Hexcel Corporation (HXL) 2026 Q3 法說會逐字稿

Hello, everyone. Thank you for joining us, and welcome to the Hexcel third-quarter 2026 earnings call. (Operator Instructions)

I will now hand the conference over to Kurt Goddard, Vice President, Investor Relations. Kurt, please go ahead.

Hello, everyone. Welcome to Hexcel Corporation's third 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 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. We will be referencing a supporting presentation today that is available on the webcast. In the earnings release and in today's webcast and the supporting presentation, we reference non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the presentation. 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 Chairman, CEO and President; and James Coogan, our Chief Financial Officer. The purpose of the call is to review our third 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 third quarter 2026 earnings call. Beginning with slide 4 of the slide deck. Increasing customer demand across Commercial Aerospace, Defense and Space continues to provide a strong long-term outlook for the advanced lightweight material Hexcel provides.

As commercial aircraft production rates recover and we work to capture Defense and Space growth, our focus is on executing the ramp to deliver for customers and capture the significant growth opportunities ahead. As discussed on our previous earnings call, third quarter results reflected the typical seasonality we experienced during the summer months with extended European holidays.

With a strong demand outlook in Q4 and 2027, we continue to return idle manufacturing lines to production and to recruit new employees to meet the higher production rates. While restarting production lines and hiring new workers to support the production rate ramp pressures margins in the short term, it positions Hexcel to benefit from greater operating leverage in future periods.

Hexcel has a compelling value proposition with a broad and differentiated portfolio of advanced lightweight composite material solutions, decades of technical expertise, vertically integrated capabilities at scale and long-standing relationships with leading aerospace and defense manufacturers. We are also building relationships with new market entrants, including Defense tech, Space and Commercial Aerospace companies. These strengths position us well as customers increase production and introduce new platforms that drive demand for Hexcel's lightweight, high-performance materials.

In the third quarter, referring to slide 5, Hexcel generated sales of $496 million, up 9% from the same period last year. Adjusted operating margins were 11%, up from 9.8% compared to the third quarter in 2025 and adjusted diluted earnings per share of $0.50 compared with $0.37 in the third quarter of last year. Turning to slide 6. Commercial Aerospace sales were $330 million for the quarter, up 21% year-over-year. Volumes increased across all our major commercial platforms, including the Airbus A350, the A320neo, the Boeing 787 and the 737 MAX.

As we have pointed out previously, Hexcel is an upstream material supplier and generally ships several months ahead of final aircraft assembly. We manage the business based on production demand and purchase orders we received, not reported OEM aircraft deliveries. The demand signals we see continue to support the production ramp and our current hiring plans.

Consequently, we are reaffirming our financial guidance for 2026 with revenues between $2.025 billion and $2.125 billion, diluted EPS of $2.30 to $2.40 and free cash flow greater than $195 million. Specifically on the A350, purchase orders received through year-end 2026 support our guidance of at least 80 shipsets.

Looking into 2027, current demand signals indicate around 100 A350 ship sets. As we prepare for that step-up in production, we will do so with a focus on maintaining the safety, quality and delivery performance our customers expect.

Turning to Defense and Space and Other on slide 7. Sales for this market were $166 million for the quarter. The year-over-year decline primarily reflects the previously disclosed divestiture of our noncore industrial business in Austria and closure of noncore industrial operations at our Leicester UK facility. These actions streamlined our footprint and increased our focus on niche industrial markets that value Hexcel's high-performance aerospace-grade composite materials. Sales in Defense and Space were also impacted by temporary softness in space launchers and rocket motors in the US market, a slow quarter for the F-35 program from timing and customer schedule shifts and a slower quarter for the Rafale from summer sales seasonality.

The Defense and Space market is a strategic priority for organic growth with its compelling long-term potential. Government budgeting, procurement and program funding can take time to translate into production and ultimately sales, particularly for companies further back in the supply chain such as Hexcel. We have strong positions across rotorcraft, fixed wing and other programs with traditional defense primes, many of which are expected to be in service for decades.

Also, we are expanding our work with new aerospace and defense entrants. Hexcel's advanced lightweight materials provide the high performance required for Defense and Space platforms, and we are confident in long-term demand in this market. Taken together, these demand trends across our portfolio support a promising growth trend.

As Airbus and Boeing reach their publicly announced peak production rates, we expect approximately $500 million in incremental commercial aerospace sales annually from our existing contracts compared to fiscal year 2025 sales. We also see approximately $200 million of additional growth opportunities across Defense and Space, regional and business jets. As these higher volumes move through our existing capacity, we will realize better fixed cost absorption that will generate greater operating leverage.

Combined with pricing increases as contracts renew, productivity improvements and disciplined cost control, the production ramp provides a path to approximately 18% adjusted operating margins before the end of the decade. We also see potential upside beyond that 18% as we focus more aggressively on pricing that reflects the value we deliver and the barriers to entry that exist to produce lightweight aerospace-grade carbon fiber composite. I have asked Jamie to take the lead on driving a multiyear margin expansion initiative, which we will describe in more detail on future calls. Looking at capital allocation. Our cash generation profile allows us to invest in the business while maintaining a strong balance sheet.

Following the increase in debt from our accelerated share repurchase last October, we are on track to leverage -- to return our leverage to our targeted range of 1.5 to 2 times net debt to adjusted EBITDA by the end of 2026. Reflecting confidence in Hexcel's growth and cash generation potential, our Board has increased the share repurchase authorization to $750 million from the $381 million remaining as of September 30 of this year. We will evaluate share repurchases once we return to our targeted leverage range sometime during Q4 of 2026. Also, as we announced last night, the Board has declared a quarterly dividend of $0.18 per share.

On slide 8, turning to innovation. Our team recently attended CAMX, the largest composites and advanced materials show in North America. We engaged with customers, suppliers and industry partners at the event, demonstrating how Hexcel's advanced materials and vertically integrated operations support growing demand for commercial aerospace, defense and space platforms.

At CAMX, we announced three advances across our honeycomb and prepreg portfolio. The announcements highlighted how Hexcel innovation enables customers to build next-generation platforms that are lighter and stronger and can be manufactured faster at higher rates. This focus on material and manufacturing innovation supports broader adoption of Hexcel Advanced Composites and positions us to secure positions on future aerospace and space platforms.

The lower image you see on slide 8 is an aerospace honeycomb that we recently qualified with an aerospace database called NCAMP, which is part of NIAR at the Wichita State University, which enables engineers at our customers and prospective customers to evaluate design-ready products. This is one example of how we are supporting new A&D entrants as we streamline the process for evaluating and adopting our composite solutions.

To summarize before I turn the call over to Jamie, the third quarter reflected normal summer seasonality, the restart of idle production lines and our accelerated hiring to meet rising customer demand. At the same time, Commercial Aerospace sales volumes continue to increase with a 21% increase. The production rate recovery is taking hold, and we are continuing to focus on execution to meet the rate ramps.

Our differentiated portfolio, technical expertise, strong global reputation and deep customer relationships, combined with our global manufacturing footprint, positions us well to capture growth, improve operating leverage and generate cash going forward. This supports our confidence in Hexcel's long-term outlook and reinforces our 2026 financial guidance.

With that, I'll turn the call over to Jamie to discuss the third quarter financial results in more detail. Jamie?

Thank you, Tom. I've now been with Hexcel about six months. And as you heard Tom comment, the key priority and focus for me is margin expansion. I'm working very closely with our global team to improve price realization while tightly managing our costs and continuous improvement efforts to expand our operating margins. While it's too soon to provide specific details and actions of these initiatives, we continue to see the benefits of price in our margins during 2026.

Now turning to our financial results for the period, starting with slide 9. Third quarter 2026 sales of $496 million grew 8.8%. Strong commercial aerospace growth was partially offset by lower Defense, Space and Other sales. By market, Commercial Aerospace sales for the third quarter of 2026 were $330 million, an increase of 21% compared to the third quarter of 2025. Commercial Aerospace comprised approximately 67% of the total quarterly sales. All four of our primary platforms grew year-over-year, including A350, 787, A320neo and 737 MAX as Airbus and Boeing continue to ramp their aircraft production.

Sales for other Commercial Aerospace in the third quarter increased 1% year-over-year. Defense, Space and Other third quarter sales of $166 million represented approximately 33% of total sales. Third quarter sales decreased 9% on lower space volume, the two fighter programs that Tom described and the absence of sales from the industrial businesses we exited in 2025 and 2026.

Lower space volume was largely attributable to lower launchers and rocket motors, which are going through a temporary soft spot due to some unique industry dynamics here in the US. As a reminder, we have exited noncore industrial markets through the divestment of the Austrian industrial business on September 30, 2025, and the winding down of the industrial business at our Leicester UK site earlier this year.

Our Industrial business is now solely focused on niche industrial opportunities that demand high performance of aerospace-grade composite solutions. Gross margin of 23.3% in the third quarter of 2026 increased from 21.9% in the third quarter of 2025 on improved operating leverage and price realization. The use of hedges and procurement contracts continues to mute the near-term impact of higher oil prices. If oil remains elevated, the impact to energy and AN costs will be layered into our business over time. I would also like to remind listeners that Hexcel is vertically integrated with value added all along the production process and that we have a broad product line in addition to carbon fiber.

AN is not a significant driver of our cost base at only low single digits as a percentage of sales. And of course, the flip side of elevated oil prices is that higher energy costs further drive the value proposition for lightweight Hexcel composites to support aircraft fuel efficiency.

As a percentage of sales, selling, general and administrative expenses were 9% in the third quarter of 2026, unchanged from the comparable prior year period. R&D expenses were 3.3% in the third quarter of 2026 compared to 3.1% in the third quarter of 2025 as we continue to drive innovation to position Hexcel to win work packages on next-generation platforms, including the next-gen single-aisle aircraft under development.

Foreign exchange remains a headwind year-over-year due to the weaker dollar. Third quarter 2026 operating margin was negatively impacted by approximately 30 basis points due to foreign exchange. Adjusted operating income in the third quarter was $54 million or 11% of sales compared to $45 million or 9.8% of sales in the comparable prior year period.

Adjusted EBITDA totaled $304 million or 19.9% of sales for the 9 months ended September 30, 2026. This compares to $249 million or 17.8% of sales for the 9 months ended September 30, 2025. And as a reference, trailing 12-month adjusted EBITDA through September 30, 2026, was $401 million.

Adjusted EPS of $0.50 increased 35% from the comparable prior year period on volume and price and was also supported by a lower tax rate. Third quarter tax rate largely benefited from the implementation of tax planning strategies in the quarter, resulting in a true-up to our quarter for the full year -- sorry, a true-up to our rate for the full year. And of course, a lower tax rate leads to lower cash taxes.

Now turning to our segments. Per slide 10. The Composite Materials segment represented 79% of total third quarter sales and generated an adjusted operating margin of 14.6%. This compares to an adjusted operating margin of 11.2% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 21% of total sales and generated an adjusted operating margin of 11.8%. This compares to an adjusted operating margin of 15.5% in the prior year period.

Net cash provided by operating activities in the first 9 months of 2026 was $171 million compared to $105 million in the first 9 months of 2025. Working capital was a cash use of $78 million in the first 9 months of 2026 compared to a cash use of $64 million in the first 9 months of 2025. Capital expenditures on an accrual basis for the first 9 months of 2026 were $61 million compared to $50 million in the comparable prior year period. Now turning to slide 11.

Free cash flow in the 9 months ended September 30, 2026, was $103 million compared to $50 million in the 9 months ended September 30, 2025. Leverage, defined as net debt to last 12 months adjusted EBITDA was about 2.1 times at September 30, 2026, which compares favorably to the year-end 2025 leverage of just under 2.7 times. We are on track to return to our target leverage ratio of 1.5 to 2 times during the fourth quarter of 2026. The company did not repurchase any shares of common stock in the third quarter of 2026, with the remaining authorization under our program as of September 30, 2026, totaling $381 million.

As Tom noted earlier, yesterday, the Board of Directors increased our share repurchase authorization to $750 million, and we will look to recommence our share repurchase activity once we've reached our target leverage levels. In addition, yesterday, the Board of Directors declared an $0.18 quarterly dividend. The dividend is payable to stockholders of record as of November 2 with a payment date of November 9. Finally, on slide 12, as Tom highlighted, our 2026 financial guidance is reaffirmed and unchanged.

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

Thanks, Jamie. Let me close with a few key takeaways from the quarter on Page 13. Customer demand continues to increase, and we are restarting idle lines early and investing now in hiring people to prepare Hexcel for higher production levels in 2027 and beyond. These hiring and training costs do impact near-term margins, but they position us to execute the production ramp and deliver for our customers.

As higher volumes move through our existing capacity, we will benefit from improved cost absorption and operating leverage. Importantly, we are maintaining our fiscal guidance in 2026. We see the production rate ramp up continuing into 2027 with very strong demand.

Our initial outlook on the A350, our largest program, is that we will deliver around 100 shipsets in 2027. Approximately a 25% increase over 2026. We also remain on track to achieve our target leverage of less than 2 times net debt to EBITDA, and our Board of Directors has approved an increase in our share repurchase authorization to $750 million.

As the OEMs reach their target levels of production for each program, we have a clear path to return our margins to the pre-pandemic level of 18% with upside based on the price realization that we are now seeing in the market. With our differentiated portfolio, technical capabilities and strong customer positions, we are confident in Hexcel's ability to convert this growth into stronger margins, cash generation and long-term value for our stockholders.

With that, Hilary, we are now ready to take questions.

We will now begin the question-and-answer session. (Operator Instructions)

Michael Ciarmoli, Guggenheim Securities.

Hey, morning, guys. Thanks for taking the question.

Tom or Jamie, just on the A350, the 25% increase next year, you guys have obviously been producing ahead of what Airbus has been delivering. It sounds like you're pretty confident in the line of sight there. Is there any risk of sort of a destock situation or that you would be slowed down at all? And then I guess, just tying in with the ramp on the A350, I mean, that's your biggest program, kind of points to incremental revenue of almost $100 million. It's the most margin-rich content. So should we expect any disproportionately higher margin expansion next year on maybe better incrementals as that program ramps?

Great. So obviously, the A350 this year so far through September had delivered 38 units. We've been calling 80 units all year in terms of our guidance. And we feel confident in that because we have firm purchase orders now that go right through the end of the year. And as we stated, we are a material supplier, so we're well upstream, at least 6 months ahead of Airbus. So the material we're delivering today is not for deliveries today, obviously, it's for deliveries next June and July.

So that's one thing is that we still see a very high probability that 80 is the right number for this year. And the reason we're saying 100 for next year is really we're triangulating a number of different signals. First of all, Airbus has publicly stated they're still on track to have 12 aircraft per month by 2028, and that next year is going to be right in line with that. The other thing is we have their skyline. They give us a long-term schedule that goes out two or three years, and that's consistent with the 100 deliveries next year.

In addition, we do supplier surveys of all the 15 or so sites around the world that take A350 material. And we ask them, what are they seeing in terms of their outlook and their near-term demand, and they are also confirming that 100 next year is a good number. And then also some of the initial purchase orders that we already have in place for next January and February reinforce that number.

So we feel confident that 100 is a good number and that we will not see destocking next year. And of course, 2028 is even going to be higher. We won't get into those numbers just yet. But we see a steady increase as Airbus proceeds toward 12 aircraft per month in 2028, which is their target.

Now in terms of margin expansion on the A350, as it expands, it obviously helps us in terms of our fixed cost absorption and getting more operating leverage. And so that will have a positive impact on margins, yes.

Okay, great. Thanks, guys. I'll jump back in the queue.

Okay, thanks, Mike.

Gavin Parsons, UBS.

Thank you. Good morning.

Good morning.

Is it possible to quantify the magnitude of the accelerated investment of growth this year? And then specifically looking at corporate, I think that lines up $17 million year-to-date. So just what you're assuming for corporate expense this year and what's a good run rate level? Thank you.

Right. Well, one way to quantify the investment we're making, I think, a good surrogate would be headcount. We have to hire new heads to support the line. So between last year and this year, we've moved forward three of our carbon fiber lines and started them up early. And obviously, we have to hire to support that. But we also have to support all of our other products, our engineered core, our structures and so forth.

And so at the beginning of this year, we said that we were going to hire 400 people over the course of the year. Well, as of the end of September, we hired about 525. So we're already well ahead of the pace. And by the end of the year, we'll probably hire another couple of hundred more. to support all the production that we see next year.

So that gives you some indication of the level of investment that we're making. And in terms of corporate expense, the SG&A, as Jamie said, was about 9% of sales, which was consistent with where it is last year. As our production goes up and our revenues increase, we don't expect that corporate costs are going to go up at the same level. And so we're targeting to get back to our 6.5% to 7% SG&A as a percent of corporate -- of total sales as we get up to the full rates of production.

Got it. Thank you.

You're welcome.

Scott Mikus, Melius Research.

Good morning, Tom.

Tom, Toray has signaled that it wants to get on to the A350 program eventually. Just curious how you're thinking about that when it comes to pricing as that LTA comes due in 2030, but also the capital investments you would need to make on that program because it seems like Airbus is going to take the production rate above 12 per month, maybe into the mid-teens at some point. But does it make sense to invest more in CapEx if Airbus is potentially going to shift some share to Toray?

Well, Scott, what I would say is material systems are very complex. They require a lot of validation of the material system itself and certification into the airplane. Those things take years. Then you have to industrialize it. I think it's very difficult to change a material system, certainly for any primary or secondary structure. So that's one thing to take into account. In terms of capital investments, we are capitalized sufficiently with the production lines that we have in place to achieve the 12 aircraft per month that Airbus has indicated by 2028.

If they go above that, that would require probably another carbon fiber line in the early 2030s. And so we would be in discussions with Airbus well in advance. It's probably about a three-year lead time for something like that, and we would be in discussions with them well in advance of that. So that's the way I would say it is we don't need any production to achieve the target production levels that they have right now, which is 12 aircraft per month by 2028. If they go above that in the early 2030s, we would talk with them about that at that time.

Okay, got it, thank you.

Richard Safran, Seaport Research Partners.

Thanks. Good morning. So I wanted to ask you guys about rotorcraft. There's a bit of concern out there. Army aviation budgets are under some pressure in fiscal '27 request. So I want to know if you could go into what, if anything, does that mean for Hexcel next year? And part 2 of that question is that you've mentioned CH-53K, UH-60 and more recently, the V-75. I just wanted to know what you're baking into your outlook here. Thank you.

Right. Well, rotorcraft is a very big product segment for us. And as you indicated, the CH-53K is our biggest program. So we have about $2.5 million to $3.5 million per shipset on the CH-53K. We have the whole material system, all the carbon fiber, all the resin plus some of the structures as well. That aircraft, of course, is for the Marines, not the Army. And so that's one thing about it. It's got a program of record of 200 units, and we are on track. I think Sikorsky has indicated they want to get up to about 24 per year, and they're on pace to achieve that. So that's going to be a good program for us for a long period of time.

And in addition to the 200 sales program of record, they've also done some foreign military sales initially to Israel, about 15 or 16 units and then possibly more in the future. So that's in terms of rotorcraft, that's the Marine. On the Army, we still have a huge position with the Black Hawk. We do the spares. Our shipset value that we've talked about is between $200,000 and $500,000 per shipset. And the Black Hawk, there's about 3,000 units in the US and then there's a lot of units overseas.

That program is likely to go for a very long time into the future. They already have firm orders through 2032. And not only do we do new production, but because we do the SARs on the blades for the Black Hawk, there's a lot of aftermarket, too. And so as it gets a lot of utilization, we'll see that. And so we see the Black Hawk as a very good program many years into the future. Sikorsky is upgrading the engines on it. They're also putting in place autonomy. So it's going to be a very capable aircraft.

You mentioned the MV-75 that Textron is building. That is also going to be a great aircraft, but that's still several years out in terms of when it enters into service. We have been talking to Textron about material packages on that. We see it's going to be a great program. But again, it's a few years out, so it doesn't impact us in the next few years.

Other Army helicopters like the CH-47 are mostly metallic. And so we have some shipset content on them, but it's not material. The other thing about rotorcraft is we do a lot with Airbus. We do a lot with Turkey and TAI. We do a lot with HAL in India. And so our rotorcraft exposure is much broader than just Army aircraft.

As I said, it includes the CH-53K. It includes Airbus and TAI and HAL. And then we still have a very strong position on the Black Hawk and we'll have a good position in the future on the MV-75.

Thank you very much.

David Strauss, Wells Fargo.

Thanks, Maureen. Tom, on the A350 and your forecast to get to 100 in '27, I would have thought if Airbus is actually going to get to '28 -- or sorry, 12 a month in 2028 that you would actually given your lead times that we would be looking at actually more than 100 shipsets in 2027.

Well, what I would say is we've looked at it, and that's the number that we think is consistent with that target. And it will go up a little bit more in 2028. When they say they're going to get to 12 aircraft per month in 2028, it won't be on a full year run rate. You probably won't see that until 2029. So if you think about 132 in 2029, which is 12 aircraft per month for Airbus with the 1 month off in August, we see the run rate in '27, '28 and then feeding into 132 in '29 as consistent. So 100 next year is right in line with that outlook.

Okay. And a quick follow-up. I don't know if you wanted to offer any comments as we're looking at 2027. Consensus right now is for low double-digit revenue growth, and I think somewhere kind of in the low 30% incremental margins. Is that a reasonable framework to think about for 2027 at this point?

Yeah, Jimmy, why don't you?

Yeah. So I think as we're going through right now pulling together our expected performance for 2027, we wanted to make sure we talked about our expectations around A350. You said, so we'll have more information on our full year outlook and expectations across the portfolio of products when we issue our results for 2020 -- we issue our results at the end of the year for 2026. So more to come on that. But generally speaking, we expect revenue growth into the next year. We expect that to result in some higher absorption of the fixed cost base over that period of time.

And we're going to see some of the near-term headwinds that we have today will result in some favorable performance as we move through next year. But we have to remind folks that some of the hiring that we've done here in the second half of 2026 is going to continue to provide a little bit of headwinds going into the first part of the year, given that there's some training and inefficiencies that come with onboarding the number of folks that we're bringing on board.

All right. Thanks very much.

Jason Holcomb, Morgan Stanley.

Hi, Tom. Hi, Jamie. Can you talk more about what you're seeing for demand in 4Q and 2027 that is driving the pull forward in hiring and the new lines coming on? Is it primarily the higher commercial rates? Is it a greater pull from maybe defense and space? I mean any additional details you can share would be great. Thanks.

Well, on the commercial programs, let's just go through them. A350, in the last quarter, they were at about 7 per month, and we expect that to continue into the fourth quarter, maybe tick up a little bit as Airbus pushes for their year-end. And then I explained the outlook for 2027 based on the different triangulations that we do. On the 320, Airbus is running about 55. That probably will step up. Airbus is still saying they're going to get to 870 deliveries for the full year.

So they're pushing hard in Q4. And they said that everything they need to produce those aircraft is already in their final assembly line in Toulouse and Hamburg and Tianjin and Mobile. So I think they have good confidence in that. In Airbus, we actually saw a pull of 10 on the 787 in the last quarter. And we've been calling 90 to 100 for the year, and they're on track for that, maybe even a little bit above. And on the 737, they've been pulling at about 41 for us. We're estimating at 500 for the year, and they seem to be on track for that, maybe even a little bit higher.

So on all the commercial programs, we see fourth quarter continuing in the same trend with some strong upside. Boeing and Airbus always close the year strong, and we don't expect this year to be any different. And then we also expect Q4 to be a little bit better on Defense and Space.

As we said, our fighter programs had off quarters. F-35 was kind of soft, but you just saw the big deal this morning on Lockheed 10 years at 156 aircraft a year. So we're not worried about the F-35 being soft in the quarter. That's just some choppiness, and that's not going to continue. So we've got great confidence in Defense and Space continuing to increase.

What we saw, as I mentioned in my comments, on space, for example, is launches were pretty slow. Launches seem this year to be a little bit lower than they were last year. SpaceX has been the dominant player on that. They don't use much composite today on their launching systems. We have some content, but not a lot. And the other launchers have been slower this year as they regroup from some issues that they had. And so we expect that to start to pick up, if not in the fourth quarter, but into 2027.

Thank you. Appreciate it.

Noah Poponok, Goldman Sachs.

Hey, guys. Good morning.

Just a follow-up right there. The full year revenue range implies that 4Q growth would be pretty strong and an acceleration from what you've seen earlier in the year. So I guess what's the split of, I guess, defense and commercial in that? Or to what extent does that count on the defense slippage coming right back in the fourth quarter versus moving into next year?

And then a second question I had, Jamie, you stated that your biggest focus, highest priority is margin expansion. Can you talk about where you think margins can go long term? And can you maybe -- I don't know if it's possible to quantify how much more spending you guys see in the near term related to the investments you've described?

Okay. Well, let me take the first part of that, which is the 2026 growth story. Q4, we see it stronger, obviously, sequentially to close the year. We are still targeting at least midrange of our guidance and possibly slightly above that. And really, the split between commercial and defense is going to be our kind of normal 65-35 split. So nothing extraordinary about that. And on margins, what I would say is Jamie has come in, brought some new perspectives, and I've asked him to take this lead on driving a very comprehensive margin improvement story. And maybe, Jim, you can talk a little bit about that and where you see the opportunity.

Yeah, absolutely. And so we've talked about -- historically, we had about a 200 basis point gap from our prior peak margin rates just given some cost inflation and other pressures that we've seen across the supply chain. Our objective in undertaking these margin expansion initiatives is to close that gap. And so as we've talked about getting back to our prior peak rates, it would be about 200 basis points lower. And then at our higher revenue levels, we could hone in on about 18% overall EBIT margins for the business.

The opportunity here would be for us to drive above that 18% to close that 200 basis point gap, and we can see the opportunity to approach somewhere closer to 20% given the initiatives that we're going to put in place to be able to do that. It's a combination of factors. So there's going to be some level of G&A efficiency that we undertake. There's some level of continuous improvement initiatives to improve our yields and efficiencies and our production processes.

But I think most importantly, it's price realization on our LTA renegotiations and making sure that we capture value for the product and technologies we're providing to our customers.

And then, Noah, you asked about spending CapEx to hit the near-term production ramp. And we said about $100 million. It's going to be in that range the next few years, possibly a little bit higher because don't forget, before the pandemic, we started a couple of lines in Decatur, Alabama, a new carbon line and a new PAN line, our precursor. We're going to pull those forward.

And so there'll be a little bit of spending over the next few years, but it's still going to be in the range of $100 million, $125 million as we go forward. We don't need to do any significant capital expenditure until the early 2030s if rates go up on the A350 or when we start to contemplate the next-generation single aisle. But for the near term, it's going to be in the range that we've described.

And Tom, just on P&L spending. So in the quarter, the discussion of incremental spending related to hiring and other drivers of forward growth. And then you guys have discussed maybe there's a little bit more of that in the near term that maybe pressures what the incremental would otherwise be. Can you quantify over the next few quarters, how long do you have to do that? And what does it do to the incremental or the year-over-year change? Or what is it in absolute dollars? Any framing you can help with for modeling the near-term margins?

Right, right. Well, as we said for this year, we're holding to our guidance. And so that gets us to about 13% for the full year in terms of operating margin. And in terms of incrementals, we've always said mid-30s, mid- to high 30s, and it's going to end up in that range. And then going into next year, we expect with continued operating leverage as these hires come on board, that will also support the margins. And as Jamie said, we've got a clear path to the 18%, but we're going to be looking at higher potentially up to 20% as we go forward. And it will be a straight line from 2027 as the volume comes in.

Ken Herbert, RBC. Your line is open. Please go ahead.

(Operator Instructions)

Ronald Epstein, Bank of America.

Yeah. Hey, good morning, guys.

Tom, I was wondering if you could speak to -- we've got 2 new awards out there for sixth-gen fighters at Boeing. And what kind of opportunity does that present for you guys? Because I would imagine those things must be up to their eyeballs in advanced materials.

Right. Both of those, the sixth-generation NGAD for the Air Force and the Navy. Boeing won both of them. So congratulations to them. Those were very intense competitions over many years. Those programs, because there's low observability and they're trying to increase range, there's a huge incentive for them to use lightweight materials like carbon fiber composite. And so we certainly will be working with Boeing to position for that. They developed demonstrators using existing material systems that the military has used for many years.

I mean if you go back many years to the F-18 and the F-22 and the B2 and then the F-35, that material system has always been Hexcel carbon fiber and then using resin from Syensqo. And so those -- that material system was part of the demonstrators. And so as they go into production, that's something that we will be talking to Boeing about as they finalize those programs.

But it does represent good opportunity. Sixth-generation fighters are going to depend on range and they're going to depend on observability. And those are 2 things that lightweight composite material really excels at because it's 5 times stronger than aluminum and 30% lighter. And so it does help increase range and reduce fuel and it also enables architectures that promote low observability.

Got it. Got it. And then in the press release and in the presentation, you guys mentioned that there was a little bit of softness with launches and rocket motors, which seems a little counterintuitive with what's going on. Just curious, the timing thing or what's going on there?

Well, timing, as I was saying, launches this year look a little bit lighter than last year, and most of them are SpaceX. And SpaceX has been pretty public about not using composite yet in their launch vehicles. And so some of the other launchers that use a lot of carbon fiber composite haven't had as many launches this year, if you look at the numbers. And so we have bigger shipsets on some of those other folks. And for various reasons that have been well documented in the press, they are in a pause. And so that will start to pick up as they resolve the issues that they encounter.

Got it. Got it. Thank you.

Okay. Thanks.

Pete Skibitski, Alembic Global.

Hey, good morning, guys. Hey, Tom, you alluded earlier to the new Lockheed F-35 contract, the 10-year. Just curious, I don't know if they let suppliers in yet kind of in terms of the terms and conditions as they were working the contract with the Pentagon or if it was brand new to you today. But I was just wondering conceptually how you think about the impact to Hexcel from that level of visibility on that program.

Yes, we don't know yet. I mean I literally just read it before I came on to this call in the trade press. 10-year deal that is looking at 156 aircraft per year. So it goes out quite a long way. Don't know what the conditions are and how those will flow down. I assume they'll be pretty typical. The program has already been in existence for a long time.

But I thought it was just encouraging is that there is a huge demand signal. It's multiyear, and that program is going to extend many years into the future, which is good for us because we have a significant position on it. But it's great, I think, for our defense forces and our war fighters because that's a very capable aircraft, all 3 versions of it. So it was great news to read this morning.

Okay. Great. Just one follow-up for me. Notwithstanding your prior comments about production rates on the commercial side, but you had Airbus strikes in Spain over the quarter or so and then obviously, some riot issues in France. Have you noticed any incremental changes to demand pull that you thought might be a result of the strikes that will be -- now that they're settled that they will kind of accelerate now that they're complete? And then would the riots, do you think impact either your supply chain or your French facilities at all, do you think?

Great. Regarding Spain, as you said, they did resolve the labor issues, and we didn't see any impact at all on production or pull. And similarly with the situation in France, we haven't seen any impact as a result of that. We obviously will monitor it and we read about it in the press. We talk to Airbus very frequently. But so far, we have not seen any impact from those issues.

Okay, great. Thank you.

Gautam Khanna. Cowen.

Yes, thanks. Good morning. I was wondering just to follow up on an earlier question on the A350 inventory that's in the channel. If you could describe maybe how aligned the various customers that you ship to are in terms of how much they're pulling from Hexcel. And maybe if you could give us an update like through Q3, how many shipset equivalents do you think you've actually moved into the channel? And just again, fundamental question is really around like confidence that what happened last year doesn't happen maybe early next year, where you're shipping ahead and then they just kind of pull back or keep you flatter for longer. What gives you that conviction?

Well, so as I said, last quarter, they pulled at about 7. So that would be 21. So we've had probably about the equivalent of 60, 65 already pulled for the year, which leaves them with another 20 or so for the last quarter, which is very achievable at a rate of 7. So we see them perfectly in line with what we have called in our guidance. And we talked to Airbus. We talked to all of the locations. And I said there was about 15. Some of them are part of Airbus, like Airbus Atlantic and now Kinston or Northrop in Salt Lake City or Airbus Aerostructures in Germany.

So a lot of different locations that are getting material. We talk to them and we talk about their outlook. And that's why we have confidence in the fourth quarter outlook. In terms of inventory in the channel, one of the things that Airbus has said is that it's in interiors and seats that have been one of the drawbacks. Well, you can build a plane without interiors and seats.

And then when they come, you can finish the airplane off and deliver it. And so there's no doubt some of that, that's happening. But as we said, we're not too concerned about destocking in 2027 because we see this demand signal of 100 units next year, an increase from this year. So we see strong demand pull throughout the year year-to-date, as I said, in the 60 to 65, strong demand signals with firm purchase orders for Q4 and then equally strong demand signals going into 2027.

I guess what I'm asking though, how does that differ than like what -- how you felt a year ago? Because if you remember, there was a similar dynamic. Was there just not the same demand signals in late '25 or 2026?

Well, demand for 2025 were the exact opposite. When we were in the middle of 2024, there was indications that '25 might have 98 units, and then it dropped to 94. We built our plan at 84 and eventually, they delivered 57. So it kind of dropped throughout the year, and we could see that. And we reflected it. If you recall, we actually dropped our guidance twice in 2025.

This year, we've seen the opposite. We've seen the demand signals continue to strengthen and go up as we've gone throughout the year, which is why we pulled the trigger on all the hiring and the start-up of the lines because we're seeing the demand and we're leaning into it. And that's the big difference is last year, it was the other way. This year, it's all positive and growing and the production rates have been increasing exactly in line with their public statements.

Thanks a lot. I appreciate it.

Myles Walton, Wolfe Research.

One clarification and one question. On the clarification, Jamie, what is the tax rate implied in the new EPS guidance that's been reiterated? Is it 15%, 17%? And then a question for Tom. Can you just comment on the China carbon fiber for aerospace application? I know one of the larger firms they are open to T1100, IM10 type grade product line this summer, starting low quantities. But I'm just curious if you think that they are a future competitor with you on, say, an Airbus platform?

Yes. So on the tax rate assumption, so kind of in that 17% to 18% range for the fourth quarter time frame, we do expect the tax rate for the full year to be sort of maybe slightly north of 16% for the full year period, but modestly higher here in the fourth quarter as we close the year out within that range.

Good. And then regarding China, yes, at JEC, there was one of the Chinese companies that did indicate they had a version of T1100, what we call IM10 or 11 that they were making. So we don't know yet how far along they are in terms of getting it qualified. It's not on any programs today. So there's still probably work for them to do to finalize it, qualify it and then be able to industrialize it for aerospace programs and then get it put on to a program. It's not realistically a competitor on current generation programs with Airbus or Boeing.

Next generation, depending on how far out it is, perhaps they could compete. There are some geopolitical issues that people would probably want to take into account as well. But we watch it carefully. They're capable in China, so we don't certainly disregard them, and they have great resources. But at this point, I think it's still a bit early for them to be a competitor, certainly on current generation products, maybe for the next generation, but we'll see.

Sheila Kahyaoglu, Jeffries.

Good morning, Tom. Jamie, thank you so much.

I wanted to ask on margins. You've hired about 525 people year-to-date. You're going to do more. Assuming that number gets up to 700 or so, do we think about your excess cost base being about $50 million this year and how that translates into '27? And just as we think about the higher COGS costs, I know you have a hedging plan and procurement contracts that kind of spread that cost. How do you, I guess, see those two items, both labor and raw material inputs factoring into margins in '27?

Yes. So as we think about that, there's a bit of a rolling cadence there. So we add the heads, the heads come on board. There's a bit of an inefficiency training, start costs that occur, the volume fills in and we get the absorption benefit from the efficiency as we bring those individuals on board. And so as we hire, right, so one of the dynamics here in the third quarter was we had lower volume given the seasonality, and we were hiring to support, right?

So that put a little bit of incremental pressure on margin in the third quarter time frame, which we didn't see last year because of, as Tom noted, we saw a falling demand environment in the back half of last year, whereas today, we see a rising demand environment coming into this third quarter of this period. So we expect that trend to continue a little bit into the fourth quarter here as we do the hiring.

We have that baked into our expectations for the 2026 time frame. As it relates to '27, we would expect maybe a little bit of first half inefficiency from the hiring we did in the fourth quarter and third quarter time frame until they get fully up to speed. But then again, as we move through the course of the year, we would gain efficiencies and the absorption on the higher volume and see margins improve.

Right. And as we said, our target as we get up to the full rates of production is we see a path to the 18% margin. But with better price realization, we think that could go as high as 20% by the end of the decade. Now you also asked about hedging. and cost of goods sold. As Jamie mentioned, oil prices are going up. Acrylonitrile is a petroleum derivative, but we do hedge that. We hedge propylene, which is also a byproduct of petroleum as a surrogate. And that's an eight-quarter hedge. So we are cushioned from some of the high spikes that we've seen in oil pricing and what the impact could be on acrylonitrile.

But as Jamie also said, acrylonitrile, while it's the core basis of carbon fiber, it's only single digits in terms of cost for us in terms of revenue. So there's all the value-added that comes afterwards, which makes up our product. Acrylonitrile is a relatively small purchase for us.

And the variability we see is going to be relatively small because of the mitigation programs we put in place.

Thank you so much.

Thanks.

Thank you for your questions. There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.