to Tom. Tom?

Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's First Quarter 2026 Earnings Call. Our first quarter results were in line with our expectations in terms of an improving commercial market with higher production levels and channel inventory levels normalizing following the destocking we experienced in 2025. Quarter reflects strong execution across the business in a very dynamic environment, which is creating the operating leverage we predicted as production rates continue to increase. Also, these results for the first quarter further demonstrate the long-term value Hexcel brings to our customers as a global leader in the development and manufacturing of advanced fledweight material solutions.

Our market position benefits from our deep technical expertise vertical integration at scale and outstanding customer relationships. With the uniquely broad portfolio of lightweight composite solutions, Hexcel is well positioned for returning to growth as commercial aerospace production recovers back to pre-pandemic levels and higher. Before turning to our first quarter results in more detail, I want to briefly address the environment with the current situation in the Middle East. We are monitoring developments closely and remain in regular contact with our customers and suppliers as the situation evolves. Hexcel constantly maintains a focus on taking actions to protect our business for near-term cost volatility.

While some of the inputs to our products are petroleum-based, most of what we buy is under long-term contract. We also hedged propylene, a petroleum derivative for 8 quarters. These mechanisms mitigate much of the near-term impact from higher oil prices for our feedstock, energy and logistics costs as much as possible. Our focus is on managing near-term impacts and maintaining flexibility in our operations, along with a disciplined approach to managing business. Jet fuel is one of the largest operating cost for airlines, which reinforces the importance of efficiency and lightweighting.

Recent consumer price index data shows that air prices for airfare have risen almost 15% year-over-year as airlines grapple with higher fuel costs. Newer aircraft deliver improved fuel efficiency, which in a higher-priced fuel environment makes lightweighting even more critical. This renewed emphasis on fuel efficiency directly benefits Hexcel. Turning to our first quarter results. XLT sales of $502 million, a 10% increase compared to the same period last year. Adjusted earnings per share were $0.59, Rising commercial aerospace demand drove earnings, which enhanced our operating leverage as we grow back into our existing capacity. Gross margins also improved compared to last year.

These results reflect improved capacity utilization and strong operating performance across our operations. In our Commercial Aerospace segment, sales were $334 million in the first quarter. An 18.8% increase in the same period in 2025. Sales increased across all 4 major programs, the Airbus A350 and the A320 and the Boeing 787 and 737 MAX. Other commercial aerospace sales increased 15.6% over the same quarter in 2025 on the strength of regional and business jets. As we have discussed in prior quarters, commercial aerospace recovery has taken longer than initially expected.

In our previous call, we highlighted our growing confidence that a sustained increase for commercial production rates at the OEMs was taking hold. We continue to see that production rate ramp materialize. Our first quarter results align with our expected outlook for growing commercial aerospace volumes entering 2026 and continuing over the next few years. Remember that as a materials provider, the various supply chain partners keep different levels of inventory, and there is also scrap and waste so production rates we provide are approximate. Also, Hexcel is typically 4 to 6 months ahead of the OE aircraft assembly so our assumptions are based on production, not OE delivered. Here's how we see the outlook for the major commercial programs. First, the A320 -- based on recent public announcements regarding A320 engine availability, we now expect our volumes on the A320 be at the lower end of our guidance of low 700 for the year rather than low to mid-70s.

We remain confident in the overall catalyst for increased OEM production rates on the A320 to continue going forward. On A350 program, we are seeing increasing alignment between our production rates and the Airbus build rates. With channel destocking largely behind us. We remain confident in our outlook for 80 units in 2026, perhaps even with the upside. On Boeing programs, we see tangible evidence of progress in the ramp-up of both the 737 and the 787, which includes investments to expand manufacturing capacity in Charleston for the 787 and in Everett for the MAX.

While we continue to lag the Boeing production rate for the MAX, the year-over-year first quarter sales growth was particularly noteworthy. Q1 was our best quarter on the MAX in years, with production at around 40 aircraft per month. Our forecast on the MAX for 2026 was mid-400s, and it looks like Boeing exceeds that. On the 787, our forecast was 900 units, and that continues to be our expectation. As commercial production rates at the OEM recover, we expect to see continuing ongoing benefits to our operations from increased operating leverage. At the same time, we are taking a measured approach to bringing capacity online to ensure incremental costs are aligned with that sustained demand and that the benefits of higher production rates are not dilutive.

Throughout this process, our propriety remains on meeting increasing production requirements while maintaining the highest standards of safety and quality. On balance, we see the puts and takes for this year handling each other out, and we are maintaining our full year guidance. Turning to the Defense Base & Other segment. Our first quarter sales of $169 million were impacted by the divestment of our Austrian facility, which led to a decrease in sales volume overall in the segment compared to the same quarter last year. Looking at just Defense & Space, our sales increased low single digits compared to the same period last year.

We saw an increase in our volume for our European fighter programs and for both U.S. and European military rotorcraft programs. This was offset by lower volumes for launchers and rocket motors in the space. First quarter volumes for this segment also reflect the inherently uneven nature of defense program funding and spending, which can vary from quarter-to-quarter. We expect to see the impact of increased defense spending in areas such as missiles begin to impact us favorably later this year.

As we have discussed in previous calls, the organic growth in the defense and space market is a strategic priority for Hexcel, and we remain confident in the long-term opportunity. Defense spending trends for procurement of new platforms by the U.S. and Western line countries continue to indicate increased multiyear defense spending. Underscoring the durability and scale of the current rearmament cycle. This increased defense and space set spending highlights the opportunity we have known as our advanced composite materials enable greater range, increased payloads and enhanced performance characteristics such as low observability for military and space platforms.

All these are areas that differentiate Hexcel. In terms of our balance sheet, at the end of Q1, we refinanced our $750 million revolver, extending its maturity to 2031. This refinancing terminated our previous revolver that was set to mature in 2028. This action further reinforces our strong liquidity position. As part of our ongoing work to streamline Hexcel's portfolio towards markets that value our high-performance aerospace carbon fiber. We remain on track with the transition of our Lester U.K. business from industrial applications to aerospace development.

The restructuring costs from our transformation at Lester impacted our results this quarter. To recap, our first quarter results reflected the forecasted rise in commercial volumes we anticipated and our expectations that operating leverage will be beneficial. Our operations typically use cash in the first quarter of the year, and this quarter, cash usage was low and noticeably favorable compared to past history. This gives us confidence in the 2026 full year guidance that we provided in our previous earnings call, macroeconomic challenges.

While uncertainty in the global environment remains elevated, the market fundamentals support sustained demand for Hexcel's lightweight composite material across commercial, defense and space markets. With our broad product portfolio, market-leading position and continued operational discipline, we are well positioned to navigate near-term uncertainty and deliver long-term value for our shareholders and other stakeholders.

With that, I'll turn the call over to Mike to walk through the first quarter financial results in more detail. Mike?

Thank you, Tom. Sales growth was strong in the first quarter of 2026 as commercial aerospace platforms ramp and the higher volume drove margin expansion from operating leverage. Total first quarter 2026 sales of $502 million increased 8.8% in constant currency, reflecting strong growth in the commercial aerospace market. This commercial aerospace growth was partially offset by lower defense space and other sales following the divestment of the Austrian Industrial business on September 30, 2025. By market, Commercial Aerospace first quarter [indiscernible] sales were $333 million, increasing 19% compared to the first quarter of 2025.

Commercial Aerospace comprised approximately 66% of the total quarterly sales. Sales increased for all 4 of the major platforms, including the Airbus A350 and A320 and the Boeing 787 and 737. Sales growth for the 2 Boeing platforms was particularly strong, which was admittedly an easier year-over-year comparison as our first quarter 2025 sales to Boeing were light. Sales for Other Commercial Aerospace in the first quarter increased 15.6% year-over-year with strength in both fines jets and regional jets.

Defense, space and other first quarter sales of $169 million represented approximately 34% of total sales. First quarter sales decreased 6.9% on lower industrial sales following the divestment of the Ocean industrial business last year. Year-over-year comparisons will be influenced through the third quarter of this year due to this previous divestment. And further, as we proceed with the ceasing industrial operations of our Western U.K. site as disclosed last quarter, that will add an additional decrement to year-over-year comparisons as the Lester site annual sales have been around $15 million annually. In terms of the Defense & Space business, international military sales were strong in the fourth quarter, including the Rafael and Typhoon fighter aircraft as well as European military helicopter program.

Domestically, the CH-53 pay and Black Hawk sales were strong in the quarter. Base sales were softer year-over-year for launches and right Motors. Gross margin of 26.9% for the first quarter of 2026 increased from 22.4% in the first quarter of 2020 on volume, mix and price realization. Rising carbon fiber sales support asset utilization, which drives margin expansion from improved cost absorption. In addition, we had a nonrecurring favorable effect from the timing of inventory utilized. As a percentage of sales, operating expenses, including selling, general and administrative expenses and R&D expenses were 13.4% in the first quarter of 2026. Compared to 12.5% in the comparable prior year period, with the increase primarily reflecting R&D expenses. .

A portion of this was the timing of R&D activities as we continue to invest in innovation to secure a position on the next-generation aircraft. Adjusted operating income in the first quarter was $68 million or 13.5% of sales compared to $45 million or 9.9% of sales in the comparable prior year period. Foreign exchange has become a headwind as the impact of a weaker dollar is now being felt following a lag resulting from our hedging program. First quarter 2026 operating margin was negatively impacted by approximately 80 basis points from foreign exchange.

In contrast, first quarter of 2025 had a favorable impact of approximately 60 basis points from foreign exchange. Now turning to our 2 segments. The Composite Materials segment represented 80% of total first quarter sales and generated an adjusted operating margin of 17.6% this compares to an adjusted operating margin of 14.2% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 14.6%.

This compares to an adjusted operating margin of 6.8% in the prior year period. Net cash provided by operating activities in the first quarter '26 was $19 million compared to a use of $29 million last year. Working capital was a cash use of $63 million compared to a cash use of $98 million last year. Capital expenditures on an accrual basis were $18 million in the first quarter of 2026 compared to $17 million in the comparable prior year period. Free cash flow in the first quarter of 2026 was a use of $6 million compared to a use of $55 million in the first quarter of 2025. Q1 is historically a cash use quarter this year was less than typical as the timing considerations we highlighted regarding 4Q '25 cash flow normalized in Q1 in addition to the improved EBITDA results.

Adjusted EBITDA totaled $107 million in the 3 months of 2026 compared to $85 million in the first 3 months of 2025 or an increase of 26%. We refinanced our $750 million syndicated revolver at the end of March, and a maturity through 2031 from 2028 with a slight improvement to pricing. There were no substantive changes to covenants and this maturity extension enhances our medium-term liquidity and improve our debt maturity profile. Leverage, defined as net debt to last 12 months adjusted EBITDA was 2.6x at March 31, 2026. And our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase.

We remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2x during 2026. The accelerated share repurchase concluded in early March with approximately 4.5 million shares repurchased or almost 6% of our outstanding float. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. The company did not repurchase any shares of common stock in the first quarter 2026 and the remaining authorization under the share repurchase program at quarter end was $381 million. The Board of Directors declared an $0.18 quarterly dividend yesterday, and the dividend payable to stockholders of record as of May 4, with a payment date of May 11.

In closing, we had a solid first quarter. And as Tom mentioned, we have reaffirmed our 2026 guidance, including adjusted EPS of $2.10 to $2.30. Our expectation remains for a roughly split between the first and second half of 2026, consistent with normalized historical seasonality. There remain a number of potential puts and takes with uncertainty from the Middle East conflict and higher oil prices, a potential headwind, whereas the possibility of faster customer rate ramp could become a tailwind as the year progresses. Before I want to turn it back to Tom, I want to state how much I've valued my time as CFO and the privilege of working with an exceptional team producing such differentiated products for our customers.

And with that, back to you, Tom.

Thank you, Mike. And before we open the call for questions, I want to thank Mike for his leadership and contributions as our interim Chief Financial Officer. Mike stepped into this role at an important time for Hexcel. Providing steady leadership while we conducted a search for Hexcel's next CFO. Mike with us to close out 2025, assisted with executing the accelerated share repurchase built the plan for 2026 and participated and led the finance sections and 2 Board meetings, refinanced our revolver and participated in 2 earnings calls. Quite a set of accomplishments for an interim CFO. With the hiring of Jamie Coogan, who starts May 1 as Hexcel's next CFO, Mike will finish out his tenure and support Jamie in his transition into the new role.

Mike came into this role and was not just a caretaker. He brought new perspectives and helped us get better in a variety of financial areas. On behalf of the Hexcel Board and the entire management team, I want to thank Mike for his commitment and the impact he made during his time with Hexcel. Thank you very much, Mike. To close out our first quarter performance reinforces our confidence in the direction of the business and Hexcel's value proposition.

As commercial aerospace production continues to recover, we will benefit from improving operating leverage, supported by our disciplined approach to bring capacity back online control costs and focus on safety and quality. Long-term fundamentals across commercial, defense and space remains strong. And Hexcel's differentiated portfolio, technical capabilities and customer relationships resisting us well to deliver growth and value over the long term.

With that, Julian, we'll take some questions.

[Operator Instructions] Our first question will come from David Strauss from Wells Fargo.

Tom, is there any change in your I think you had forecast commercial up low to mid-double digits for the year. Is there any change there given the potential upside you're talking about on rates? And then second question on the Composite Materials margin. It looks like the incrementals there were north of 40%. I think you're absorbing a decent kind of FX headwind. What kind of -- how did you get there this quarter and how you're thinking about incrementals from here.

So in terms of the outlook on commercial, we're basically saying that we're going to pull to our guidance and our overall plan with some puts and takes. So we do see a little bit of upside on the A350 from the 80% based on the Airbus master schedule based on our bottoms-up forecasting and based on the POs that we already have, the firm. We see upside on the 737, as I mentioned, and 787is about flat. But we do see some pressure on the A320. As I said, our original forecast was 700 to 750 so low 700s, to mid-700. And now we're saying it's going to be at the low end of that range because Airbus has highlighted that with the engine situation, they're expecting to deliver fewer A320s this year.

So net-net, we see basically a flat outcome for the year in terms of our plan, but substantially up from last year. So again, higher on A350 and 27%, flat on 87 and a little down on. In terms of the margins, this quarter really benefited from a few things. One, we had strong volume performance. Secondly, we did get some price on a couple of contracts with customers that customers send you in the normal course of events and we were able to capture that. We also benefited, as Mike mentioned in his remarks from inventory that was built last year and was on the books at a lower cost since when we sold it, we got the benefit from that. And then it was just a lot of operational discipline, holding the line on costs, driving productivity in the factories, and that helped improve our margins. And so overall, we were very pleased with that outcome.

Our next question comes from Sheila Kahyaoglu from Jefferies. .

Tom, maybe just given -- and clearly, the volume incrementals are dropping through really nicely. Maybe on just where the mix can be particularly helpful. It sounds like you're feeling better about the destocking trend there, and it's only the A320 that's an issue. So you mentioned favorable inventory sales timing in Q1. How does the A350 ultimately flow through to the top line and margin profile as we move through the year?

Great. Well, what we see, typically, Julie, is when our volume goes up, we get better operating leverage because we're using more of our capacity. And so that drives the operating leverage for improved margins. And when I say capacity, we have 14 carbon fiber lines in Salt Lake City. We had 4 of those mothballed during most of the pandemic. We brought 1 on at the end of last year. We'll bring on another 1 this year. And so as we go through the year and rates increase, particularly on the A350, using that additional capacity will create more operating leverage for us.

And as we bring the next line on, that will create even further operating level and so that's really the way it translates. Increased volume allows us to utilize more of the capacity that absorbs more fixed cost and increases the operating leverage, which drives margin. And as I mentioned, we expect to see the rates continue to increase. As Airbus has said, they're at 7, they're planning to go to 8. We may see before the end of the year. And that's why we feel comfortable right now with our outlook of 80 and maybe a little bit of upside to that as we go through the year.

And then just volume on defense. I wouldn't expect that to really accelerate given some of the opportunities you have in your portfolio and how we see the budget come through. .

Right. Well, defense is -- sometimes it's lumpy, like on space launchers and satellites. We do see lumpiness on that. We saw that this quarter. For example, there was 1 program that we supply, the Vulcan, which has been paused. And so that was a pretty good number last year. And in the first quarter, it was fairly negligible. And so that's an example of the lumpiness. We saw the same in Europe with some launch systems. But on missiles, for example, we're at a very good rate right now, but that gets better and we start to see it really jump in the third and fourth quarter of this year. because there have been a lot of new orders for missiles, and that's starting to flow through.

But it hasn't flowed through yet. It will flow through later in the year. And then on some of the other programs that we're on, I would say they're still in the EMD phase. In terms of engineering, manufacturing development going into LRIP, low rate initial production. And so over time, as those rates start to ramp up from low rate initial production and the full rate production, we'll start to see the benefit of that. So it's a slow build, but we're starting to see it and it will become more material in the third and fourth quarter this year.

Next question comes from Scott Mikus from Melius Research. .

Tom and Mike very nice numbers; Tom, if the numbers in my model are correct, I think the $281 million of commercial aero sales of composite materials is the highest for any quarter since the first quarter of 2020, which wasn't really impacted by COVID. Wide-body production rates are still below pre-COVID levels. So I'm just curious, was there a restocking benefit? And then on the pricing comments, was there any specific end market or program that was particularly strong from a pricing perspective?

Right. Okay. I'll do the first one. Yes, commercial aero sales were high. And even though wide-body production is still below where it was in 2019, and we expect it to be below for a couple of years. We are seeing the benefits of that increased production. We didn't see the restocking that we saw last year. We saw that our deliveries were more in line with the OEM production rate and so that suggests to us that, that's normalizing, and we're not seeing the destocking. So that's a positive.

In terms of the pricing, it was not in any particular area. It was just several contracts that came up for renewal in the normal course of events. And as I've said before, whenever that happens, we do try to align current market conditions with pricing on those contracts. And we got the benefit of that in Q1 and so we'll continue to see that on a regular basis as we go forward. And our contracts tend to be 5 to 7 years. So every year between 15% and 20% of our contracts come up for renewal, and we renegotiate them, and we have been getting better prices to align with some of the inflation and the higher cost of labor materials and utilities and logistics that we've seen in recent years.

Great. And then you sounded upbeat on the A350 outlook for this year. Airbus is on Kinston now for over 5 months. Based on your conversations with Airbus, is that facility no longer issue when it comes to A350 production and mainly that ramp just comes down to business class seats and to a lesser extent, engines?

Well, I'll let them speak to the specifics of it. But certainly, they now have full control of it, and they're able to control their own destiny. They've been fairly optimistic in terms of their schedules. And what we look at is our bottoms-up demand estimate, where we talk to every plant, including Kinston, and that's been very strong. And then we look at the firm POs. Our POs are generally firm 5 months out into the future. So we're starting to see the POs already for September, which is post the August shutdown and those are very strong as well. So it's on the basis of that, that we're optimistic on the outlook for the year.

Next question comes from Myles Walton from Wolfe Research.

Mike, you mentioned guidance split roughly in half. First half versus second half. Were you referring to sales, EPS or both?

I was referring to EPS. That was in the context of the $210 million to $230 million, yes.

And so that $0.10 or so decline that you're pointing to at the midpoint, -- is that mostly based on margins being lower within CM because of the lack of benefit from the inventory you had in the first quarter?

So a couple of things as you think about margins and trajectory going forward. Certainly, that was a nonrecurring benefit of relatively significant or I wouldn't have mentioned it. There are other considerations as we move through the year. Tom mentioned about lines coming back on which is great because we're carrying the depreciation and get the leverage for that, but you'll also have some start-up costs when you open up a new line and the phasing of hiring in that. So there's always an ebb and flow along the way. So as we look at the balance of everything, like Tom said, seem pretty good through September. We'll see what the Q4 comes in later down the road. We saw that as the right balance of conservatism as well as looking at the potential opportunity later in the year as well.

And then, Tom, anything you want to comment on the M&A pipeline or outlook for inorganic growth?

Well, right now, Myles, our focus is really 100% on executing on the production ramp, then also making sure we're driving our R&D and innovation to get on the next generation aircraft and then focusing on organic growth in our core businesses and in defense in particular. As you know, we did the ASR last year in October, and we took $350 million out of our revolving credit facility and we committed that we would pay that back and get our leverage down back below 2.

So as Mike said, we're at 2.6%, 2.7% right now. Our goal is to get back under 2 by the end of this year. And so we're not really planning on any M&A until we get to that point. But in the future, the focus for M&A will be looking at things that are advanced material science and have an ROIC of 15% or greater. And in the absence of that, we will continue to repurchase shares in the future. But not until we get back below 2x our net debt-to-EBITDA leverage.

Next question comes from Ken Herbert from RBC Capital Markets.

Nice results. I wanted to see if you can provide a little more detail as to how you're managing risk on specifically European your European manufacturing footprint. I know you went through some of this detail on the call, and we've had a number of questions on this over the last month as we've seen greater volatility, obviously, in input cost. Can you just help framing the risk that and help with confidence that you won't see any sort of uptick or inflated risk as a result of what's happening with energy prices or other input costs globally, but in particular with your European footprint. .

Great. So a couple of things. First of all, most of what we buy for production in the U.S. and Europe comes from U.S. and Europe, over 90%. So we have that sort of natural edge. In Europe, in particular, we do have a forward buying program on things like natural gas that give us a little bit more stability in the energy outlook. Now of course, if things persist for a very long period of time, we'll see the impact of that in out years. But for the next couple of years, we feel very confident with our hedging program and our forward buying program. that will help mitigate some of those costs. And the fact that most of what we buy in for European production comes from Europe and not from outside of Europe or from some of the regions that are more impacted by the current events.

Ken, as Tom said, we layer in sequentially as you go out over several quarters, both the hedging of the propylene as well as the prebuy. So in the near term, you're the most covered as it were. And then that obviously fades off as you go out in the later period. But again, none of us have a precise crystal ball as to what exactly how events will unfold here over the next few months.

And in fares to is most of our production of carbon fiber is in the U.S. So we've got 14 lines in the U.S., 2 in Europe, 1 Paline in Europe in 7 in the U.S. So again, we tilted a little bit more towards U.S. production. Now preCrag is mostly in Europe, which is near the Airbus plants, but the carbon fiber production is tilted towards the U.S.

Tom, you've mentioned a few times again, spending to support next-generation aircraft. Do you have any updated thinking in your spending as to when we could hear about announcements from your customers and not that you get in front of anything they might say, but is the timing accelerating? Has your timing on this changed at all as you think about sort of next-generation pre-sheet aircraft? .

No, it hasn't changed. We're still consistent with what the OEMs have both declared publicly, which is that they wouldn't make a decision for another couple of years, maybe launch a program by the 2030 time frame with an entry of service in the late 30s. And so nothing has changed in that. But there's a lot of discussions that are going on right now for all different parts of the aircraft. Looking at not only what type of carbon fiber and resin system but also what type of production process. And so we're deeply engaged in those discussions with both airframe OEMs, much in Boeing, but also with the engine OEM. And so those discussions are continuing, and I expect that they'll stick to their time frame that they've announced publicly.

Our next question comes from Gautam Khanna TD Cowen.

I wanted to ask you just if you could so wanted to ask you if you could quantify what you think your A350 shipment rate was in the first quarter? And maybe if you could give it for some of the other programs as well. .

Just roughly, I'd say A350 was at about 7%, a little bit underneath 7. 787 was a little bit above 7%. Both of them are talking about going to in later this year. Boeing is talking about going above that and Airbus is the same for its A350 as I said, we think we could see 9% before the end of the year. On the A320, we were just under 60-ish. So kind of in line with where Airbus is, but that's good -- and as I said, we're usually ahead of the OEMs, and our production is a little bit more of an estimate because we're looking at the quantity of material and we're also about 6 months ahead of them in terms of where they are. So it's not deliveries that we're looking at so much as production.

On the math, as I said, we're in the 40% range. which is consistent with where Boeing has said they are. They've been tracking very nicely, and they're expecting to go to 47 later in the year, so we will be prepared for that. And on the 787, we were a little bit ahead of in and they're tracking nicely to the 90 to the 100 that they indicated last year that still seems to be a good number. So that's how we look at each of the rates.

Our next question comes from Jordan Lines from Bank of America. .

Last quarter, you guys talked about a selective hiring for the A350 ramp up. Could you just give us a sense of where you are in the hiring? And then two, how you're thinking about hiring for everything else that is also ramping up?

Right. Well, because our production is fungible across all of the programs, our hiring is kind of aggregate. So I'll give you the overall. So, as we said, we were a little bit heavy last year in terms of staffing because we had expected higher rates. We hired people that didn't come. So, we ended up higher. But there was no point in, obviously, laying them off as we knew we had our hiring back this year in train. So we held on to that and that impacted some of our margins last year.

This year, we expect to hire around 400 people, direct labor to help support the production. And through March, we hired about 200 about half of -- so we -- because we saw the rates going up a little bit, we were expecting to not start hiring in volt until the middle of the year. But with the higher rates, we started a little bit earlier. So we had about 200 in the first quarter. We expect 400 for the year to support the plan that we have in front of us.

Our last question will come from Scott Deuschle from Deutsche Bank.

Mike or Tom, is this step-up in R&D likely to continue over the rest of the year? Or should it normalize back down from these levels?

Scott. So a couple of considerations that play here. Just broadly, our overall R&D head count is actually down during year. But remember, R&D spending involves other activities as well. So we had a degree of an increase in Q1 just with the timing of certain activities related to that. as well as if you start any fiscal year, you look at and revisit where are your costs are flowing and there was a couple of items that were in the factory cost centers that we identified would be that are really dedicated and related to R&D. So there was a little bit of a bucket shift there, nothing drastic or radical. So I would just give you that context for that. .

Yes. Well, and that's -- that's exactly right. So when we are doing testing of new carbon fibers to increase tensile strength and modulus and compression, we have to produce batches of test material. And those batches historically just stated it with the plant because they're picking up now, they're a little bit more material. We're allocating them more properly to R&D. So you'll see some of that. And that's the bucket shift that Mike mentioned.

But in general, we are stepping up R&D to make sure that we have the right products in front of our customers as they make their decisions in the next-generation products. So you will see a slightly elevated R&D as we go forward. Some of it being the bucket shift and some of it just being -- we are stepping it up to be right in line with where the OEMs are both the airframers and the engine makers for the next-generation aircraft.

Okay. Great. And then Tom, the high end of guidance implies the average EPS over the next 3 quarters is about in line or actually even slightly lower in the $0.59 you pen this quarter. I understand you had the inventory sale benefit. But unless that was really big, it would seem there'd be pressure to grow EPS off this first quarter base given the build rate increases. And so was just curious if you could just clarify the puts and takes as you go into the...

Mike said, we're going to be half and half on EPS for the course of the year, the first half, second half. This was a strong start to the year. Obviously, we're going to continue to drive forward on production rate efficiencies, holding the line on costs, driving productivity in the factories. And so we feel comfortable with the outlook it's about balance, as I said, first half, second half. And with all the uncertainty with regard to production rates in the trade and oil, we feel it's prudent right now to just hold the line and maintain guidance, but we'll certainly try to drive productivity and improve on it. But right now, as we said, about half and half, half in the first half.

Yes. And Scott, the -- as we mentioned, we're very well mitigating all of the various cost increases here in the near term, but not completely 100%. So we're just being thoughtful about that. You see it while everybody focuses on oil per se and those inputs just as it is within the broader economy, but prolonged elevation of that type of situation. You can see that a lot of other things such as shipping costs and others. So again, just being prudent and balanced as we think about the full year. And as I mentioned earlier, there's the phasing of the startup of the lines with start-up costs and you got to bring the hiring on before you realize the business and the flow-through of it. So again, just taking all those into consideration there, we felt this was the balanced outlook. And like Tom said, hopefully, we see some further acceleration, and that could lead to potential upside.

We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

Hello, everyone, and welcome to Hexcel Fourth Quarter and Full Year 202 Earnings Call. Please note that this call is being recorded. [Operator Instructions]. I'd now like to hand the call over to Kurt Goddard, Vice President of Investor Relations, please go ahead.

Thanks, Elie. Hello, everyone. Welcome to Hexcel Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. Before beginning, let me cover the formalities.

I would like 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 earnings 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 express permission. Your participation on this call constitutes your consent to that request.

With me today are Tom Gentile, our Chairman, CEO and President; and Mike Lenz, Interim Chief Financial Officer. The purpose of the call is to review our fourth quarter and full year 2025 results detailed in our news release issued yesterday. Now let me turn the call over to Tom. Tom?

Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's Fourth Quarter and Full Year 2025 Earnings Call. With positive signs emerging for a sustained ramp-up in commercial aircraft production rates, we are confident in Hexcel's ability to meet this increasing demand. Longer term, it is a promising outlook for the entire industry. IATA recently released data highlighting the current backlog for commercial aircraft has exceeded 17,000. Same report also noted that to-date, there has been a delivery shortfall of at least 5,300 aircraft, underscoring the current imbalance between supply and demand for commercial aircraft. The fact that even with this historically high backlog, airlines are still ordering new aircraft, underscores how much demand there is for these new aircraft and incorporate more lightweight material [ that are ] more fuel efficient and require less maintenance than the older aircraft they will replace. This situation is positive for manufacturers like Hexcel as production rates are likely to remain at elevated levels for an extended period.

As a vertically integrated manufacturer of advanced lightweight carbon fiber composites for the broad product portfolio, we are well positioned to support the needs of our Commercial and Defense customers. Also, we continue to focus on developing Advanced Materials Solutions for next-generation aircraft as lightweight composite materials increasingly replace metals in aircraft structures, make them lighter, stronger and more fuel efficient. Combined with our commitment to operational excellence, we see Hexcel is well positioned to benefit as commercial aircraft production rates continue to recover and funding for defense platforms increase globally.

2025 was a challenging year for us as destocking by the OEMs, schedule delays and lingering supply chain constraints for the OEMs impacted our plan. Despite these challenges, Hexcel closed the year on a positive note as we continue to see an upturn in commercial orders that we first highlighted in our previous earnings call. This positive trend is setting this up for a stronger 2026. Across all our major programs, the A350, the A320, 787 and the 737, we see positive catalysts that a sustained recovery and ramp-up of commercial aircraft build rate is beginning to take hold.

On A350, the closing of the Spirit AeroSystems transaction moves major A350 production in-house for Airbus eliminating previous bottlenecks. On the A320 engines have been a problem. Safran is expanding LEAP engine production capacity with the new final assembly line in Morocco. LEAP production continues to increase with record unit shipments in the fourth quarter 2025 and full year 2025 unit shipments exceeded the pre-pandemic 2019 prior peak. The GTF from Pratt & Whitney, engine shipments have also been increasing and are forecast to increase further in 2026. Airbus added 2 new A320 final assembly lines, one in the U.S. and one in China.

On the 787, Boeing broke ground to expand its Charleston, South Carolina site to double 787 output, and Boeing reported that they are transitioning production to 8 aircraft per month. They also said in their earnings call on Tuesday that the 787 inventory is more normalized with the supply chain now. And on the 737, Boeing reported that they are producing at a rate of 42 aircraft per month after the FAA lifted the production cap. Along with reduced supply chain disruption, these catalysts give us growing confidence that the long-rated recovery in commercial aircraft production is coming into focus as impediments to the OEM reaching their peak build rates are receding and the destocking we experienced in 2025 appears to be largely behind us.

Aircraft production peaked in 2018 at 1,734 aircraft. In 2025, production was still just 1,503 aircraft or about 87% of the pre-pandemic level. In 2026, we should finally fully recover to pre-pandemic production levels as an industry, although wide-body production will probably not recover fully, for a couple more years. With the historic backlog held by Airbus and Boeing, and our sole source position and long-term contracts on our commercial program, Hexcel is in a strong position to benefit from the increase in commercial aircraft production.

As we have previously highlighted, when Airbus and Boeing achieved publicly disclosed feed build rates, we expect to generate $500 million in incremental sales annually from those sole-source contracts. Additionally, growth from defense and space as well as business and regional jets will add over $200 million in additional sales. As our sales volumes increase, it drives greater operating leverage and margin expansion for our business. It was based on our confidence in this production ramp and our ability to execute on it that we initiated the $350 million accelerated share repurchase program last October.

Shifting to opportunities in Defense & Space. We expect strong long-term demand in this market as defense budgets in the U.S. and allied nations globally continue to increase due to an uncertain geopolitical environment and the development of new platforms. We continue to engage the U.S. defense [indiscernible] directly as well as government stakeholders, highlighting Hexcel's unique value proposition. We are well positioned to serve defense customers with Hexcel's innovative lightweight advanced materials that provide defense and space customers with greater payloads, greater range and low observability that those platforms require. Additionally, our vertically integrated operations in the U.S. and across Europe provide those governments with secure and sovereign access to advance carbon fiber that is critical for defense platforms.

Our strong positions in both commercial and defense markets underscore Hexcel's ability to capture growth going forward. With this foundation in place, let me now turn to our financial performance for the fourth quarter and full year 2025, which reflects the actions we have taken to navigate near-term challenges and position for long-term success.

Our 2025 full year results were impacted by Airbus revising the A350 production schedule combined with channel destocking on the A350 and other programs. In 2025, Hexcel achieved full year sales of $1.894 billion, adjusted EPS of $1.76 and free cash flow of $157 million. In the fourth quarter, Hexcel generated $492 million in sales, up 3.7% from 2024, highlighting the positive trend in commercial orders as we enter 2026. Commercial Aerospace sales in the fourth quarter were $299.5 million, an increase of 7.6% compared to 2024. This increase was due to strong growth in the A320 along with increases in 787 and 737 volumes as well as increased regional jet sales. The overall sales volume increase in the Commercial segment was partially offset by lower sales volume in the A350 due to lingering destocking in the quarter.

In our Defense, Space & Other segment, sales were $191.8 million in the fourth quarter, down 1.9% compared to the same period in 2024. Taking a closer look at this market, we experienced increased sales for Defense & Space due to strength in military rotorcraft programs and launchers, but sales overall were lower due to the divestment of our Austrian-based industrial business that we announced at the end of the third quarter in 2025. Overall, our full year 2025 results were impacted by Airbus initiated schedule changes on the A350 program, destocking by the OEMs and charges related to the disposition of non-core businesses in Austrian and Connecticut. In addition, we closed the facility in Belgium as we rationalized our footprint to streamline operations.

Commercial order activity continued to trend higher throughout the quarter, which we expected and first highlighted in our third quarter earnings call. Also, we believe the majority of destocking by the OEMs is now generally behind us. However, this remains a watch item for all of us, and we will continue to monitor it throughout 2026. While our results reflected the headwinds we face in 2025, they also underscore the importance of the operational discipline we maintained throughout the year.

Let me share with you a few of the actions we took to strengthen our operational excellence foundation for the future. As we dealt with the impact from scheduled changes and destocking throughout 2025, we kept a strong focus on cost control and operational discipline. This included the business rationalization I mentioned earlier as we exited industrial markets like wind energy, and winter recreation market, and we continue to streamline operations in 2026. We just announced a proposal to refocus our Leicester U.K. site to perform work solely related to commercial aerospace development. Along with our cost control initiatives, we continue to invest in productivity enhancements in our factories through automation, AI-driven workflows and digitization, while maining high levels of safety and quality. Also, we remain focused on managing head count closely. We finished 2025 about 330 positions fewer compared to our year-end head count for 2024 and well below our original plan for 2025. This delta reflects an intentional use of attrition or lower head count during 2025, which was slow, along with the head count reductions that resulted from our site rationalization equity.

Going into 2026, we are starting to evaluate some selective hiring earlier in the year to support increased A350 production, followed by some general hiring that will likely begin around midyear. In the third quarter of 2025, we launched the $350 million accelerated share repurchase program, which underscores our confidence in Hexcel's long-term growth. This decision reflects our strategy to invest in Hexcel as we see tremendous opportunity to benefit from increasing commercial aircraft build rates and growth organically in Defense & Space over the coming years.

Also, as we noted in the third quarter earnings call, I want to be very clear that we remain committed to disciplined financial management in our targeted leverage range of 1.5x to 2x net debt to EBITDA. We intend to repay the $350 million we borrowed from our revolver for the ASR as soon as possible in 2026 to return Hexcel to that target leverage range. We also announced a 6% increase in the quarterly dividend to $0.18 per share, reflecting our positive outlook in Hexcel's long-term growth and strong cash generation profile. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. Along with strengthening our financial foundation in 2025, we also focused on leadership across the organization.

We welcomed several new members to the Hexcel leadership team, bringing fresh perspectives and deep industry expertise to help drive our strategic priorities. This includes Mike Lenz, who joined us as our Interim CFO while we conduct a search for the next permanent CFO. You'll hear from Mike shortly. We have made great progress on the CFO search, and we are focused on identifying the right person for Hexcel. Also, we added new functional and business program leaders across Defense, Safety, R&D, Quality and Operations, all areas that are critical to delivering on customer commitments and maintaining the highest standards of excellence.

Before I turn it over to Mike, let me briefly highlight our outlook for 2026. I want to emphasize that 2025 was a year of disciplined execution as we manage through the schedule changes and the impact from destocking. We closed the year with encouraging trends, including an uptick in commercial orders and the margin rates for the fourth quarter, carrying over a trend that began the previous quarter. We believe the commercial recovery is gaining traction as OEMs take steps for higher production rates across all our key programs. At the same time, defense and space markets remain robust with budgets increasing and the demand for advanced composite solutions across rotorcraft, fixed wing and space applications. As OEM hits their publicly disclosed peak commercial build rates before the end of the decade, this will, as I said, generate $500 million in incremental sales from existing contracts with Airbus and Boeing, and we expect to generate in excess of $1 billion in free cash flow cumulatively over the next 4 years in 2026 to 2029.

In 2026, we expect sales in the range of $2.0 billion to $2.1 billion, adjusted EPS between $2.10 and $2.30 and free cash flow greater than $195 million. Increased operating leverage from higher sales volumes, along with the disciplined execution and focus on controlling costs will be the primary driver of these results. We believe that our guidance reflects prudent assumptions regarding commercial aircraft rate brands. Now Mike will provide additional details of our financial results. Mike?

Thank you, Tom. We closed the year with a strong fourth quarter and a return to year-over-year growth. The higher sales supported adjusted operating margin expansion illustrating the operating leverage opportunity ahead. The Commercial Aerospace OE recovery continues to become more apparent, both in our business and in the broader supply chain.

Total fourth quarter 2025 sales of $491 million increased 1.6% in constant currency. Growth in the commercial aerospace market was partially offset by lower Defense, Space & Other sales following the divestment of the Austrian Industrial business on September 30, 2025. By market, Commercial Aerospace fourth quarter 2025 sales were $300 million, representing approximately 61% of total fourth quarter sales. Fourth quarter Commercial Aerospace sales increased 5.8% compared to the fourth quarter of 2024.

Sales increased for the A320, 787 and 737 whereas sales decreased for the A350 as a result of some lingering destocking. Sales for Other Commercial Aerospace in the fourth quarter increased 16.1% year-over-year, led by regional jets. Defense, Space & Other represented approximately 39% of fourth quarter sales and totaled $192 million, decreasing 4.3% on a constant currency basis from the same period in 2024. Sales were basically unchanged year-over-year on an organic basis. Demand was strong for a European Fighter Program and European Helicopter Programs as well as launchers and satellite offset by lower automotive sales and the absence of the divested Austrian Industrial business.

Gross margin of 24.6% in the fourth quarter decreased from 25% in the fourth quarter of '24, principally due to sales mix. As a percentage of sales, operating expenses, including selling, general and administrative expenses and R&D expenses were 11.4% in the fourth quarter of 2025 compared to 13% in the comparable prior year period. We continue to focus on cost control and there is leverage within our operating cost structure so that expenses should grow slower than the rate of sales growth. Adjusted operating income in the fourth quarter was $65 million or 13.3% of sales compared to $57 million or 12.1% of sales in the comparable prior year period.

In terms of foreign exchange, Hexcel benefits when the dollar is strong. We generally sell in dollars for Commercial Aerospace, yet we have a significant European presence and European cost base. We hedge our operating profit over a 10-quarter time horizon for foreign exchange gains and losses are layered into the financial results over time. Foreign exchange has become a headwind as the impact of the weaker dollar is now being felt. Fourth quarter 2025 operating margin was negatively impacted by approximately 110 basis points from foreign exchange. In contrast, fourth quarter 2024 had a favorable impact of approximately 60 basis points.

Now turning to our 2 segments. The Composite Materials segment represented 80% of total fourth quarter sales and generated an adjusted operating margin of 20.5%. This compares to an adjusted operating margin of 15.3% in the prior year period. The Engineered Products segment which is comprised of our Structures and Engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 11.1%, which compares to an adjusted operating margin of 10.7% in the prior year period.

For the full year 2025, we met our updated sales and adjusted EPS guidance. The lower tax rate was supportive, contributing roughly $0.02 to adjusted EPS. The lower effective tax rate in 2025 primarily reflects the tax benefits associated with restructuring charges for the closure of the Belgium facility, which contributed roughly a 4% rate reduction. To share some further perspective on our Commercial Aerospace business for the full year, latest generation wide-body sales comprised about 1/3 of total Commercial Aerospace sales in 2025. Narrow-body sales were also about 1/3 of sales and legacy commercial aircraft were about 10%. Other Commercial Aerospace, including business jets and regional aircraft accounted for the remainder at somewhat less than 25%.

Shifting to full year 2025 Defense, Space & Other sales. Approximately 1/3 of Defense & Space 2025 sales were outside of the U.S. Our International Defense & Space sales are predominantly from customers located in NATO-aligned countries and also include customers in India, Brazil and South Korea. Net cash provided by operating activities in 2025 was $231 million compared to net cash provided of $290 million in 2024. Working capital as a use of cash of $1.5 million in 2025 compared to a cash use of nearly $1 million in 2024. Capital expenditures on an accrual basis were $77 million in 2025 compared to $81 million in the comparable prior year period. Free cash flow in 2025 was $157 million, which compares to $203 million in 2024. There are always a number of moving parts with working capital at year-end and free cash flow came in below our guidance.

Strong sales in December led to an end of the quarter increase in accounts receivable greater than we forecasted, combined with lower than projected payables at year-end, along with some retirement plan flows.

Adjusted EBITDA totaled $346 million in 2025 compared to $382 million in 2024. Following our revolver borrowing to finance the ASR, our leverage is temporarily elevated. Leverage, defined as net debt to last 12 months adjusted EBITDA was just under 2.7x at year-end 2025, and as Tom said, we remain firmly committed to a disciplined financial policy to returning leverage to the targeted range of 1.5x to 2.0x as soon as possible during 2026.

The Board of Directors declared an $0.18 quarterly dividend yesterday, and this reflects a $0.01 or 6% increase compared to the prior dividend. The dividend is payable to stockholders of record as of February 9, with a payment date of February 17.

I will conclude by sharing some additional details regarding our 2026 guidance. In terms of comparing 2026 sales guidance to our actual 2025 sales, recall that the divested industrial facility in Austria generated just under $30 million of sales in 2025, so those sales are not recurring in 2026. Further, the Leicester U.K. facility that Tom referenced earlier, generated around $15 million sales in 2025, so if the facility is closed in the first half of 2026, that will only be a partial year of sales this year. Foreign exchange will be a headwind in 2026 compared to 2025 due to the weaker dollar. We are not guiding to an expected FX impact due to the uncertainty of future rates. But as a reference, our average euro-dollar rate in 2025 was $1.13. FX had an approximately 10 basis point unfavorable year-over-year impact to operating margin in 2025. In 2024, the average euro-dollar rate was 1.08, and FX was a benefit of approximately 40 basis points year-over-year.

Cash conversion should exceed 100% for a period of time as capital expenditures remain subdued. Inventory days on hand should continue to trend lower during 2026 as we grow into our inventory levels, while even though inventory may grow modestly on a dollar basis, sales are expected to grow faster, leading to a reduction in days on hand. And then three comments regarding seasonality.

Operating expenses are typically elevated in the first quarter on stock-based compensation. Third quarter sales are seasonally soft due to summer holidays, particularly impacting European sales and the business typically uses cash in the first quarter of the year with the strongest cash generation typically in the second half of the year.

Repayment of the revolver will be a priority during the year, and consistent with Tom's comment regarding our focus on deleveraging in 2026. As a result, interest expense should decrease as the year progresses, the cash is generated and used to pay the revolver. Depending on the timing of cash receipts and market rates, interest expense for 2026 is expected to be in the range of $50 million to $55 million.

And lastly, we are projecting an effective tax rate of 20% for our EPS range. And with that, let me turn the call back to Tom.

Thanks, Mike. Before we move to Q&A, I want to take a moment to express our deep appreciation for Jeff Campbell's leadership on Hexcel's Board of Directors. Jeff recently announced that after almost 23 years of service on the Hexcel Board, the last 7 as our Lead Director, he will not stand for reelection at our next annual meeting. Jeff has been an invaluable contributor to our governance and strategy for more than 2 decades. We are grateful for his commitment and the impact he has made on Hexcel.

Looking ahead, Hexcel enters 2026 with strong momentum. Positive order trends we saw late in 2025, combined with the catalyst enabling increased commercial aircraft production and the opportunities we have in defense and space position us well for the future. We are excited about the path ahead and confidence in Hexcel's ability to deliver value for our customers and shareholders. With that, Eli, we are ready to take questions.

[Operator Instructions] I'd now like to call Ken Herbert for our first question from RBC Capital Markets.

Maybe, Tom, just to start with sort of the midpoint of the up 8% on revenues in the '26 guide, can you provide any more detail on how we should think about Commercial Aerospace within that growth? And specifically, what the underlying assumptions are associated with the A350?

So the 8% is a mix of, of course, our Commercial and then the Defense, Space & Other. Defense, Space & Other is going to be diluted because as Mike explained, we aren't going to have the $30 million from the Austrian business and also probably about $8 million or so from that Leicester U.K. business that I mentioned. So that gets us to the 8%.

For Commercial Aerospace by itself, I would describe the growth rate as low to mid-double digits for next year. So we are seeing an increase. And the assumptions underlying that, because we right now are very aligned to the original equipment commercial aerospace build rates for the OEMs, Boeing and Airbus in particular. And primarily, the A350 is our biggest program where we have a shipset of $4.5 million to $5 million. That's a big driver.

As I said in the past, we're assuming about 80 units delivered and produced that we're going to deliver to Airbus in 2026. That's up from the 57 that they delivered in 2025. So it's a big leap. But what we see is we do a bottom-up demand forecast where we contact all 35 of the locations that received material, and the 80 is a pretty good representation of what we think from the bottoms up as well as the top-down analysis.

Now I also want to remind you that we're a material provider. So we're typically 4 to 6 months ahead of the OEM in terms of what our assumptions are, because we're looking that far ahead in terms of material. So it's really -- our forecast is kind of a mix between the [indiscernible] for '26 and; 27 combined. But for A350, the underlying assumption in our plan is about 80.

Now just to carry on for the A320, as we've said before, our shipset is between $200,000 and $500,000 on the A320, it's more toward the upper end of that range. We're assuming low to mid-700s. And again, remember that we're 6 months ahead of Airbus. So our number is going to be a little bit higher than what they're communicating or estimated. On the MAX, we're targeting mid-400s which we are going to monitor closely. We saw a lot of destocking in 2025. They're getting through that, but there's probably still some lingering destocking on the 37 program. So we'll watch that. But we're expecting mid-400s, and then the 787, consistent with Boeing, what they said on their call, 90 to 100 is what we're assuming in our plan.

So for the four major programs, those are assumptions. As I said, we're a little bit ahead of the OEMs because we're a material provider. But we've also tried to be conservative in making those assumptions as we build the plan because we know it's been tough with the supply chain. But as I mentioned in my prepared remarks, there are four catalysts across each of those major programs that give us confidence that these build rates can now start to ramp up and that they will hit their peak production rates in the next few years.

That's great. I appreciate all the detail, Tom. Just one quick follow-up on the A350. You called out in prior quarters that you were seeing purchase order activity and customer activity that supported these rates in your expectations into '26. Can you just comment, did that continue through the end of the fourth quarter? And what have you seen so far this year, specifically on that program in terms of just customer purchasing activity or pull?

Right. The purchase orders are very strong this year in contrast to last year. And so we've got good visibility on the purchase orders, firm purchase orders all the way out through May, so 5 months. And so that's good. But it was this bottoms-up demand management profile that I mentioned, where we with Airbus go out to all 35 internal Airbus plants as well as external third-party plants. And we basically pull them on what their orders are going to be. And so that bottoms up analysis is also giving us confidence in that 80 number that we gave.

In fact, we're confident enough that we've had a number of carbon fiber lines mothballed over the past few years because production has been lower. We actually brought on online earlier than expected, just so that we're prepared for the increase and even if it goes above that. So just to give you a little bit of color on how we built that plan and the confidence we have in the assumption.

Next question comes from the line Gautam Khana of TD Cohen.

I apologize if I missed this, but I was wondering, in the fourth quarter, Composite segment, if you could quantify the out-of-period benefits for the one-timers?

And then just one of the things we noticed last year is you had pretty high decremental margins, but the implied incrementals look to be kind of like 30, mid-30s. Wondering if what would be the case for upside and why shouldn't we think that there could be just given you get the leverage coming back?

Okay. Let me take the incremental margin first, and then I'll turn it over to Mike. You're right on the incremental margins. It's mid-30s is what we're seeing based on the current land. And the upside is really its gets down to commercial build rates. If we see higher production rates on the A350, the A320, the 37, the 787, then we'll see upside to those incremental margins.

The key point about Hexcel is we are all about operating leverage. As the production rates go up, we're going to get operating leverage. As I mentioned in my remarks, production is only 80% recovered, 87% recovered overall and less on widebody. As the production gets back to pre-pandemic levels, that generates a lot of operating leverage for us, which will improve margins and our incremental margins as we go forward. Now I'll let Mike answer the question about that...

Yes. So the adjusted operating margin in the fourth quarter for Composite materials, that was 20.5% was the margin. We can we can follow up with any more specifics about what numbers are plugged there to get to that margin. But that is the adjusted one. The table, as you know, that's a GAAP number.

Next question comes from the line of Gavin Parsons of UBS.

I'd love to just go back to the incremental conversation. Could we have a little bit more color around maybe fixed versus variable costs? Just kind of aligning your hiring expenses, your utilization to your revenue. Just how do we think about some of the pieces underlying incrementals?

Right. Well, we're managing costs overall in the corporate area. You saw G&A it was lower than last year. So we held the line a lot of [indiscernible] tightening on things like professional fees and head count and T&L and things like that. The other thing that we've done is, as we said, in terms of cost, fixed cost in the factories is we -- now this -- some of the labor, the direct labor is variable cost, but we had a hiring freeze on. We also led attrition because the volume wasn't there. We didn't need all the people. So we did let attrition go down. We had a couple of small cap production.

And so we ended the year with 330 head count below where we ended 2024, and it was way below our original plan for 2025. And we're keeping that low level of head count going into '26. We're only going to start to hire as we see evidence that those rates are coming up. We're starting to see it on the A350, which is why we started up that new carbon fiber line a little bit early. But other than that, we're going to wait until midyear before we start any increased hiring. And that's how we're going to manage some of the fixed and variable costs as we go into 2026.

And then on A350, will you go up at the same rate as Airbus? Will you be leading them on that typical 4- to 6-month time frame? How do we think about the time frame?

As I said, a little bit ahead of them, but we're more in lockstep. There was a lot of destocking last year. But as we get into fourth quarter and we got into December, in particular, we saw that kind of normalizing and shipping to them at close to their delivery rate. So we expect that to continue throughout 2026. And we'll go up with them. We'll be a little bit ahead, as I said. So our rates are generally a little bit ahead of them.

But as I said, we're protecting more on the upside, and that's why we started up that extra carbon fiber line because the initial bottoms-up forecast is probably a little bit higher than our underlying assumptions, and we want to be ready. We just don't want to miss. As you know, there have been a lot of companies called out for being behind on production rates for Boeing and Airbus. We don't want to be one of those. We haven't been. We've always been a very good supplier in terms of on-time delivering quality, and we intend to remain that way.

Your next question comes from the line of John McNulty of BMO Capital Markets.

Maybe just fleshing out a little bit more about how to think about incremental margins going forward. It looks like based on the revenue outlook that you've laid out, you're kind of calling for somewhere around 30% incremental margin, which is definitely kind of lower than what we saw in 4Q. And I would imagine just given that you are really feeling some demand pull and you've got kind of the assets and the people in place. I would think it should be maybe a little bit north of that. So I guess, how should we be thinking about what's embedded in the guide at this point?

Right. Well, I guess if you took the midpoint and you add it back, it would be in kind of the low 30s. We think it could be a little bit better. That's why I say mid-30s. But -- and it's for the reasons that I mentioned. It's -- for us, it's about operating leverage. We've been so under capacity in the last 6 years really since the pandemic began that we're not able to basically allocate all of the fixed cost depreciation from the assets that we put in place to go up in rate. As we start being able to absorb all that depreciation because the volumes going up, it's going to lead to operating leverage, which will drive margins faster than revenue growth. And that will create the positive incremental margins. So I think the mid guide, I would say, are probably low 30s, but I said I'm comfortable with saying mid-30s incremental margins for '26.

Got it. Okay. Fair enough. And then just as a follow-up or a quick question. So you just got finished with a big ASR, so I understand you've already put a lot of capital behind the stock. I guess as we look to 2026, it sounds like debt reduction is kind of the first priority just getting leverage back to where you want it to be, which seems like that should be pretty quick. Should we expect further cash going into buybacks as we look into 2026? How should we be thinking about that?

I'll just go back to last year when we did the ASR, we did a $600 million share purchase reauthorization. And so we had $134 million a previous authorization. We added $600 million, we took out $350 million, so we still have $384 million left. We want to get back down to our target leverage ratio -- but after that, we will certainly look at continued share repurchase. But the first goal is to get down, and we expect to be down to less than 2x by the end of the year.

Your next question comes from the line of Scott Mikus of Melius Research.

I just wanted to ask kind of on the incremental margins as well. Does the guidance range kind of contemplate any higher cost to de-mothball additional carbon fiber lines. If Boeing and Airbus actually exceed the A350 and 787 production rate targets that you have baked into the guide?

And then some of the other puts and takes. I mean can you quantify the year-over-year tailwind to operating income from closing the Austrian and Liecester facilities? And is there an additional tailwind from the ERP implementation that you did in 2025 that won't repeat in '26?

Okay. Let me talk about the mothball costs. We've built in all the costs into the plan required as we bring new capacity online. So we don't expect any incremental and it's -- taking those lines out, it's not that big of a deal. It's really about just going and hiring the people. So those costs are all incorporated into our plan and our outlook. In terms of the -- your second question was on the operating income to close all of the different assets. Okay. That's all incorporated.

On the ERP, let me just be clear. The ERP, there was some costs in '25. There's some additional costs in '26 as we implemented. It's just incorporated into our numbers. We're probably about halfway through the overall implementation. We expect to get most of it done in '26, maybe a little bit in '27. But it's not material in terms of our overall numbers. So we're not highlighting it. It's just incorporated into our SG&A.

It's roughly flattish if you think about it for the ERP, but we're rolling out a number -- a greater number in '26 than we did in '25. So as Tom said, we're pushing to get through that, but likely the early '27.

Yes. But the overall focus is we are going to continue very strong disciplined management of all of our costs so that we can continue to drive margins would obviously contribute to the incremental margin.

Okay. Just to clarify, were the Austrian and Liecester facilities, were they EBIT-negative in 2025?

It was immaterial in terms of -- it goes to breakeven, maybe even a little negative so -- but not material. And -- so -- but as we've said, we closed those. They were basically non-core operations, and this was all part of streamlining the portfolio so that we can be more focused and productive as we go forward. And so both of those, plus closing the Belgium facility and selling our Hartford facility, all contribute to that. It's about lowering costs and be more productive. We won't see the full impact of that. We'll see some of it this year. We'll see all of it on a full year basis next year.

Your next question comes from the line of Michael Ciarmoli of Truist Securities.

Tom, I have missed it. Did you guys give in terms of the revenue guidance, did you give a breakdown or a split by the end market in terms of what we should expect this year between Commercial Aero and Space & Defense?

And then just any update on sort of the price-cost equation. I know some of the main material input, notably acrylic nitrile, some of those prices could be coming down. I know you've got the hedging strategy, but any general update there as well and how that may impact margins as we're kind of talking about this incremental margin?

Okay. So on revenue guidance for 2026, what I said is Commercial will be low to mid-double digits. Defense will be low to mid-single digits growth, depends on its own defense space on its own because the Defense, Space & Other is going to be flat to slightly negative because of the $30 million from the Austrian facility plus the $8 million or $9 million or so from the Leicester facility. But defense by itself will be, say, low to mid-double digits and commercial will be low to mid double -- excuse me, defense is low to mid-single digits and commercial aerospace will be low to mid-double digits growth for 2026.

On the price cost equation, AN acrylonitrile is the basic raw material that we use to make the carbon fiber. It's essentially a petroleum byproduct, but we hedge propylene. And so that's we -- so it's a fairly volatile price over the years. It is down right now, but we hedge it, so we smoothen out over the year. So we don't expect a variation on that because we have a very strong hedging program on that.

The other thing I will mention is that we talk about margins a lot as production rates go up. And as we get to the target peak production rates across all the programs for Boeing and Airbus, that's going to generate, as I said, $500 million of incremental revenue per year. Then on top of that, we have a couple of hundred million dollars increase in defense and regional jets and business jets. The combination of all of that gives us a path back to 18% margins before the end of the decade. So we are always working on pricing as contracts come up -- and so we'll continue to do that. But along with the operating leverage and the productivity initiatives, we do have a path back to the 18% margins for the end of the decade as the OEMs achieve their peak production rates across all the different programs.

Your next question comes from the line of Myles Walton of Wolfe Research.

Mike, I just wanted to follow up on the margins in Composite Materials. I understand that the press release was 20.5%. But that -- that number is enormously greater than what you've ever done in the last several years and even back pre-COVID, you'd have to have 10% higher volumes. So was there anything in there that was not normal? I understand it might not be non-GAAP one-timer, but anything non-normal in that margin?

There is nothing specifically unique for the -- in terms of any one-timers there. Again, we had a pretty very solid cost control here at the end of the quarter. When -- and so that certainly contributed to that.

Well, I think another thing that contributed was compensation. In other words, our incentive compensation didn't pay out at target because 2025 was fairly light year for all the reasons that we mentioned. But unfortunately, that resulted, unfortunately, for the management team, that resulted in lower payout on compensation, and that contributed to the margin and particularly in the fourth quarter because that's when those costs...

The biggest true-up is in the fourth quarter because you true it up for the full year in Q4.

Got it. So it's a reverse flow of accruals through the course of the year. What was the size of that reversal?

I don't think it's -- we haven't revealed it. So i'd rather not just go into that right now. But it was obviously fairly sizable because of the year we just didn't hit the target. The other thing in this year's numbers, that wasn't in last year, recall last year, I succeeded Nick. We had duplicate expenses at the CEO level for the back half of last year. Obviously, that didn't repeat this year. So that was also a contributor. And then as Mike said, just a lot of cost control on SG&A, travel, professional fees, headcount, all the normal levers we continue to focus on.

Okay. And then a longer-term question, Airbus, one of their head of commercial talked about the new plan likely not having a composite fuselage, but obviously, having a composite wing. Can you just landscape us if you map an A320 to a new plane without a composite fuselage, but with the composite wing with the shipset scaling would look like?

Right. Well, first of all, I still think that the is out jury on the fuselage because you get lighter weight, better fuel performance and you also get less maintenance. So that's something I think that the OEMs will continue to take into account. But right now, the A320 and the MAX are about 15% carbon fiber composites. And we said that our shipset value on that is $200,000 to $500,000 and the 320 is close to the upper end of that range, so call it $500,000. If you put a wing on the next narrow-body, that will take the 15% to 30%. So double the $500,000 to $1 million per shipset at 75 per month. It's a lot of carbon fiber.

The other thing is the fuselage would probably take the 30% up to 50%. And so that's also a possibility. And so that -- at that point, you would take the 30% to 50%, the $1 million per shipset probably goes to $1.5 million to $2 million per shipset at 75 aircraft per month. So that just gives you a thought process on it.

Now the wing for sure, 100% will be carbon fiber because of the characteristics of the wing, improved lift drag ratio, increased range, reduced fuel consumption, so that's not a consideration anymore. There is still a lot of discussion on the fuselage. Of course, we're advocating for it. I think there's a lot of strong arguments for it. It's all about reducing the cost, improving the time and reducing the capital required to produce it. And all of those things, I think, are in works. There's lots of pilots going on. We'll continue to make base. But if it is a fuselage, that takes up to 50% and about $2 million per shipset on aero.

Your next question comes from the line of Scott Deuschle of Deutsche Bank.

Just one question. Tom, this business Human Composites was recently purchased by another public company, but it seems like something that would have been a good strategic fit for Hexcel, given that they make advanced composites for aerospace and defense market. I was just curious if -- yes, it's called Siemens Composites. Carmen bought it, a space company. I was just curious if that was an opportunity that you had the -- or business you had an opportunity to look at? And if so, why Hexcel was not a buyer?

Right. And unfortunately, I'm not familiar with Siemens, do they make composite structures or do they make composite materials?

I believe it's composite materials for the marine market, but yes, it's all good. I'll pass it on.

I'm sorry, I'm just not familiar with that. So it's not in one of our core markets. And so we did not look at it. And unfortunately, I just can't answer.

Your next question comes from the line of Sheila Kahyaoglu of Jefferies.

Tom, maybe just to start off, just looking at your revenue assumptions, at least some of the content you've helped frame on the Commercial Aero side, it seems like you're a little higher on Airbus deliveries and folks expect and a little lower on Boeing. So maybe what's driving some of those assumptions?

Well, I'm following, I'll start there on the MAX, we did see a lot of destocking last year. I know they're getting up to 42 aircraft per month, but our numbers really show them what they're pulling from us still a little bit lower than that. So yes, we are being probably a little bit more conservative on Boeing, on the 37.

On the 87, I think we're right on top of them. 90 to 100. So it's really the 37 and it's more worried about the destocking, but we'll see.

On Airbus, we're a little higher than consensus, but we're probably a little bit lower than the Airbus estimates, and again, we're a little bit lower than our bottoms-up demand management tool would indicate. So we have a lot of visibility and clarity on Airbus. And so that's why we are [indiscernible] where we are. We still think that the 80 is conservative on the Airbus A350 based on all of our bottoms-up work and all the top-down work and what's the master schedule at Airbus says. So we're comfortable with it. We'll watch it throughout the year, and monitor to make sure that we're seeing evidence of it. But that's what our -- all of our bottoms up analysis is coming.

That makes sense. And then if I could ask one on margins. How do you think about just risk to profitability going forward and how we should be thinking about the FX headwind?

Well, FX is going to be a headwind. The dollar is lower. And Mike, maybe you can comment a little bit.

Well, yes, sure, Sheila. Thanks. We talked about previously. The weakening of the dollar to the euro early last year shifted the effect of foreign exchange on our earnings from a tailwind for the first half of the year to a headwind in Q3 and into Q4. And we've certainly projected a higher headwind in Q4 versus Q3. But the 110 basis points that I called out that included the settlement of certain short-term non-USD balances that influenced the year-over-year FX comparison to a greater degree than historically. So we don't anticipate that to be an ongoing trend. So I would not project the Q4 impact of the run rate into '26. So I hope that helps.

But we did build in headwind into '26 into the plan. already baked in for a headwind on foreign exchange. So that's already there. And it will be there. We have a hedging program. So it will be a little bit more muted than it might have otherwise been, but there is some headwind in the '26, and we incorporated that already into the outlook.

Your next question comes from the line of Ron Epstein of Bank of America.

Maybe just revisiting some of the stuff that we've already spoken about. But when we think about maybe a next-generation aircraft. You alluded to potentially lower fabrication costs that kind of thing. Are you guys doing work on [ autoclave ], I mean can you just give us a sense on maybe some of the new tech that you all are looking at?

Right. So we are working with the OEMs and both of them on production techniques to improve all of those characteristics that I talked about. Let me give you an example. Yes, we are working on out of [indiscernible]. But it starts with layup. There's automated fiber replacement has replaced hand layout. But the question is how many kilograms an hour can you lay out? If it's 20 kilograms an hour, we think we have techniques that could take it up to 80 kilograms an hour, maybe even double that to 160 kilo an hour, making the tape wider and thicker and faster.

We're looking at not only [indiscernible] let but also [indiscernible]. We're also looking at how can we improve the cure time on carbon fiber. Today, it could be 12 hours we think we have ways to take that down to 3 hours or even less than 2 hours. We're also looking at ways to improve nondestructive inspection and make that better. And also looking at improved ways to do resins-infusion at the point of manufacture. And then on top of that, is looking at ways to improve joining techniques. So all these things improve with time it takes to build a part. It reduces the cost and it also reduces the amount of capital.

Capital being [indiscernible] or it could be NDI type equipment, trim and drill, all of those things by all of the techniques that I just mentioned. So those are some of the levers. And yes, we are working very actively with the OEMs on those techniques. That's a big part. The production system is absolutely critical to the next-generation aircraft, not just about the cost of the material, it's also about the whole production system.

That makes sense. And if I may, just a second question real quick. Missile production going up a lot. I mean you kind of -- there's been a lot of announcements about that and some big agreements with the big contractors. And a lot of the unmanned systems, the smaller systems are part of fiber composite systems. When you look at the changing defense environment with the volume of everything kind of going up, particularly, a lot of things that are made of the carbon fiber. How do you think about the potential opportunity there for you?

Big opportunity. Lightweight is so critical because range is important, and durability is also important. Now some of these drones are -- they don't carry people and they don't come back for one way. So it changes some of the requirements. But in general, range and strength are key and our material addresses both of those issues. So this new defense that you were describing is a big opportunity for us.

And one of the things I mentioned in my prepared remarks is we have started to strengthen our defense team so that we can address these markets. These are new markets. They don't exist today. They're growing very fast. We think we can play a big part in it, and that's why we're strengthening the team so that we can do that.

Our last question for today comes from the line of Kristine Liwag of Morgan Stanley.

Tom, looking at the production rates from Boeing and Airbus, it's clear that it seems like we're beyond the trough, and you've got stability and visibility in your business. Now that we're in this better place, I was wondering, can you discuss how you're thinking about the portfolio today? Over time, when you look at your exposure to OE, do you want to expand more into aftermarket? Do you want to expand more into defense or potentially go into more vertically integrated component structure? It'd be helpful to think about where the direction you want to -- you see the business going in the next few years?

So certainly, we want to continue to grow, Kristine, and those things are important. But the #1 priority for us right now in the immediate future is to focus exclusively on making sure we can ramp up on these production rates. That's going to generate so much operating leverage. And so that's what our focus is. That's a little bit why we did the ASR is because we have great confidence that this is going to go up. We thought we were undervalued at the time, and this is an opportunity for us. And we want to make sure that we're laser-focused on executing it.

On the other growth initiatives that we are going to push very hard in is defense. It's already about 35% of our current business. We think it can be more. We think it's growing not only in the U.S. but also in Europe and also in some other markets like Turkey or India, Brazil, some other markets. And so we think we can play a big part there. And so that's the focus for us and growth in the immediate future is in defense. And then, as I said, just to reinforce, the big priority for us over the next couple of years, absolutely laser-focused on executing on the rate ramps for all of our customers to make sure that we can deliver the quality and maintain a safe work place.

This concludes our question-and-answer session for today, and this concludes the session. Thank you so much for attending. Have a wonderful day. Goodbye.

Thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Third Quarter Earnings Call.

[Operator Instructions]

I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Sir, please go ahead.

Hello, everyone. Welcome to Hexcel Corporation's Third Quarter 2025 Earnings Conference Call.

Before beginning, let me cover the formalities. I would like 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 earnings 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 Tom Gentile, our CEO and Chairman and President; and Patrick Winterlich, our Executive Vice President and Chief Financial Officer.

The purpose of the call is to review our third quarter 2025 results detailed in our news release issued yesterday. Now let me turn the call over to Tom. Tom?

Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's Third Quarter 2025 Earnings Call. Our confidence in the growth outlook in the aerospace and defense markets and Hexcel's unique position within the industry remains strong. With Hexcel's broad portfolio of advanced innovative lightweight materials, we are well positioned to meet the needs of our customers as they increase commercial and military aircraft and rotorcraft production rates. We are also working with customers on developing innovative advanced material solutions for next-generation commercial and military platforms. As we look at the opportunities in front of us, the outlook for Hexcel is compelling.

At our September Board meeting, which centered on strategy, we reinforced our strategic focus of advanced material science with an emphasis on the aerospace and defense market. This is our North Star as we navigate a dynamic near-term environment and look to take advantage of the medium- and longer-term opportunities in the aerospace and defense industry. The aerospace recovery from the pandemic has been frustratingly slow with numerous start stops for original equipment suppliers like Hexcel. However, we have growing confidence that we are seeing the beginnings of a more sustained ramp-up in production based on our customer discussions and actions as well as what we see in the aerospace supply chain.

The demand for fuel-efficient lightweight aircraft is clear. Air traffic has more than recovered to 2019 levels. The backlog for commercial aircraft has grown from 13,000 units before the pandemic to more than 15,000 today. Even with limited availability of near-term production slots, airlines around the world continue to place orders with Airbus and Boeing. As we look at the macro environment for the commercial aerospace industry, we are clearly seeing growing momentum as past supply chain constraints subside.

While we may experience some lingering destocking in the fourth quarter of 2025, we expect to exit 2025 fully aligned with the commercial aircraft build rates of our customers and positioned for growth in 2026 and beyond. Positive news developments in the past few weeks further support the rate ramps for each of our key platforms.

Beginning with the A350, our largest program, where we provide the entire lightweight material system, anticipated production rate increases by Airbus will be impactful for Hexcel in terms of driving capacity utilization. Airbus is targeting 12 aircraft per month by 2028 on the A350 program. Rising build rates will drive operating leverage for Hexcel and the EU approval last week that allows for the Spirit AeroSystems merger to move forward is another positive data point as those operations become streamlined into Airbus and Boeing.

On the A320, Airbus is targeting 75 planes per month by 2027, with the expectation that build rates will be in the 60s in 2026. GE Aerospace just raised their 2025 LEAP delivery guidance for engines, and Safran just announced a new LEAP-1A engine assembly line in Morocco to support Airbus and the A320 program, and that should be operational by the end of 2027.

On the 737 MAX, production has reached 38 airplanes per month and Boeing recently received FAA approval to increase to 42 airplanes per month. On the 787, Boeing is now at 7 a month as they target 10 aircraft per month in 2026. Boeing is currently expanding its 787 production capacity in their Charleston facility, so there may be future upside beyond Rig 10. We visited Charleston recently and saw the construction underway.

All of these different signs of improving production system stability in the 4 major programs for both Airbus and Boeing give me and our Board increasing confidence that their production targets are now getting traction. This growing confidence, coupled with actions that we have taken to clean up our portfolio, including the divestiture of our plant in Austria, will help us approach the margin levels we enjoyed in the past as production rates increase and drive operating leverage for Hexcel. We are clearly at the start of a multiyear growth cycle for commercial aerospace original equipment production, which will benefit Hexcel given the strong positions that we have on all the major programs.

Turning to our financial results. Hexcel generated $456 million in sales and adjusted diluted EPS of $0.37 in the third quarter of 2025. These results are in line with our expectations for the quarter, which we knew in advance would be challenging due to slower seasonal sales and continued destocking by the commercial OEMs.

Hexcel's gross margin for the third quarter was 21.9% compared to 23.3% in the third quarter of 2024. This was partly driven by tariffs and our decision to reduce finished goods inventory in the quarter, which impacted operating leverage and margins. As build rates rise into 2026, that increased sales volume will drive operating leverage and margin expansion.

Regarding our markets, Commercial Aerospace sales were $274.2 million for the third quarter. Commercial Aerospace declined 7.3% year-over-year on a constant currency basis, primarily due to destocking on the Airbus 350 program and to a lesser extent, on the Boeing 787 platform. That lower volume was partially offset by a 9.3% increase in other commercial aerospace sales driven by regional jet sales growth.

Looking ahead to 2026, Hexcel is already seeing increased order activity for the first half of next year from the commercial OEMs, which supports our growing confidence. We experienced continued strength in our Defense, Space and Other segment with $182 million in sales for the third quarter, an increase of 11.7% on a constant currency basis over the same period last year. This growth was broad across several platforms for domestic and international customers that include fighters, rotorcraft and space.

As defense budgets in the U.S. and with allied countries around the globe continue to increase, particularly to support the introduction of new platforms, we see continued strength in the underlying demand for Hexcel's advanced lightweight composite materials. Our innovative solutions enable greater range and payload as well as lower observability for stealth platforms.

In August, we were honored to host the U.S. Secretary of Labor, Lori Chavez-DeRemer at Our Salt Lake City facility. This is our largest global facility. We produce both carbon fiber and prepreg at this facility, and the site also hosts our newest research and technology center of excellence. This visit was an opportunity to highlight Hexcel's critical role as the only vertically integrated U.S. domiciled manufacturer of high-strength aerospace-grade composite materials for commercial aircraft and defense platforms.

It was also an opportunity to showcase our innovation as we develop and deliver even lighter, stronger and stiffer composite solutions that are designed to support high production volumes by our customers. Our innovation is a mix of evolutionary steps by improving upon existing products, such as enhancing the adhesion characteristics of the carbon fiber surface and revolutionary steps such as new resin systems that cure more quickly and at lower temperature to enable greater throughput by our customers. While we see commercial aerospace production rates starting to rise in the fourth quarter and into 2026, we still expect lingering OEM destocking in Q4.

Tariffs also remain a headwind. As we look at how the year may close out, we have narrowed our sales expectation to the bottom of the prior range, and we have reduced EPS guidance due to the impact of lower production from lingering destocking and the incorporation of tariffs into our guidance. We have also continued our cost reduction actions as we streamline operations through site rationalization. At the end of September, we completed the divestiture of our Neumarkt, Austria plant, which supplied wind energy and recreational markets using third-party purchased glass and industrial carbon fibers. This action follows the closure of a high-cost facility in Belgium and the divestiture of an additive manufacturing business that was not strategic for Hexcel earlier this year. These actions are part of our broader strategy to focus our operations and reduce our cost profile as we prepare for the upcoming production rate increases in our major programs. As we have throughout this year, we continue to manage headcount closely.

In previous calls, we stated that our headcount at the end of 2025 will be no higher than it was at the end of 2024. Our headcount has continued to decrease this year due to attrition and streamlining our operational footprint as well as lagging production schedules until we see clear evidence of increases. At the end of the third quarter of 2025, our headcount was around the levels of year-end 2023 and well below where we ended 2024. Our inventory acts as a near-term buffer for unexpected demand spikes, and we expect to begin hiring again sometime in early 2026. We are comfortable that we will be able to attract and train the workers we will need. We do not ever intend to be a bottleneck for our customers' production.

In addition to our cost reduction actions, we continue to drive productivity. This includes our future factory initiative to drive greater unit cost efficiency with more use of automation, digitalization, robotics and artificial intelligence. Along with cost and productivity gains, we will continue to work to realize price. As we have shared before, about 10% to 15% of our contracts come up for renewal annually. As we negotiate new contracts, we are realizing price gains and expanding escalation and pass-through clauses.

Once publicly disclosed peak build rates are reached, our existing sole-source contracts with Airbus and Boeing will generate an incremental $500 million of annual revenue. Defense-based business and regional jets are all additive to that number. So the path to sales growth is very clear. And again, the increasing sales drive operating leverage and margin expansion for Hexcel.

As we grow back into existing capacity, capital expenditures will remain subdued for a period of time at less than $100 million per year, likely for the rest of this decade. These factors will all drive strong free cash flow generation. We are forecasting to cumulatively generate more than $1 billion of free cash flow over the next 4-year period of 2025 to 2028.

With the forecasted production rates finally firming, our primary focus for the immediate future will be executing on the rate ramp, innovating lightweight materials to earn a position on the next generation of aircraft and organically growing our defense business while returning excess cash to our stockholders. Given that the business is generating cash in excess of reinvestment needs, the Board and the management team spend a lot of time thinking about capital allocation.

In the past 18 months during my time as CEO, we have undertaken an extensive review of potential inorganic growth opportunities. We have not found any business that meets our stringent and disciplined strategic criteria for M&A, namely innovative advanced material science with an emphasis on aerospace and defense and a return threshold of 15% ROIC or greater.

What we do see in front of us is unprecedented and pent-up demand for modern lightweight aircraft. This represents a tremendous organic growth opportunity for Hexcel. While OEM production schedules have been challenged for the past several years, we are seeing the OEMs increase production as the supply chain stabilizes. The individual catalysts for each major program that I mentioned earlier have helped remove obstacles to production rate increases.

Hexcel is uniquely positioned in this market as the largest and most vertically integrated aerospace-grade carbon fiber composite manufacturer. Our industry segment has significant barriers to entry given the large sums that we have invested in our material system and production facilities globally. We have industry-leading technology and intellectual property. And most importantly, we have our people, a highly trained and skilled workforce that we know can deliver on the rising demand in front of us with safety, quality and the on-time delivery our customers expect.

Our confidence is growing that the ongoing recovery in build rates is at an inflection point to a sustained ramp to peak rates, providing us greater optimism in our sales outlook and future cash generation. Given all these factors, strong cash generation profile driven by significant organic growth that provides us significant volume leverage, combined with cost control and productivity to improve margins and an unmatched position in the marketplace, we believe now is the right time to repurchase Hexcel stock.

Since 2013, we have returned more than $1.5 billion to stockholders through share repurchases. In the past 7 quarters, we have repurchased $350 million of shares and retired almost 6% of our float. Yesterday, Hexcel's Board of Directors authorized an additional $600 million share repurchase program, and we also announced an accelerated share repurchase program, or ASR, of $350 million. We will fund the ASR from our revolver, which we will then repay from future cash generation.

Launching this ASR now and making a significant repurchase of our stock underscores our strong belief in commercial aerospace production rate increases and our ability to execute with safety, quality and on-time delivery to our customers. We are seeing resolution of major supply chain problems that have plagued the industry the past several years, and we see all the OEMs making solid progress on increasing their production rates.

I also want to be clear that we remain committed to a disciplined financial policy. We target a leverage ratio of 1.5 to 2x debt to EBITDA. We plan to repay the ASR borrowings as soon as possible during 2026 to return Hexcel to this targeted leverage range.

Now before I turn the call over to Patrick to provide more details on the numbers, I want to comment on the 8-K we just filed announcing that Patrick has accepted an offer to move over to Howmet, a much larger company than Hexcel. I am thrilled that Patrick has this opportunity to work with a company that plays such an important role in our industry. For 27 years, Patrick has been a transformational leader at Hexcel and has helped position our company to capture the opportunities I have described.

He has also been a terrific partner in helping me transition into my role at Hexcel over the last 1.5 years. We all wish him great success in his new role. Patrick has agreed to remain as our CEO during a transition period through the end of November, and we've already launched a process with a leading global executive search firm to recruit a world-class CFO to succeed them.

So with that, over to you, Patrick, for your final Hexcel call.

Thank you, Tom. I appreciate your comments. Total third quarter 2025 sales of $456.2 million were unchanged year-over-year as strength in defense and space was offset by Commercial Aerospace destocking. By market, Commercial Aerospace third quarter 2025 sales were $274.2 million, representing approximately 60% of total third quarter sales. Third quarter Commercial Aerospace sales decreased 7.3% compared to the third quarter of 2024.

While the third quarter is seasonally slower due to summer holidays taken by our customers, 2025 third quarter sales were also impacted by destocking. The A350 program was most impacted, followed by the 787. Sales for the 737 MAX program continued to lag stated Boeing build rates as we expected, though we did see positive progress in the third quarter. For the A320neo, third quarter 2025 sales increased nominally compared to the prior year period.

Sales for Other Commercial Aerospace in the third quarter increased 9.3% year-over-year, led by regional jets. Defense, Space and Other represented approximately 40% of third quarter sales and totaled $182 million, increasing 11.7% on a constant currency basis from the same period in 2024. Demand was strong across a number of fighter, helicopter and space programs, both domestically and overseas.

For fighters, sales increased for the F-35, the Rafale and the Eurofighter. For helicopters, European demand was strong, along with the Black Hawk, including replacement helicopter blades. And it was a solid quarter for space sales, including launches, rocket motors and satellites.

Gross margin of 21.9% in the third quarter of 2025 decreased from 23.3% in the third quarter of 2024 as sales mix, tariffs and inventory reduction actions negatively impacted operating leverage. The lower third quarter sales from seasonality and destocking magnified the underutilization of carbon fiber assets, pressuring margins. As our customers increase production rates, higher sales levels in 2026 and beyond will drive strong operating leverage and lead to margin expansion.

So said another way, higher sales levels are critical for us to return to mid-teens margins. As mentioned above, tariffs are also a headwind. We continue to work on mitigation actions and continue to monitor this dynamic regulatory environment. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 12.1% in the third quarter of 2025 compared to 11.7% in the comparable prior year period.

Financial and manufacturing IT system upgrades, which we have mentioned previously, along with the impact of wage inflation contributed to higher operating expenses as a percentage of sales. Other operating expenses totaled $8.8 million in the third quarter of 2025, including charges for the divestment of the Neumarkt Austria industrial business and the closure of the Belgium facility.

Adjusted operating income in the third quarter was $44.8 million or 9.8% of sales compared to $52.9 million or 11.6% of sales in the comparable prior year period. Foreign exchange has been a consistent tailwind to margins for an extended period of time as Hexcel benefits when the dollar is strong. We hedge our operating profit over a 10-quarter time horizon, so foreign exchange gains and losses are layered into the financial results over time. This foreign exchange tailwind is now beginning to switch to a headwind as the impact of a weaker dollar begins to work into the business.

While our third quarter top line benefited to a modest degree from the dollar weakness, particularly from our European military sales dominated in local currency, the operating margin was negatively impacted by approximately 10 basis points.

Now turning to our 2 segments. The Composite Materials segment represented 80% of total third quarter sales and generated an adjusted operating margin of 11.2%. This compares to an adjusted operating margin of 14.5% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 15.5%. This compares to an adjusted operating margin of 11.5% in the prior year period.

Net cash provided by operating activities in the first 9 months of 2025 was $105 million compared to net cash provided of $127.3 million in the first 9 months of 2024. Working capital was a cash use of $63.8 million in the first 9 months for 2025 compared to a cash use of $93.1 million in the first 9 months of 2024.

Capital expenditures on an accrual basis were $49.9 million in the first 9 months of 2025 compared to $59.6 million in the comparable prior year period. Free cash flow in the first 9 months of 2025 was $49.9 million, which compares to $58.9 million in the first 9 months of 2024. Adjusted EBITDA totaled $249.2 million in the first 9 months of 2025 compared to $291.3 million in 2024.

As Tom explained, we are executing a $350 million accelerated share repurchase program or ASR. We will fund this repurchase using our revolver. This action will result in leverage temporarily being over our targeted range of 1.5 to 2x. We will utilize subsequent cash generation to repay the revolver and return to our targeted leverage range over the coming quarters.

Following the Board stock repurchase authorization of $600 million and after this ASR is concluded, the remaining authorization under the share repurchase program will be approximately $384 million. Hexcel did not repurchase any stock during the third quarter of 2025.

I want to reiterate, we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2x as soon as possible during 2026. The Board of Directors declared a $0.17 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November 3 with a payment date of November 10. We have revised our 2025 guidance, as Tom explained. To share some additional color, operating leverage within the business is strong on rising sales, but conversely is a headwind on softer sales, which we are now forecasting for the fourth quarter of 2025.

Our reduced EPS guidance reflects the impact of lower production as we work through some lingering destocking in the fourth quarter and our continued focus on inventory levels. Further, we have now incorporated tariffs into our guidance. And finally, the revised earnings guidance includes the impact of higher interest expense in the fourth quarter from revolver borrowings to execute the ASR.

We continue to assume an underlying effective tax rate of 21% for the fourth quarter of 2025. Given some discrete adjustments in the first 9 months of 2025, we expect the average adjusted ETR for the full year 2025 to be lower than 21%. We continue to forecast a tariff impact of $3 million to $4 million per quarter, however, the tariff situation remains uncertain. Our regional sourcing helps to insulate us from the direct impact of tariffs and over time, we will continue to work on mitigation and pass-throughs.

I would also like to highlight that the divested Neumarkt, Austria industrial business generated just under $10 million of sales per quarter in the first 3 quarters of 2025. The divestment occurred on September 30, so there will not be any sales from the Austrian business in the fourth quarter of 2025 or going forward. The niche value-add industrial market that we will continue to serve will be supported by existing Hexcel Aerospace facilities using existing aerospace assets.

When we first issued guidance in January 2025, we had forecasted 2025 sales for the Commercial Aerospace market to be flat and for sales for the Defense, Space and Other market to be flat. As the year has progressed, Commercial Aerospace has been weaker than initially forecasted due to anticipated destocking, particularly on the A350. Conversely, Defense and Space has been stronger.

As a result, we are revisiting these percentages. 2025 Commercial Aerospace sales are now forecasted to be down mid- to upper single digits and Defense, Space and other sales are now forecasted to be higher by mid- to upper single digits on a percentage basis. Consistent with past practice, we provide annual guidance during our fourth quarter and full year earnings call. To reemphasize what Tom already covered, we expect to exit 2025 strongly positioned for growth as we anticipate being generally aligned with our commercial aerospace customer build rate. Sales growth will drive operating leverage and margin expansion in 2026 and beyond, supported by continuing price realization, productivity gains and cost control.

Lastly, as I close out my 33rd and final earnings call for Hexcel, I would like to take a couple of moments to express my sincere gratitude to this great company. Companies, as we all know, are ultimately a collection of people aligning to achieve a common goal. And I have been honored to work with so many wonderful people over my 27 years. I cannot thank them enough. I now look forward to joining Howmet and starting what I believe will be an incredible new journey. However, I know for certain, I will never forget my amazing colleagues at Hexcel.

With that, let me turn the call back to Tom.

Thanks, Patrick. To close, while the third quarter reflected near-term headwinds, the strong-term fundamentals for Hexcel remain exceptionally strong. The Commercial Aerospace backlog is at historic levels. Defense spending continues to rise globally and the Aerospace and Defense supply chain is finally ramping to support build rate increases. Hexcel is uniquely positioned to capitalize on this momentum. Our unmatched portfolio, deep customer relationships and global manufacturing footprint give us confidence in our ability to deliver accelerating growth over the coming years.

We expect to generate over $1 billion in cumulative free cash flow over the next 4 years. That cash flow will support continued investment in innovation, and we will continue to evaluate returning cash to stockholders as demonstrated by the new share repurchase authorization of $600 million and the $350 million ASR that we just announced. We believe the recovery in build rates is real and sustainable. Hexcel is ready to meet that demand and deliver long-term value for our stakeholders.

Tiffany, we're now ready to take questions.

[Operator Instructions] Your first question comes from the line of Myles Walton with Wolfe Research.

Congratulations, Patrick, on the move and good luck in the search, Tom. In the context of the $500 million growth that you're looking for at manufacturer production rates, Tom, can you talk about -- I think that implies maybe $1 billion of Airbus revenue out in that time frame. How much of that should it be -- or how much higher should that be if you actually had contracts that allowed for inflationary pricing to have escalated during the last decade?

Well, the good thing about the Airbus contract that we signed in 2008 for the A350 is that it was a long-term contract, and it gave us the confidence and foundation to make massive capital investments to industrialize for the A350. And we extended that contract in 2016 to go all the way out to 2030. Now as you know, the production rates ramp very quickly up through 2018, 2019, they peaked. We delivered 112 A350s in 2019. And our overall revenue that year was $2.355 billion and the margins were 18%. Now since that time, the pandemic hit, volume dropped quite a bit, and we also experienced a lot of inflation.

Now where we are today, we're not getting volume leverage across the board. And we've absorbed a lot of that inflation on some of our long-term contracts, particularly with Airbus. When we get back to the $2.35 billion of revenue, probably sometime in the next couple of years, our margins are going to be a little bit curtailed. They'll be at about 16%. So about 200 basis points of headwind from the inflation is really what the impact is.

Now when we get the full impact of the $500 million from all of the targets across the major programs, we think that will get us back to 18%. But obviously, we would like to do more than that, and that's why we're driving our productivity projects. So to summarize, the impact of the inflation that we've absorbed over the past couple of years is about 200 basis points, and we're working to offset that.

Okay. And Patrick, one financial one for you. The debt or interest costs we should plan on for '26 in light of the ASR, is it close to $50 million or so?

50, Did you say 5-0? I mean, it should be a lot less than that. And the debt will decrease quite rapidly after the first quarter. The first quarter will probably be a cash usage, it's normal but then we should see the debt coming down quickly as we generate free cash flow next year. So you can assume the revolver about 5.5% interest rate as that balance reduces through next year.

Your next question comes from the line of Michael Ciarmoli with Truist Securities.

Maybe just to stay on both of those topics. Tom, I think you said getting back to that 18%. I mean, so is it reasonable to think that incremental margins can be in that, I guess, implied 40% plus range to get back to that 18%? I mean, is there going to be any disruption with labor add-backs? Or do you think you have more confidence in pricing along the way with -- I think you said 10% to 15% of these contracts renew and then you probably have that bigger renewal out in 2030 with Airbus. But is that the right way to think about incrementals?

Yes, yes. I mean the way I would say it summarize is that as the volumes increase and as our revenue goes up, we're going to get a lot of operating leverage. And we're not going to have to make a lot of capital investment to get there. you always have to offset various things, inflation and productivity and potentially other costs like utilities or logistics. But that's what your productivity programs have to offset. But the biggest driver for Hexcel is that as production rates increase and our revenues go up, that drives an incredible amount of operating leverage, which will create the enhanced margins and the recovery back to the 16% first and then 18% as we get the full impact of all the target rate reductions across the major programs.

Okay. Okay. And then just on the ASR, I mean, maybe a little bit of dilution out of the gate but it sounds like that should be paid down if you're carrying a portion of that interest expense here in 4Q, maybe a full $5 million in 1Q and 2Q but then you're obviously going to have the cash generation. So that should kind of eliminate some of that interest headwind and shouldn't really be dilutive on a full year basis for '26?

It should be positive on a full year basis. So we'll take out 80% of the share count basically on Monday or tomorrow or Monday when those 80% of our shares are surrendered. So you'll have 2/3, 2 months out of 3 this quarter will benefit from that reduced stock count of what, 4 million, 4.5 million shares, I would guess. And then you'll have that benefit offset by the interest charge next year. But I would assume there would be a net benefit to 2026 overall as the debt gets paid down quickly.

Your next question comes from the line of Gavin Parsons with UBS.

I guess just following up on the margin question. In 2026, if Commercial Aero revenue is higher than it was in 2024, can margins also be higher?

They can, yes. We have work to do to offset some of the natural inflation that we see normally but that's certainly the goal.

Okay. And then, Tom, I guess, as you plan for 2026, obviously, the supply chain has been pretty lumpy. A350 increases have been set back. How do you think about possible contingencies if destocking does continue longer than you expect? So maybe it's not as operationally disruptive to Hexcel as it was this year?

Well, what we've been doing is lagging a little bit more in terms of the demand, waiting to see it materialize before we go ahead and hire the heads. And we'll continue to do that. We have a lot of inventory, so we can cushion any potential unexpected increase in the short term. But that's really the primary way we've been managing it and cushing it is one is set realistic expectations, lag the growth in terms of when we actually hire and use our inventory to make sure we have a proper cushion for any unexpected demand.

Your next question comes from the line of Scott Mikus with Melius Research.

Patrick, congrats.

Thanks, Scott.

Tom, you referenced the LTA negotiations and historically, your LTAs have included language where some of the productivity benefits are shared between Hexcel and its customer. So as those agreements come up for renegotiation, are you making sure that you get to keep a larger share of the productivity benefits going forward?

Well, we always want to keep as much as we can. That's for sure. But at the same time, you've got to make sure any negotiation ends up being a win-win. And a lot of the productivity projects that we drive do require engineering resources from our customers. And so you want to make sure you can obtain those resources. So yes, the goal is always to make sure we get a fair return on the investments that we make and the value that we deliver but also recognizing that we want to make it -- we want to facilitate the fact that we need some help and engineering from our customers.

Okay. And then we've seen some airlines complain that the A321 XLRs range is a little bit shorter than advertised and they produce their orders. But just given that your material reduces the weight of the aircraft, is there an opportunity for Hexcel to potentially increase its content on the A321 XLR if Airbus were looking to extend its range?

Well, lightweight materials always help, and there's always an effort to look at material substitution and to change out higher weight materials for lower weight materials. Those efforts are ongoing. A lot of the ones, I'd say the low-hanging fruit has already been captured. So there's probably limited opportunities to, frankly, to change it on the existing aircraft but a lot of opportunity on the next generation. The A321, all the versions, the 19, the 20, the 21 LR, XLR, et cetera, are only 15% carbon fiber composite. The A350 is 50%. so the next-generation narrow-body will for certainly be much higher ratio of carbon fiber composite lightweight going forward. But the current aircraft, probably most of the material substitution has already been captured.

Your next question comes from Ken Herbert with RBC Capital Markets.

And Patrick, let me extend my congratulations as well, and thanks for the help over the years. Maybe -- yes, first question, Tom, last quarter, you were pretty explicit in terms of expected delivery schedules on some major programs. It looks like the guidance maybe implies about 5-ish A350 units were pushed out of the fourth quarter. Can you just talk about if we're thinking about that appropriately? And specifically, maybe you sound very confident in the exit rate on that program this year, sort of where you expect to be exiting this year as you think about that program?

Yes. I think that's about right, Ken. What we're seeing is that Q4 is a little bit lighter than we thought. We only had about 5 aircraft per month full in Q3. And Airbus has gone to 7 aircraft per month now. That change has been made, but it's not necessarily flowing all the way down yet. And so as a result, the orders for Q4 were a little bit lighter than we expected. Now that said, the orders going into 2026 are stronger than we expected. And so that, again, gives us confidence in this rate ramp really taking traction. Airbus is at 7 now. They're supposed to go to 8 sometime in the middle of the year and maybe even get to 9 aircraft per month by the end of the year is the current schedule.

But yes, it was a little softer in Q4, but the orders going into 2026 are actually higher than we expected. So that's very promising.

That's great. And with the tariff impact, is there any opportunity to recapture to call back some of those incremental costs at some point in the future?

Yes, there are. There's a couple of different provisions if the goods are for export or if the goods are for military use. There's lots of different areas that we can push and pull to try to recover, and we're doing that. It's just -- those are a little bit more longer term and the impact, the dollars that we pay out are right now, and that's been about $3 million or $4 million a quarter. But we do hope to recover some of that as we go forward and frankly, to shift some of our foreign supply to domestic sources to avoid the tariffs.

Your next question comes from John McNulty with BMO Capital Markets.

Patrick, again, congratulations on the move. So I guess I was hoping you might be able to quantify or give us a little bit of an idea of how big do you feel like that inventory cushion that you have actually is? Is it a couple of months? Is it a couple of quarters? Yes, I guess as you're thinking about the ramp going into 2026, I'm just trying to get a better understanding of that cushion.

Yes. Well, we've been running pretty high on inventory the last couple of quarters, over 100 days, north of $400 million total amount. And that's down to about 90. Back in the 2018, 2019 time period, it was more like 70 days. So we've got a 90-day cushion on inventory but it should more in kind of static terms and steady state, be more like 70%. So that's the goal. So that's where we are. We do have that inventory. We've been burning it down, and you saw some evidence of that in this quarter. By burning down some inventory, we had some absorption impact, and that impacted our margins a little bit.

Got it. Okay. Fair enough. And then I guess when you're thinking at least as of now about the ramp for your customers next year, I guess, how much in terms of labor will you have to be adding? Because it does sound like you've drawn it down a decent amount this year. And it almost feels like you're trying to thread a pretty small needle here with letting labor come down and only to basically rehire or hire next year. So I guess, can you help us to think about that?

Right. Well, we're really right now starting some of the hiring in Europe in Q4 because we see this very high strong demand that has come in for 2026. And we'll be hiring in the early part of '26 and really throughout the years -- throughout the year in order to align to production rates. So we know how much labor we need for the production that's on the books, and we'll be hiring that. As I said, some of that hiring has actually started in Europe in Q4, and it will continue into the first part of 2026.

Your next question comes from the line of Pete Skibitski with Alembic Global.

Congrats, Patrick. I guess maybe, Tom, you could talk more about Space and Defense, just the growth you've seen over the last 2 or 3 quarters. Does it feel like this is the start of kind of this European secular defense spending trend? Or are we not there yet? And I was wondering, should we expect a pretty big ramp on the CH-53K as well now that Lockheed got the full rate production contract?

Yes. Well, on Europe, I mean, honestly, we saw growth in Europe at European Defense at about 18% for the quarter. So that was very strong. And I think it is an indication that we're really seeing defense spending in Europe increase. Obviously, they had 1% of their GDP historically, and they've committed now to 5% going forward. So there's going to be a massive ramp, and we've seen that with a lot of the companies in Europe.

And an example of a program is the Rafale program. It's been around a long time, but France has said that they are going to be increasing production of the Rafale in the coming years to meet the demand for European defense. And we have a very big position on the Rafale. So that's going to bode well for Hexcel. So the answer to that is yes. European defense is growing, and we expect it to continue growing, and we're going to be doubling down on that.

Now with regard to the CH-53K, this was probably a bit of a softer quarter, Q3 on the CH-53K but you read that Lockheed signed a $10 billion deal with the Navy and the Marines to deliver 99 units that will take it out to 2032. So that is a great sign of confidence in the CH-53K program. And so we have a very large position on it, $2.5 million to $3.5 million per ship set. And so we're very excited about that program, very excited about this multiyear deal that Lockheed and Sikorsky were able to sign with the Navy and the Marine.

Tom, just one more program, the F-35, just because Lockheed got the Lot 18 and 19 contracts definitized. Is that pretty steady state for you guys? I know it's a big program for you as well. Is that pretty steady state for you guys for a while?

It is. They've been producing at about 156 aircraft per year. I think this year, they might do 170 to catch up a little bit. But in general, at 156 is a good steady state amount, and that will go for years and years to come. So that's what we will see is a little bit of an uptick on sustainment. Some of the materials that we make for the F-35 are consumable based on usage and flight legs. And as the fleet grows and they fly more, that will drive a little bit more of that material sales for us.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Patrick, congratulations and Tom, good luck. And maybe, Tom, if I could ask you on the first question Myles asked going back to that. Just the $1 billion of free cash flow over the next 4 years on an additional $500 million of revenue, assuming that 35% incremental historically holds, it still assumes some working capital lift. Can you maybe talk about how we should think about inventory unwind from here?

Well, the goal is to continue to drive it down. We've been running heavy on inventory because sales have been lower, and we produced, and we're managing that now a lot more tightly. And so the goal is we're, call it, 90, 95 days of receivables on hand and the goal is to drive that down into 70. That's more of a steady state for us. And if we can do better, we will but that's the target right now on inventory. So we will be winding inventory down in the coming quarters.

Got it. And then if I could just ask on the margin commentary for '25. How do we -- I know you didn't have a direct margin guidance but as we think about the implied margins, it seemed like they're down 100 basis points versus the prior guide and the tariffs were about 60. So what could you attribute the remainder of that to?

A little bit of it was this inventory drawdown, which is absorption for us. So as we don't produce and take out of inventory, that creates some pressure on our operating -- and so that was part of it. We also, as we've mentioned in previous calls, have been investing in a new ERP system, Microsoft D365. And the implementation of that is a little bit of a hang. And then just the lower volume in general because of the destocking and some mix changes and kind of the combination of all that is what weighed on the margins this quarter.

Your next question comes from the line of Gautam Khanna with TD Cowen.

Congrats, Patrick.

Thanks, Gautam.

Guys, I may have missed it, but can you update us on what the A350 equivalent shipments are expected to be this year? Previously, I think you were saying low 60s. And I just want to make sure I understood what happened in Q3 and...

That's not -- 60 is the right number. We started off much higher. Our original plan was 84, and that dropped after the first quarter to 68. We're staying about 60 right now.

And your best guess, given what you know now about 2026 equivalents would be?

I'd say in the 80 range.

Okay. And to your point, you already have kind of capacity, labor, et cetera, to meet that rate. So in theory, the incrementals next year could even be -- I know you answered the question on 40% but could they even be higher given the absorption?

You always have other factors that you have to offset. But there's no doubt that as those production rates, particularly on the 350 go up, we get better operating leverage and that drives higher margins.

And last question just on tariffs. Previously, I think you said $3 million to $4 million a quarter, and I just wanted to know what is in the 2025 guide aggregate tariff headwind?

That's what we've incorporated into the updated guidance is that amount.

And is that's for 3 quarters or for 2?

Yes. Yes, right. And then I mean, if you look at it, basically, it's about $0.10 of EPS. So we dropped our midpoint on EPS from $1.95 to [ $1.75 from $1.95 to $1.75. ] And so $0.10 of that was based on the tariffs.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Patrick, let me add my thanks for all your help over the years.

Thanks, Noah.

If I look at consensus right now, it has total company revenue up 12% full year 2026 versus 2025. Is that kind of growth directionally achievable? Or does the aerospace new build destock last long enough into '26 to make that look steep?

It probably looks a little bit steep. I don't think -- we're confident that we've reached the inflection point and it's going up but I don't think we want to overcall it. I think we want to be conservative in terms of what that outlook is. So it's definitely going up, and it will be a healthy increase but 12% is a little aggressive, and we'll see where we end up. But I think we'll also be conservative in our outlook of what we plan for and build and wait and see the increases happen before we get too far out in front of it.

Okay. That makes sense. And Tom, at a high level, if I look across the aerospace supply chain and I take the 2025 operating margin versus the pre-pandemic, the 2019 -- there aren't that many suppliers that are down, a lot are similar and a lot are up considerably, and Hexcel is down. What do you attribute that to? And I know you have some pretty significant contract renegotiations over the next few years. Are there things you're looking to change in your contract terms with your customers to improve the profitability protection in the case of downturns and industry disruptions?

Yes. Well, first of all, let me answer the first question. The reason our margins are down and maybe others in the industry aren't down is we are mostly original equipment and others have more aftermarket. If you look at the industry, air traffic dropped 96% in April of 2020. and it recovered fully within 4 years. But production peaked in 2018 at 1,734 units. Last year, we were only at 1,230 units, only 75%. So while air traffic increased, production didn't. And probably 3,600 aircraft that should have been built in that period weren't built. And that meant that the fleets were older and people had to spend a lot more on aftermarket. So anybody who's had aftermarket exposure has done extremely well. For better or worse, Hexcel makes material that goes into structures that don't wear and don't have a lot of aftermarket.

And so the fact that we are so heavily tilted toward original equipment for commercial aerospace and that production is only 75% recovered. And by the way, only 50% recovered on widebodies, that explains why our margins are still down and others are higher because they have this great aftermarket exposure. But as the production rates increase, we will get huge amounts of operating leverage. And that's why the next 4 or 5 years for Hexcel are going to be absolutely great because we're going to benefit from the $500 million of incremental annual revenue and the increased cash flow that, that will generate.

So that's what I would say. And then in terms of the contracts, yes, the contracts as we go forward, first of all, they won't be longer. The 22-year contract is not what we're going to be looking for. And we'll also have more tiered to volume. So as volume goes up and volume goes down, the price will change. We'll probably also look at more pass-throughs on costs that we can't necessarily control some of our resins or chemicals and products like that. So the contracts will be more sophisticated to reflect a more dynamic environment that we face today that we didn't face back in 2008.

Your final question comes from Scott Deuschle with Deutsche Bank.

Tom, just to clarify your response to Ken's question, do you expect to enter 2026 at 7 a month on the A350?

Yes, we do. They're there. A little bit of destocking in the fourth quarter, but they'll have a couple of months under their belt at 7, and we expect to enter '26 at 7 going to 8 and possibly 9 by the end of the year.

Okay. And then, Patrick, can you offer any quantification as to what the FX headwind that you flagged in your prepared remarks could look like going forward? I'd imagine it's fairly immaterial, but I just want to check on that.

Well, it was very immaterial really in the fourth quarter, just 10 basis points, as I called out, the hedging mechanism that we have in place and have had in place for many years smooths the peaks and the troughs. We are at this cusp of a turning point from a strong dollar to a weaker dollar, so into a slight headwind now into 2026. But again, I wouldn't overstate the 10, 20, 30 basis points maybe in 2026 but it all depends on where the dollar now moves.

Okay. And one last question, if I could. I mean, Tom, if you see value in the stock today, just trying to understand why you didn't buy back any in the third quarter when the stock price was 20% lower than it is right now. It would have been.

A $350 ASR. I think that's my response.

We have time for one more question from Richard Safran with Seaport Research Partners.

Patrick, wish you all the best. It's been a pleasure. Listen, Tom, I know you're coming off of facilities in Austria, Hartford and Belgium. I was just wondering if you're contemplating any further changes in the portfolio.

Well, we're always looking at the portfolio to figure out how to streamline and optimize it. And so there could be a few more things that we do. These were the big ones, but that's an ongoing part of our normal operating cadence. And so we're going to continue to look at that and figure out how do we optimize so that we get the best cost and make sure we're focused on the strategic priorities. And the #1 priority for us in the next few years is making sure we can ramp up to meet the production rate increases for our customers, the safety, quality and delivery. That's our #1 priority, and we'll continue to optimize the portfolio to help achieve that.

Okay. And on the -- just quickly on the buyback. I was just accelerated buyback. I just wondered what drove the change in capital deployment strategy? It seems a bit out of character. And should we take that in the future, you're going to do more of these with the $1 billion you're anticipating over the next 4 years?

Well, the answer to that is yes, we'll continue to look at that, and it will be a top priority. I think what changed is a couple of things. One is we're looking at the market and the market clearly is at an inflection point and the rates are going up. So we now have great confidence in that. Secondly, as I mentioned, our capital deployment strategy has always been fund productivity, fund R&D to get on the next generation of products, fund organic growth and then look at inorganic growth.

Well, we look hard. We did a very comprehensive search. We didn't see anything out there that met our strategic priorities or our return threshold. And so we said we've got all this excess cash that's coming. The best investment in aerospace right now is Hexcel, that's where we put our money. And that's why we did the ASR, and that's why we made the reauthorization as big as it is so that we could do more in the future once we pay this one down and get back to our target leverage ratio.

Ladies and gentlemen, this concludes the Hexcel Third Quarter Earnings Call. Thank you all for joining. You may now disconnect.