Hexcel Corporation Aktie

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.

Hello, and welcome to the Hexcel Second quarter 2025 earnings call. [Operator Instructions]

[Audio Gap]

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 and CEO and President; and Patrick Winterlich, our Executive Vice President and Chief Financial Officer.

The purpose of the call is to review our second 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 as we discuss our 2025 second quarter results. The fundamentals for the commercial aerospace industry and for Hexcel's outlook continue to be very positive. Hexcel has a strong market position with a uniquely extensive range of advanced lightweight composite materials, meet the requirements for record levels of new commercial aircraft on order with Airbus and Boeing as well as supporting military applications and growing global defense spending.

Starting with Boeing. There is a positive momentum for their key programs with Boeing stating that they are now at a production rate of 38 aircrafts per month for the 737 MAX aircraft. Solid progress also continued through the 787 build rate as Boeing lose toward producing 7 aircraft per month in 2025, following the apparent resolution of supply chain issues.

For Airbus, the outlook for the A320 ramp is also becoming more encouraging in terms of the growing availability of engines in the second half of 2025 to enable Airbus to increase the build rate and then push monthly build rates through the 60s in 2026. Airbus continues to project that they will achieve a production rate of 75 aircraft per month on the A320 Neo program by 2027. The A350, Hexcel's largest program is currently one of our major challenges as Airbus looks to stabilize the program's build rates and move monthly rates towards 7 by the end of 2025. In addition to A350 production challenges due to supply chain disruption, we have seen some destocking impact in Europe in the second quarter based on high levels of inventory for A350s for certain parts, including the wings.

As previously communicated, we expect this destocking to continue through the third quarter. Airbus has indicated that the destocking should end as we go into Q4, and they are still targeting to achieve a build rate of 12 aircraft per month on the A350 program by 2028.

Remember that the ship set for Hexcel in the A350 is between $4.5 million and $5 million per shipset. And each monthly step-up in the monthly A350 build rate brings significant revenue and operating leverage benefits for Hexcel. The medium to longer-term outlook is very positive for Hexcel, including the expected multi-decade production life for both the A350 and the 787.

The material demand requirement from these 2 programs will drive strong ongoing capacity utilization for Hexcel, which will underpin strong cash generation for years to come. As we have communicated, we expect to generate over $1 billion of cash cumulatively over the next 4 years. Demand within other commercial aerospace is also solid. And second quarter revenue saw growth both year-over-year and sequentially.

As a reminder, the modern large cabin business jets now have extensive composite content, with ship set value between $200,000 and $500,000 per shipset. The second quarter of 2025 saw strong defense sales with broad strength across a number of domestic and international programs. Military and defense budgets around the globe continue to strengthen.

Notably, natal members in Europe have indicated that they will increase defense spending to 5% of GDP, which ultimately translates to higher and sustained build rate for most platforms. Development of new platforms is also encouraging, such as sixth generation fighters and autonomous drones.

Hexcel participated in the Paris Air Show last month, which provided a confident outlook for the aerospace industry and where we reinforce existing relationships announced new relationships and highlighted recent advances with our innovative technology for lightweight materials. Of notes, included Embraer and Hexcel celebrated 50 years of Hexcel supplying lightweight composite solutions by saying a preferred supplier agreement for composites. Hexcel has been a long-standing provider to Embraer on a range of advanced lightweight composite materials, including prepregs, engineered core and advanced structures.

Various Embraer aircraft platforms use these lightweight composite materials, such as the C390 military transport in the KC-390 tanker, the E2-Jet family of narrowbody regional aircraft and the Pinom 300 business jet. We also signed a long-term agreement with Concur, the Norwegian defense and aerospace systems provider. The agreement covers the supply of Hexcel's lightweight engineered honeycomb and prepreg products for strategic production programs over 5 years.

This is just one example of Hexcel's strong European presence in relation to the increase in defense spending in Europe. In addition, we announced the collaboration with Fine Well, and Hexcel on an exciting project to develop an advanced solution for modern air ship structures. Project will utilize a broad range of Hexcel products and especially Hexcel's light weight carbon fiber, which has been selected for the pol TRUDA-tube that compose the skeleton of the fine wells airship.

Each airship is forecast to have a shipset of more than $1 million. Looking at our financial results for Q2 2025, we generated sales of $490 million and adjusted diluted EPS of $0.50 per share. As we highlighted in our last earnings call, aircraft production rates in 2025 will not meet the initial expectations due to supply chain disruptions. Commercial aerospace sales in the second quarter of 2025 were $293 million, down 8.9% on a constant currency basis in the same period in 2024

Lower sales year-over-year were primarily due to the A350 and the Boeing 787. However, this was partially offset by a 5.1% increase in sales within the other commercial aerospace from international demand. To share some additional color. Commercial aerospace sales were up on a sequential basis. The Boeing 787, the 737 MAX and the Airbus A320 neo all increased sequentially as did other commercial aerospace. The A350 sales were lower as anticipated due to channel destock.

In Defense, Space and others, sales totaled $197 million, up 7.6% in constant currency in the same period in 2024. Growth was driven by the CH-53K, 2 international fighter programs and a strong quarter for space, including waters, rocket motors and satellites. Adversely, the V-22 Osprey continues to weaken as expected, as that program comes to the end of its production life.

However, the overall continued growth in defense underscores capabilities and value Hexcel lightweight materials brings to the military market. Within -- with lower-than-expected sales line in our commercial business, we see 2025 as a year where we need to remain focused on the fundamentals of our operations and controlling costs as we navigate reductions in near-term production for commercial aerospace programs, notably the A350 before the production rates continue to increase in the second half of 2025.

Our gross margin of 22.8% for Q2, down from 25.3% in 2024 was negatively impacted by lower operating leverage from the lower sales combined with actions that we are taking to reduce inventory levels. And then margins also were impacted by this lower overhead absorption. In addition, we are now beginning to feel the impact of tariffs.

Harvest production rates increased in the back half of 2025 and into 2026. The increased volume will drive operating leverage and expanded margins. While production rate increases for original equipment and commercial aerospace have experienced delays in 2025, the commercial aerospace industry outlook and confidence levels appear to be getting stronger.

Given this backdrop, we continue to remain extremely vigilant on the internal elements of our business that we can control, which is on-time delivery. We were pleased to receive a supplier award for best performer from Airbus this quarter, recognizing Hexcel for our outstanding delivery and quality. We continue to push pricing and recover cost inflation impacts from contracts when they renew.

About 15% of our contracts by number come up for renewal each year, and historically, the average life of our contracts has been about 7 years. We have worked hard over the last few years on all our contract renewals to get pricing to offset recent material, energy and labor cost pressures, and we will continue to do so.

We are also introducing more escalation in pass-through clauses for our sales contracts whenever we can. We will continue to seek price increases to offset the inflation we have countered over the last several years as our contracts come to the end of their terms.

As we have mentioned in recent quarterly calls, we are managing headcount very tightly and we'll only add people when demonstrated production rates clearly justify it. Specifically, as we stated in our first quarter earnings call, we expect that our headcount at the end of 2025 will be no higher than the head count we ended within 2024.

This will be more than 400 heads short below our original plan for 2025. As of June 30, our head count was below fiscal year-end 2024 level and decreased sequentially from the end of the first quarter. Our strong focus and operational excellence and general cost control remains as robust as ever as we continually work to drive efficiency and productivity.

We also continue to move forward on our future factory efforts which will see significant cost per unit improvements over the next several years, in part through the adoption of more automation, digitization, robotics technology and the incorporation of artificial intelligence at our production site. In relation to continued efforts to optimize our production efficiency and overall facility footprint, we have now completed the legal process required in Belgium and have announced the closure of our engineered product facility in that country.

Production stopped at the end of June, and the majority of our employees have departed even a small residual team to decommission the site and prepare it for sale. We took a restructuring charge of $24 million in the second quarter relating to severance and associated costs for the Belgium site. This Belgium site was operating as part of Hexcel for decades. But over time, the cost structure became untenable.

While we are incurring near-term cost for closest site, there will be a longer-term reduction in structural costs within the Engineered Products segment of our business from this action. Please also note the production and sales from this plant have been transferred to other existing Hexcel sites, largely to our facility in Morocco, but also to our plant in [ Takville, Pennsylvania ]. So there is no impact to our top line. The previously announced divestiture of our Australian glass fiber prepreg and recreation business is continuing, and we plan to provide an update later this year.

We also recently divested our additive manufacturing business in Hartford, Connecticut as part of our overall streamlining of noncore activities, so we can focus on the upcoming production rate increases in commercial and military aerospace. Hexcel is well positioned on all fronts to meet the opportunities that lie ahead. We have an unrivaled product portfolio of advanced lightweight composite materials. We have world-leading technology and intellectual property positions.

We have world-class production facilities across the U.S. and Europe, and we have the right team to drive growth. As build rates increase, we are well positioned to drive EBITDA and free cash flow while delivering strong returns to our shareholders.

Our publicly announced peak build rates across all their programs, Hexcel will see an additional $500 million in annual revenue. That is without winning another contractor program. On top of this organic growth, we also believe there is a place for targeted and disciplined M&A. We continue to be vigilant for appropriately priced assets that will provide synergistic benefits to Hexcel and complement what we do today in the sphere of advanced material science technology. To date, we have not found any actionable assets at the right prices, but we continue to look and evaluate potential opportunities.

In the meantime, we have continued our periodic repurchase of Hexcel staff. And indeed, we bought back another $50 million of shares in the second quarter. This now brings our repurchases to $100 million for the year and $350 million or almost 6% of our outstanding stock in the last 18 months. With that, let me turn it over to Patrick to provide more details on the numbers. Patrick?

Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter time horizon. The year-over-year sales comparisons I will provide are in constant currency, which thereby remove the foreign exchange impact sales.

The commercial aerospace market reported approximately 60% of total second quarter sales in 2025 of $489.9 million. Second quarter commercial aerospace sales of $293 million decreased 8.9% compared to the second quarter of 2024. We experienced lower sales year-over-year with each of the 4 major commercial aerospace programs including the Airbus A350 and A320 and the Boeing 787 and 737 MAX.

As the overall aerospace supply chain continues to experience challenges ramping as quickly as the market demand falls, A350 sales declined year-over-year and sequentially as expected, on channel destocking as Airbus face supply challenges causing delays in the rate ramp.

As Tom mentioned, 787, [ A320 neo ] and 737 MAX all increased sequentially. Sales for other commercial aerospace in the second quarter increased 5.1% year-over-year led by international demand. Defense, Space and Other represented approximately 40% of second quarter sales and totaled $196.8 million increasing 7.6% from the same period in 2024.

For rotorcraft, the CH-53K and Blackhawk program year-over-year, partially offset by the sunsetting V-22 and a softer quarter for Apache. The space market grew strongly year-over-year, including both from the traditional defense prime and private-based companies. Growth was across multiple space applications, including launches, rocket motors and satellites.

Gross margin of 22.8% in the second quarter of 2025 increased from 25.3% in the second quarter of 2024 as lower sales and inventory reduction actions negatively impacted operating leverage. Specifically, this off the gross margin reflects the impact of our underutilized carbon fiber assets and the initial impact of increased tariffs, which started in the second quarter. We expect upcoming production rate increases, especially in commercial aircraft to create operating leverage and drive increased margins as we go through the year.

As a percentage of sales, selling, general and administrative expenses and R&D expenses were 11.7% in the second quarter of 2025 compared to 10.9% in the comparable prior year period. Upgrades to financial and manufacturing IT systems, combined with some additional professional fees contributed to higher operating expenses as a percentage of sales.

The closure of the engineered product facility in Belgium drove the other operating expense of $24.2 million in the second quarter of 2025. These costs consist primarily of severance expenses with the majority of cash outflows expected to occur in the second half of 2025. Let me reiterate what Tom said. There will be minimal impact to sales with the closing of this facility as production is transferred to other Hexcel sites.

And longer term, this trans closure will help us reduce our engineered product cost structure as Belgium was a high-cost market for the product being manufactured. Adjusted operating income in the second quarter was $64.2 million or 11.1% of sales compared to $72 million or 14.4% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the second quarter to operating income was favorable by approximately 10 basis points.

Now turning to our 2 segments. The Comps and Materials segment represented 80% of total second quarter sales and generated an adjusted operating margin of 14.1%. This compares to an adjusted operating margin of 17.2% 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 excluding the impact of the Belgium plant closure generated an adjusted operating margin of 10.9%.

This compares to an adjusted operating margin of 14.3% in the prior year period. Net cash used by operating activities in the first 6 months of 2025 was $5.2 million compared to net cash provided of $37.2 million in the first 6 months of 2024. Working capital was a cash use of $124.5 million in the first 6 months of 2025 compared to a cash use of $118.3 million in the first 6 months of 2024. Capital expenditures on an accrual basis were $31.8 million in the first 6 months of 2025 compared to $41.1 million in the comparable prior year period.

Free cash flow in the first 6 months of 2025 was negative $46.6 million, which compares to negative $14.4 million in the first 6 months of 2024. We typically use cash in the first half of the year, and this year was no different.

Adjusted EBITDA totaled $172.5 million in the first 6 months of 2025 compared to $204 million in the 2024. We used $50.5 million to repurchase stock during the second quarter, the remaining authorization under the share repurchase program as of June 30, 2025, with approximately $134 million. The Board of Directors declared a 17% quarterly dividend yesterday.

The dividend is payable to stockholders of record as of August 8, with a payment date of August 15. We are reaffirming our 2025 guidance with the caveat that we are still reviewing the recent change to capital. Our initial assessment is that our cash taxes will be lower than 2025 than our book due to the deductibility of past IT costs with what is, in essence, a onetime catch-up.

I would also like to clarify that our guidance of an effective tax rate of 21% is the underlying ETR we are currently assuming for the third and fourth quarters of 2025. Therefore, given some discrete adjustments in the first 6 months of 2025, we expect the average adjusted ETR for the full year of 2025 to be lower than 21%.

And as I have just indicated, we will update our forward ETR guidance if needed, once we have fully digested the impact of recent tax law changes. We continue to forecast the tariff impact of $3 million to $4 million per quarter.

However, the tariff situation remains uncertain with more potential changes to come. Our regional sourcing helps us to insulate us from the impact of tariffs, and we will continue to work on mitigation and pass-throughs, so that takes time. And finally, I would like to share a reminder of the typical third quarter sales seasonality that arises from European summer vacations. With that, let me turn the call back to Tom.

Thanks, Patrick. Despite the challenging first half of the year and the near-term softer-than-expected demand for the A350, fundamental outlook for Hexcel remains robust. Backlog for new aircraft is at an all-time high and every new commercial and military aircraft program brings more demand for advanced lightweight composite materials in the alteration it replaces. And as defense budgets around the world continue to get stronger, this provides an additional tailwind for Hexcel.

Given this landscape, we are extremely confident that with Hexcel's unrivaled portfolio of technology and lightweight product offerings, and given the production footprint, we already have in place requiring minimal capacity increases over the next several years, there is a great opportunity for Hexcel to generate strong incremental margins, drive growing EBITDA and generate significant free cash flow for many years to come.

To repeat, we expect that we will generate over $1 billion of cash flow in the next 4 years. Hexcel has the technology, the lightweight product portfolio, customer relationships, qualifications and the team to deliver as commercial production rates fully recover and defense spending increases. We appreciate your engagement with us today. With that, we're ready to take your questions.

[Operator Instructions] Your first question comes from Ken Herbert of RBC Capital Markets.

Tom, maybe -- or Patrick, just to start off, can you outline specifically what the assumption is on either build rates or delivery rates or sort of the growth in the second half for the A350 program?

Yes, Ken, sure. So as we've said, that's a program that has changed. Airbus announced back in November that they were bringing down their schedule. And then in February, they announced again another reduction in the schedule. So we have built our plan around 84, and we dropped that to 68 million at our last call. What we're seeing now is something in the low 60s for the full year.

But what we do see is that we think that destocking should end in the third quarter. Airbus has said that they're going to get to 7 aircraft per month in the September time frame. And so we're expecting a pretty strong fourth quarter, probably 2021 units in the fourth quarter of demand pull from us.

And so that's how we see the year shaping out. It's lower than we originally thought, but we do see with Airbus planning to increase rates to 7 in September, that Q4 should be pretty strong as we get past the destocking.

Great. That's very helpful. And is there any reason to think that we shouldn't see continued growth within the defense space and other portfolio in the back half of the year, I think the run rate has been very nice to start the year.

It has been. It's been probably a little bit higher than we expected. And I take it to continue. I mean defense spending around the world on all programs is going up. So we're very encouraged with the Q2 results and extremely optimistic about the rest of the year. .

The next question comes from David Strauss of Barclays.

Following on Ken's question there with destocking that you've seen in the blocking on the A350 you've seen in Q1 and Q2, what rate were you effectively shipping that in the first half of the year?

For the A350? SP-2 Yes. Well, the rig -- it's always a little bit different because you -- we're a little bit ahead of everybody by 6, 8 months just because of the type of material we provide. But in the first quarter, the rates were kind of in the low 6s and then in the second quarter in the high 5.

But don't forget, those are the rates and what they actually ship can be different. And it also depends on whether they can shift sometimes. For example, they've talked about the fact that they have some shortages on laboratories or things like that. So that can all impact it. But those are the kind of rates we saw, so low 6s in Q1 and kind of high 5s in Q2.

And the thing is we've got a disparity between what we're shipping in the U.S. and what we're shipping in Europe. So the destocking is likely Europe. And so we were shipping a lower rate in Europe, whereas we're getting pulled still at a relatively high rate in a high rate in the U.S. as that treat [indiscernible] out.

Okay. Got it. So just to clarify, so those are the -- those aren't the stated Airbus rate? Those are the rates you're actually shipping at.

Yes. What Tom was talking about is what we're shipping at and how we're shifting more in the U.S. than we are in Europe.

Yes. And let me clarify, this is the destocking aspect because what the stated Airbus rates are could be one level, but what they're pulling from us at because their destocking is another level. And so our results kind of reflect the lower number, which is the destocking. So our results won't reflect what Airbus is reporting as their ship rates because they are destocking.

Yes, perfect. That's what I was getting at. And then Patrick, on currency. So you're still seeing a bit of tailwind given your hedging. When would you expect the currency comparison to flip negative here given the weakening in the dollar that we've seen?

We continue to benefit, and it really does kind of speak up to the merits of the currency hedging that we do. So it was a tailwind again. I think we will actually continue to see a net tailwind this year. If rates stay where they are, we're going to see that flip or start with, I think, next year in 26, David.

The next question comes from Gautam Khanna with TD Cowen.

Yes. I was wondering -- to follow up on the prior question. Do you guys have any -- can you give us any framework of thinking how the recoupling the underlying rates on the A350 progresses in 2026, do you think you'll be at that 7-ish rate that you implied for Q4 for much of 2026 irrespective of where Airbus is? I'm just curious like there's a destock and then as a recoupling. Just wondering the pace of recoupling, if you will.

Right. So our sense is that we'll get through the destocking in Q3 and start to get closer in terms of that coupling that you mentioned in Q4 and through next year. So Airbus looks like they're going to enter 2026 at 7 on the A350, probably raise it to 8 sometime during the course of the year. And we'd expect that we'll be closely and more coupled with them throughout '26.

Got you. Okay. And then just on the other major programs like the 787. Could you update us on where you are and how you see that progressing into 2026?

Great. well, to be honest, the first half year was probably a little soft for us on 787 just in terms of what they were pulling. But Boeing is getting up 87 and they have plans to continue all the way up to rate 10 and beyond. So again, we're expecting the back half of the year to be stronger on these 87. Boeing has been reporting very strong production rates on that. So our poll is probably a little softer in Q1 and Q2. But the production rates on that program look very strong and are expected to grow.

And last one. I think you mentioned something on the pricing side in the prepared remarks, is there any reset that you can point to with respect to a time? Is it -- like in 2026, you start to see kind of a reset on pricing? Or anything you can speak to on how pricing might change and when?

Great. Well, as I mentioned, our average contract length is about 7 years. So we're doing about 15% or 20% of the contract renewals every year. And when contracts come up, we always take the opportunity to reset the terms and also negotiate price to reflect some of the inflation that we've been seeing make sure we're getting a fair return on our investment.

But it's, I'd say, an ongoing gradual process, about 15% or 20% of the contracts per year. The one exception on that would be some of our Airbus contracts, our bigger Airbus contracts, including the A350 are set up till 2030. So that's a slightly longer term.

Those contracts go back at least the A350 contract originally goes back to 2008. So that was a very long-term contract. Going forward, we -- that's not been the case. Our contract is averaged about 7 years now and about 15% or 20% come up each year for renewal.

The next question comes from Myles Walton with Wolfe Research. .

Tom, you mentioned the award from Airbus for the best supplier for schedule and quality. I'm just curious how do you use that to your advantage? And what conditions on the ground would have to exist such that on your Airbus contracts in particular because they're so onerous and so long dated, where you would say, we're your best supplier, we're not getting value for what we're delivering and we need to renegotiate.

Well, look, I think that key right now for commercial aerospace, Boeing and Airbus is to get the production rates back up. And to do that, they need the supply chain delivering and performing. And we're very proud on Airbus, as I mentioned, is that we received an award for best performing.

And this was in the materials category for our quality and delivery. And that's very important to support Airbus as they're increasing the rates across all their programs. And so we're going to continue to do that. At the same time, we always want to -- are working with our customers, including Airbus, to drive productivity.

And so even though our contracts in the case of Airbus aren't 2 to 2030, we're constantly working productivity initiatives where we can jointly share the benefit. So the contracts do go through 2030, but that doesn't mean we're not working proactivity to drive mutual benefit in the meantime.

Okay. And just to circle the square on the A350 deliveries. So 2021 in the fourth quarter, you're shipping probably something like 10% in the third quarter. Is there any risk internally for that kind of 50% up slope that you anticipate? Or is that something that's not really a test to the system for you?

Not an issue. We've got plenty of capacity in place, we've got a trained workforce. And that's one of the things. I mean, because the volumes have been a little bit lower than we expected, we're essentially overstaffed. We could have probably taken out 50 or 100 people, but we didn't because we know the rates are going up in the back half, and we're going to need those folks.

So we didn't want to have to rehire and retrain them. But we are -- absolutely, we got enough capacity and staffing to meet the demand as they come up in Q4 '25, but also upto '26.

Okay. And one last one, Patrick, the $24 million in restructuring, how much of that is cash that you have to spend in the second half?

Yes. A large majority 85%, 90% will end up with cash, majority of that cash, I would expect to move in the third quarter, Myle. .

The next question comes from Michael Ciarmoli with Truist Securities.

Just a further clarification on the A350. Does the full year guidance contemplate low 60s? Or do you think you end up at 68. And then just from a seasonality perspective, does 3Q look a lot weaker kind of across the board than normal?

Q3 does look weaker. We've got the destocking. As Pat mentioned, you got the seasonal holidays that always take place in Europe. So Q3 does look softer. Yes, the full year, we think, is kind of low to mid overall.

But as I said, we're expecting a fairly strong Q4. Airbus is planning a rate break to 7 in September, and the destocking should really be behind us by that point. And so Q4 should be strong, and that leads into 2026.

Okay. Okay. And then just for clarification, the tariff headwind, I mean, it sounds like you're trying to offset. You've got some regional sourcing, but kind of indicated you're starting to feel it. How should we think about just the earnings guidance that do we think the low end comes into play? Or is that range doable if you kind of get the full brunt of tariffs?

Right. Well, the tariffs, it's -- they're changing frequently. And so we're trying to keep up and figure out what they are. As we said, the direct impact on us is about $3 million or $4 million a quarter. There's 3 quarters. We said we're at the low end of the range in this quarter. So we anticipate kind of given things in the outlook right now, maybe it's $10 million, but we don't know.

So we didn't include it in the guidance just because it could be smaller or larger, we just don't know based on where the negotiations end up. So we've left it out. But you could probably extrapolate and say it could be up to $10 million. Our EPS target is to $1.95 or $195. And so there could be some pressure that brings us towards the lower end of the range if the full tariff impact is.

But we just don't know. And so we didn't want to go in into the guidance and then have to change it based on what we've learned. We'll know more in the next few months. It seems like some of the deals are coming through and that will provide more clarity. But put it in right now just seem to us to be a little bit premature especially since it's only $3 million or $4 million a quarter, and we're at the low end of the range.

The next question comes from Richard Safran with Seaport Research Partners.

I just have one two-part question for you guys on defense this morning. First, Tom, you touched on this a couple of times for 2025 this morning. But could you discuss a bit more about how the administration is spending on defense and the increases you've been mentioning in European defense spending impact your longer-term outlook.

Given the increase in U.S. and Europe, I just would have to think infinitely better than when you started the year? And second, would you be willing to provide some comment on your view of the long-term growth and margin potential for your defense business?

Great. Well, there's no doubt that the defense spending has increased. The recent budget had a higher amount, and then there's the supplemental funds as well. So I think that is definitely driving the current performance and the outlook for the rest of the year. There's no doubt about that.

We're seeing it strength across the board in some of our big programs like the CH-53K, where we do the whole material system or the F-35, where we provide all the carbon fiber for the material system. And then some of the space and missiles have also been strong. So we expect that to continue, if not accelerate because the underlying defense spending and the demand is so great.

But we're also seeing that in Europe. We have a big work share on the Rafale program, which is the fighter jet from Dessau and that was up a lot. And the demand for that is up significantly. Many countries are turning to that aircraft as they go forward. So we expect that to continue throughout the year. I don't know if it will be the same level of increase that we saw in Q2, but we certainly expect to see strength.

And as we translate that into the long term, I think that's a key aspect. Right now, defense is about 30%, 35% of our total revenue. We still see that as a potential big opportunity for growth organically and potentially inorganically as we go forward. So I think this long-term trend in increased defense spending, both in the U.S. and in Europe, is going to benefit our defense growth in the future.

And we see that probably as our top core organic growth opportunity in defense, both in the U.S. and in Europe. But by the way, it's not just Europe. We also have some very good defense contracts in Turkey and India, and we expect those to continue to grow as well.

The next question comes from Scott Deuschle with Deutsche Bank. .

Patrick did to the midpoint of the EPS guide, I have to assume something like a 45% incremental operating margin in the back half. I guess does that math sound directionally right? And if it is, can you walk through what's going to drive that type of operating leverage

We clearly need to step up in the second half. We've got the seasonality sales effect in the Q3, but with cost and management, we will drive a solid Q3 as we can. And then as Tom has said, at least a couple within this morning.

We're leaning into a strong fourth quarter as we exit the year as the build rates go up as the widebodies kind of move towards 7 that we spent to move towards 60%, and hopefully, we're started getting aligned on the 58 on the MAX. So that should drive pretty strong leverage as we exit the year and deliver what we see as a positive fourth quarter.

So yes, I agree roughly with your numbers. As Tom said, sort of the $195 million or ex the tariff impact is really where we're expecting to finish the year.

Okay. And then Patrick, can you give the latest split in cost of goods sold between energy and raw materials, direct labor, overhead and the like? Has energy become a meaningfully larger share of that cost breakdown? Or has that been fairly stable as a percentage of your overall cost of goods sold?

Yes. I mean we've never shared the details of that, but Materials continues to be the largest part of our COGS followed by people cost, labor cost. I mean, energy is still single digit. I'll say that much. I think we've indicated that before, is [indiscernible] with the European impact of the Ukraine war a few years ago now, and it's still at that level.

So it hasn't -- certainly hasn't materially changed in the last year or 2, but it's in that sort of mid-single-digit level.

The next question comes from Scott Mikus of Melius Research.

Tom, to dig in a little bit on the pricing protections and the LTA negotiations. Historically, some suppliers have had to pass back productivity, the Boeing and Airbus as part of their LTAs. And you mentioned at some of your Airbus contracts, you're sharing the productivity benefits with them. So as you renegotiate these LTAs and they come due or you bid for new programs. Are you making sure that you get to keep the productivity that you drive in your own 4 walls?

Well, it's a little bit of both. I mean I would say, as we get into renegotiations, we're trying to learn from the past. And so we're building in volume adjustments because certainly that was a big issue from the pandemic. We're also looking to ensure that there's appropriate escalation protection for things like inflation in labor or material or if we were just talking energy or logistics.

And or tariffs as we have learned. So those are some of the ways that we're looking at it. The thing on productivity is that this is a tough industry, and you always need to be running fast to stand still. And our customers expect ongoing productivity. So while if we can get buying protection and we can get escalation protection, we certainly have to be willing to work jointly with them to get productivity that we share. And that's been a hallmark of our contracts with all of our big customers in the past, and I expect that will be in the future as well.

Yes. If you have to remember, Scott, most of the time with all the qualified products and processes to make changes, we need the cooperation of our customers. And if we can do it in-house and is purely in-house, then yes, we would keep it. But the vast majority of the time to speed up our lines, change our parameters. We need those signed off and approved by the customer. So we do tend to work with them.

And to Tom's point, ultimately, it's a competitive advantage. If we can give them some benefit as well as clearly keep as much as we can for ourselves. So normally do we do have to elaborate.

Okay. And then thinking about build rates, we saw GE raised its commercial OE sales growth and reaffirm the LEAP delivery guidance. Boeing's production rates have been surprising to the upside. And you mentioned the A350 destocking to be over by the fourth quarter, could we see a possibility maybe in early 2026, where you start to see a restocking benefit actually on the 737 and while destocking on the A350 is entirely behind you?

Well, when you say restocking, I mean, just the build rates going up. .

Well, I mean customers, some of the sub suppliers that you ship to maybe have burned down excess inventory and need to build higher levels of buffer inventory to support future higher production rates?

Yes. I mean it remains to be seen. I think the goal for everybody is to synchronize and get everybody on the same production rates as we go forward. We're not quite there yet, but getting closer. So I don't think so. I think the goal for everybody in the supply chain get synchronized so that we're all at the same rates, not different parts of the chain building differently.

Yes. And restocking is a very gradual process, Scott. It takes time. There won't be a little bit of it, but it's not line decoking, which is tough and abrupt and significant restocking is very gradual over a period of time as the network as the supply chain builds up at a higher rate. .

But I would say, just to your point, we are starting to see this inflection point with the rates going up in a sustained way across all the main programs of Being and Airbus. And so that's very positive.

We're still in the final throes here of the destocking on the A350 but it looks very strong for Q4 as we've said and into 2026. And it's not just the 350, the 320, the 787, 737. It's been a long recovery period, but we're finally getting to the point where it's going up.

The next question comes from Sheila Kahyaoglu with Jefferies.

Tom, patrick, sorry, I'm going to ask you to do some math on this because all this capacity and headcount had me thinking. So when we look at your headcount per aircraft, it's actually flat versus 2019 levels.

Obviously, headcount is down because revenues are down. But the actual number of aircraft people produce are the same. So it implies that you're actually getting a net price decline of 6% where other companies in the sector are probably up multiples of that. So I guess how do we think about when that fixes itself to get the margins back up, not only based on volume, but this contract renewal process, Tom, if that extends?

Yes. Well, I think there's 2 things going -- one is just operating leverage because if you go back to 2019, we peaked in terms of our revenue and our production. We shipped 112 A350s, and our revenue was $2.35 billion. And we had all the capacity in place to support that level of production. Where we are now is a much different place.

I mean, obviously, last year, Airbus delivered 57 A350s. And so we're utilizing only of the capacity, probably 2/3 to 3/4. And so we're not getting the operating leverage that we should get, both in terms of headcount but overall. And that's what's impacting our margin. So I think as our margins -- our revenues and build rates recover where they were in 2019, you'll see us get the operating leverage, and that will improve revenue per head count.

And it will also improve margins. Now as we've said, because we've experienced some inflation in labor and in material and in utilities, even when we get back to the previous levels of revenue, we're still going to have some headwinds, up 100 basis points of headwind on margin. That's what we're working to offset with our future factory initiative. And ultimately, as we get to the renewal period for our contracts is to use price to help offset some of that as well. But that's how I would lay it out.

Yes. That makes sense. And then, I guess, maybe if I could ask as the destocking alleviates itself from the Q2 levels. What program has the most operating leverage? And then how do we think about the Belgian factory payback?

Well, I mean the destocking in -- I mean, it's really an A350 story for us, primarily. It's our biggest program. We invested significant amounts of money from 2010 to 2019 to support the industrialization to go up to 13 aircraft per month, and the rates have been far below that, as you know, since the pandemic.

And so that's the biggest issue in terms of operating leverage. And I'd say the A350 has probably been the biggest issue in terms of destocking. Just to give you some quick math, it's not perfect, but look at last year's numbers, we reported that our results for the A350, we delivered about 72 shipsets in '24. Airbus only delivered 57. So it's not an exact comparison, but that's essentially what's destocking right now.

The next question comes from Gavin Parsons of UBS.

Tom, pretty healthy pace of buybacks. But in the prepared remarks, you maybe sounded a little more front footed on M&A. I just wanted to know how you think about that trade-off and how you're contemplating size of maybe bolt-ons for something more significant.

And, as I said, we're looking at it. We think it could be a good complement to the organic growth that we're going to experience both from the recovery in build rates and the growth in defense spending. But we're going to be very disciplined. We're going to look for things that are strategic that advance our advanced material science focus, have a heavy emphasis on aerospace and defense and meet our return thresholds, which are quite high.

But I can't find something that fits that criteria. We have been doing share buybacks, and we'll continue that. But that's thinking about it is we think it could be a good complement if the right opportunity surfaces but we're going to be very disciplined.

And in the absence of that, we'll continue to fund our productivity, our innovation, our organic growth and then continue to do share buybacks on a selective basis.

Okay. And then it seems like Kinston is the main bottleneck on the A350. I wondered if you could share some insights on the improvement time line, given your familiarity with that facility and if you think that's contingent upon the transaction closing? .

I think Airbus has pointed to that in the past, but they could probably provide more insight onto it. One thing they said is that once the deal closes and they take full control of that operation, they'll be able to drive more productivity. And I think that's probably the case. .

The next question comes from Ron Epstein of Bank of America.

This is Alex Preston on for Ron today. I was wondering, we talked a little bit about the direct impact of tariffs. Maybe if you're considering or seeing any impact indirectly on -- I'm thinking especially like robust demand in the U.S. and sort of maybe how you're thinking about that in the early stages here.

Well, as we've said in the past, that's our bigger concern. It's not the direct impact tariffs on us. But if there's any indirect impact that could impact build rates for Airbus or bond. At this point, it doesn't look like that will be the case, but we need to wait and see. Obviously, there is no deal yet with the European Union. We'll have to wait and see what that is and then what the treatment is of aerospace trade that goes back and forth.

And one thing I'll say is, over the years, aerospace has been a great industry for the U.S. It's probably the biggest net importer or in industrial industries with over $120 billion of net exports. And it's relied on zero tariffs, and that's serving the industry well. So we'll see where we end up.

But at this point, it's hard to say. And for us, as I said, the direct impact of tariffs is relatively minimal, $3 million or $4 million a quarter. the indirect could be bigger, but we don't know what that could be at.

The next question comes from Kristine Liwag of Morgan Stanley.

Maybe I'll kick off with a currency question. I mean, can you remind us your mismatch with your European business, how much of the European footprint are actually sold in dollars? And also, if you could remind us regarding your hedging policy, how much are you hedged for this year and next year? And if we see the dollar weaker for longer, how we should expect that to result in your margins?

Yes. So we enter a year roughly 75% hedged. So if I look at 2025 for the back half of '25, we are going to be hedged more than that at this point with just those 2 quarters remaining. So we're probably 80%, 85% hedged. It's not 90% now through the end of 2025.

We're building up our hedge profile for 2026. And by the end of this year, as I said, I would expect to enter 2026 around 75% hedged. We -- the vast majority of our sales in Europe are in dollars. And with the decline of the wind energy business, that was actually a source of euros.

That has now gone away. So if anything, our need to sell dollars to cover our European cost base in euros and pound has actually grown a little bit, not massively, but it's grown a bit. But our hedging policy remains the same.

It's very disciplined over 10 quarters and we layer it in each quarter as we move forward. In terms of putting a magnitude on things, yes, I mean, ultimately, if the dollar stays weaker, that will be a marginal headwind certainly to where we are today, but I'm not going to speculate on the size of that at this juncture.

Great. And if I could follow up on the contract negotiations. I mean, Tom, hearing from your tone, it sounds like you're a bit more conservative or maybe more balanced regarding these contract negotiations with your customers as these contracts roll off.

But when we're talking to other industry players and other suppliers, they seem to be a lot more optimistic that there's significant pricing increases for these contracts as the OEMs really want to ramp. I guess I want to understand when you're doing these contract negotiations, are there offsets that you have to factor in, like why can't you get more pricing through when it seems like a lot of your peers are getting that pricing.

And ultimately, the OEMs can't really change out their material input at this point, and they're pretty -- you've got that strategic advantage. So why can't you get more pricing?

Well, as you go into any contract negotiation, your goal is always to maximize the value of the contract. But of course, you have to negotiate that with the other party. And so there's trade-offs to be made. But our goal is always to make sure that we get a fair price that reflects the value we provide and the huge investments that we've made.

And also takes into account the cost increases that we've seen over the last years in labor and material and utilities and logistics. So the goal is always to maximize price. And you take into some account other considerations.

So for example, this is a long-cycle business, and there only a few players in it. And the programs come up only once every few decades. And so we're also trying to get on the next program. And the next program, of course, is going to be the narrow body, and that's going to be a huge program. So that's another trade-off that you factor in. But again, our goal, Kristy, and I can assure you is always to maximize price and contract negotiations subject to where our counterparties will let us go.

That is all the time we have for questions. This concludes today's conference call. We thank you for joining. You may now disconnect. .