Q2 2025 Hexcel Corp Earnings Call
Operator: The Hexcel second quarter earnings call.
Operator: All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, please press star 1 on your telephone keypad.
Hello and welcome to the hexyl second quarter earnings call all lines have been placed on mute to prevent any background noise.
Kurt Goddard: I would now like to turn the conference over to Kurt Goddard, Vice President, Investor Relations. Please go ahead.
After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during this time, please press star 1 on your telephone keypad,
Kurt Goddard: Hello, everyone. Welcome to Hexcel Corporation's second quarter 2025 earnings conference. Before beginning, let me cover the formality.
Speaker Change: I would now like to turn the conference over to Kurt Goddard vice president investor relations. Please go ahead.
Kurt Goddard: I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this 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. Such factors are detailed in the company's SEC filings and earnings release.
Kurt Goddard: Hello everyone. Welcome to Hexcel Corporation second quarter 2025 earnings conference call. Before beginning, let me cover the formality.
Kurt Goddard: I want to remind everyone about the Safe Harbor. Provisions, related to any forward-looking statements. We may make during the course of this call.
Kurt Goddard: Certain statements contained in this call May constitute forward-looking statements within the meaning of the private Securities. Litigation Reform, Act of 1995.
Kurt Goddard: 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.
Kurt Goddard: 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. cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that.
Judge factors or detailed in the company's SEC filings and earnings release.
Kurt Goddard: With me today are Tom Gentile, our Chairman, 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.
Kurt Goddard: 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 Gentilly, our chairman CEO and president and Patrick, winterlich our Executive Vice President and Chief Financial Officer.
Tom Gentile: Now, let me turn the call over to 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 its uniquely extensive range of advanced lightweight composite materials to meet the requirements for the record levels of new commercial aircraft on order with Airbus and Boeing, as well as supporting military applications and growing global demand. 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 aircraft per month for the 737 MAX aircraft.
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 Tom. Thanks Kurt. Hello everyone and thank you for joining us today as we discuss our 2025 second quarter results.
Kurt Goddard: The fundamentals for the commercial Aerospace industry and for hexels, outlooks continue to be very positive.
Kurt Goddard: Excel has a strong Market position with its uniquely extensive range of advanced, lightweight Composite Materials meet the requirements for the record levels of new commercial aircraft on order with Airbus and Boeing as well as supporting military applications from growing Global defense spending.
Tom Gentile: Solid progress also continues for the 787 build rate as Boeing moves toward producing seven aircraft per month in 2025, following the apparent resolution of supply chain. For Airbus, the outlet 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 pushed monthly build rates through the 60s in 2020. Airbus continues to project that they will achieve a production rate of 75 aircraft per month on the A320neo program by 2027.
Kurt Goddard: Starting with bowling, there is a positive momentum for their Key Programs with bowling stating that they are now at a production rate of 38, aircraft per month for the 737 Max aircraft.
Kurt Goddard: Style progress. Also continues to the 787 build rate as Boeing moves toward producing 7 aircraft per month. In 2025 following, the apparent resolution of supply chain issues.
Kurt Goddard: 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.
Tom Gentile: The A350, Hexcel's largest program, is currently one of our major challenges. Its Airbus looks to stabilize the program's build rates and move monthly rates towards seven by the end of 2025. In addition to A350 production challenges due to supply chain disruption, we have seen some de-stocking 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're still targeting to achieve a build rate of 12 aircraft per month on the A350 program by 2028.
And then push monthly build rates through the 60s in 2026, aerbus continues to project that they will achieve a production rate of 75 aircraft per month on the A320 Neo programmed by 2027.
Kurt Goddard: The 8350 hexo largest program is currently 1 of our major challenges at Airbus, looks to stabilize the program's build rate and move monthly rates towards 7 by the end of 2025.
In addition to 8350 production challenges, due to supply chain disruption, we have seen some deep stocking impact in Europe, in the second quarter, based on high levels of inventory for 8350 for certain parts, including the wings.
Kurt Goddard: As previously communicated, we expect this destocking to continue through the third quarter.
Tom Gentile: Remember that the ship set for Hexcel on the A350 is between $4.5 million and $5 million per ship set, 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 requirements from these two 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 a billion dollars of cash cumulatively over the next four years.
Kurt Goddard: Airbus has indicated that the dacking should end as we go into Q4 and there are still targeting to achieve a build rate of 12 aircraft per month on the on the 8350 program by 2028.
Kurt Goddard: Remember that the ship set for Hexcel and the a350 is between 4 and 1.5 million and 5 million per ship set. And each monthly step up in the monthly a350 build rate. Bring significant Revenue in operating leverage benefits for Hexcel.
Kurt Goddard: the medium to longer term Outlook is very positive for Hexcel including the expected multi-decade production, like, for both the 8350 and the 7887
Tom Gentile: Demand within other commercial aerospace is also solid, and second quarter revenues saw growth both year-over-year and sequentially. As a reminder, the Martin Large Cabin Business Jets now have extensive composite content which shifts that value between $200,000 and $500,000. 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 Notably, NATO members in Europe have indicated that they will increase defense spending to 5% of GDP, which ultimately translates to higher and sustained build rates for most class of aircraft.
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 accept expect to generate over a billion dollars of cash cumulatively over the next 4 years.
Kurt Goddard: 500000 per ship set.
Kurt Goddard: the second quarter of 2025 saw a strong defense sales with broad strength, across a number of domestic and international programs,
Kurt Goddard: Military and defense budgets around the globe, continue to strengthen.
Tom Gentile: Development of new platforms is also encouraging, such as Six Generation Fighters and Economist . Hexcel participated in the Paris Air Show last month, which provided a confident outlook for the airspace industry. and where we reinforced existing relationships, announced new relationships, and highlighted recent advances with our innovative technology for lightweight materials.
Notably NATO 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 6 generation Fighters and our Economist drones.
Hexyl participated in the Paris Air Show last month which provided a confident outlook for the airspace industry.
Tom Gentile: Summation of notes included, Embraer and Hexcel celebrated 50 years of Hexcel supplying lightweight composite solutions by signing a preferred supplier agreement for composite. Hexcel has been a longstanding provider to Embraer on a range of advanced lightweight composite materials, including prepreg, engineered core, and advanced structure. Various Embraer aircraft platforms use these lightweight composite materials, such as the C-390 military transport and the KC-390 tanker, the E-2 jet family of narrow-body regional aircraft, and the Phenom 300 business We also signed a long-term agreement with CONSWR, the Norwegian defense and aerospace systems provider. The agreement covers the supply of Hexcel's lightweight engineered honeycomb and pre-bred products for strategic production programs over five years.
Kurt Goddard: And where we reinforce existing relationships, announced new relationships, and highlighted recent advances with our Innovative technology for lightweight materials.
Kurt Goddard: So might have of of notes, included, embryo and hexyl celebrated, 50 years of hexyl, supplying lightweight composite solutions by signing a preferred supplier agreement for composites.
Excel has been a long-standing provider to embryo on a range of advanced lightweight Composite Materials including pre-preg engineered core and advanced structures.
Various embryo aircraft platforms. Use these lightweight Composite Materials such as the 3, the c390 military transport in the KC 390 tanker. The e2j family of nearby Regional aircraft and the Phenom 300 business Jets.
Kurt Goddard: We also signed a long-term agreement with kongsberg, the Norwegian Defence and Aerospace Systems provider.
Tom Gentile: This is just one example of Hexcel's strong European presence in relation to the increasing defense spending in Europe.
Tom Gentile: In addition, we announced a collaboration with Flying Whales and Hexcel on an exciting project to develop an advanced solution for modern airship structures. Project will utilize a broad range of Hexcel's products, and especially Hexcel's lightweight carbon fiber, which has been selected for the pultruded tubes that compose the skeleton of the Flying Whales airship. Each airship is forecast to have a ship set of more than a million dollars.
Kurt Goddard: The agreement covers, the supply of hex cells, lightweight, engineered honeycomb, and pre-reg products for strategic production programs over 5 years. This is just 1 example of hexyl, strong European presence in relation to the increasing defense spending in Europe.
Tom Gentile: 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 changes. 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 airlines.
Kurt Goddard: In addition we announced a collaboration with flying whales in, hexyl on an exciting project to develop an advanced solution for modern. Airships structure project will utilize a broad range of hexels products and especially excel's lightweight carbon fiber, which has been selected for the protruded tube that composes the skeleton of the flying world's Airship. Each Airship is forecast to have a ship set of more than a million dollars.
Kurt Goddard: Looking at our plans for results. For Q2 2025, we generated sales of 490 million and adjusted diluted EPS of 50 cents 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,
Kurt Goddard: Commercial Aerospace sales in in the second quarter of 2025, we're 293 million down 8.9% on a constant currency basis from the same period in 2024. Lower sales. Year-over-year were primarily due to the 8350 and the Boeing 787
Tom Gentile: To share some additional colors, commercial aerospace sales were up on a sequential basis. The Boeing 787, the 737 MAX, and the Airbus A320neo all increased sequentially, as did other commercial aerospaces. The A350 sales were lower as anticipated due to Channel D stock. In defense-based and other, sales totaled $197 million, up 7.6% in constant currency in the same period in 2020. Growth was driven by the CH-53K, two international fighter programs, and a strong core for space, including launchers, rocket motors, and satellites. Conversely, the B-22 Osprey continues to weaken as expected. as that program comes to the end of its production.
Kurt Goddard: However, this was partially offset by a 5.1% increase in sales within the other commercial Aerospace from International demand.
Speaker Change: To share some additional colors.
Speaker Change: Commercial Aerospace, sales were up on a sequential basis. The Boeing 787 the 737 Max, and the Airbus A320 Neo.
Speaker Change: All increased sequentially. As did other commercial Aerospace, the a350 sales were lower as anticipated due to channels these stocks.
In defense base and others sales. Total 197 million up 7.6% in constant currency in the same period in 2024.
Speaker Change: Growth was driven by the CH 533 International fighter programs and a strong quarter for space including launchers Rocket motors and satellites.
Tom Gentile: However, the overall continued growth in defense underscores capabilities and value Hexcel Lightweight Materials brings to the military market.
Speaker Change: Conversely, the B22 Osprey continues to weaken as expected as that program. Comes to the end of its production life.
Tom Gentile: With lower than expected sales volume 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.
Speaker Change: However, the overall continued growth and defense, underscores capabilities and value Excel lightweight materials brings to the military Market.
Speaker Change: Within with lower than expected sales, volume 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. Not only notably the 8350 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.
Speaker Change: Combined with actions that we are taking to reduce inventory levels.
Tom Gentile: In addition, we are now beginning to feel the impact of tariffs. However, as production rates increase 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 in 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, such as 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.
Speaker Change: And then margins also were impacted by this lower overhead absorption. In addition, we are now beginning to feel the impact of terrorists. However, as production rates, increase in the back half of 2025 and into 2026, the increase by volume will drive operating, leverage and expanded margins.
Tom Gentile: 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 seven 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 We are also introducing more escalation and pass-through clauses for our sales contracts whenever we need them. We will continue to seek price increases to offset the inflation we have encountered over the last several years as our contracts come to the end of the year.
Speaker Change: Given this backdrop, we continue to remain extremely Vigilant on the internal elements of our business that we can control such as on-time delivery. We were pleased to receive a supplier Award for best performer from Airbus. This quarter recognizing hexyl for our outstanding delivery and quality.
Speaker Change: We continue to push pricing and recover costs inflation impacts from contracts uh 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 and all our contract. Renewals to get pricing to offset, recent material, energy, and labor, cost pressures, and we will continue to do so.
Speaker Change: We are also introducing more escalation and pasture Clauses to our sales contracts whenever we can.
Tom Gentile: As we have mentioned in recent quarterly calls, we are managing headcount very tightly and will only add people when the demonstrated production rates clearly show. 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 headcount we ended with in 2020. This will be more than 400 heads short below our original plan for 2020. As of June 30th, our headcount was below fiscal year-end 2024 levels and decreased sequentially from the end of the first quarter. Our strong focus on operational excellence and general cost control remains as robust as ever as we continually work to drive efficiency and productivity.
Speaker Change: 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.
Speaker Change: As we have mentioned, in recent quarterly calls, we are managing headcount. Very tightly and will only add people when the 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 headcount we ended with in 2024.
This will be more than 400 heads short.
Speaker Change: Below. Our original plan for 2025 as of June 30th, our headcount was below fiscal year, end 2024 levels and decreased sequentially from the end of the first quarter.
Tom Gentile: 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 facilities.
Speaker Change: Our strong focus and operational excellence in general cost control remains as robust, as ever as we continually work to drive efficiency and productivity.
Tom Gentile: 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 products facility in that country. Production stopped at the end of June, and the majority of our employees have departed, leaving 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. This Belgium site was operating as part of Hexcel for decades. But over time, the cost structure became untenable.
Speaker Change: We also continue to move forward on our future P 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,
Speaker Change: 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 products facility in that country.
Speaker Change: Productions stopped at the end of the of June and the majority of our employees have departed, leaving a small residual team to decommission the site and prepare it for sale.
Speaker Change: We took a restructuring charge of 24 million in the second quarter relating to Severance and Associated costs for the Belgium site.
Tom Gentile: While we are incurring near-term costs to close the site, there will be a longer-term reduction in structural costs within the engineered product 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 Pottsville, Pennsylvania, so there is no impact to our top line. The previously announced investiture of our Australian Class Fibre Pre-Preg and Recreation business is continuing, and we plan to provide an update later this year.
Speaker Change: This Belgium site was operating as part of hexyl for decades, but over time, the cost structure became untenable.
Speaker Change: While we are incurring near-term cost to close the site. There will be a longer term reduction in structural costs within the engineered product segment of our business from this action.
Speaker Change: Please also note the production and sales from this plant have been transferred to other existing hexyl sites, largely to our facility in Morocco, but also to our plant in possible. Pennsylvania. So there is no impact to our Topline.
Tom Gentile: We also recently divested our additive manufacturing business in Hartford, Connecticut as part of our overall streamlining of non-core 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. 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.
Speaker Change: The previously announced investor of our Australian class fiber pre-preg and Recreation business is continuing and we plan to provide an update later this year.
Speaker Change: We also recently devest our additive manufacturing business, in Hartford Connecticut at part of our overall streamlining of non-core activities, so we can focus on the upcoming production rate increases in Commercial and Military Aerospace.
Hexyl is well positioned on off 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 US and Europe and we have the right team to drive growth.
Speaker Change: As Bill greats increased, we are well, positioned to drive ibida and free cash flow while delivering strong returns to our shareholders.
Tom Gentile: OEM build rates increased, and they will be a part of our growth in the next few years. Indeed, once Airbus and Boeing hit their 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 would 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.
Speaker Change: OEM build rates increased and they will be a part of our growth in the next few years. Indeed, once Airbus, and Boeing hit their publicly announced Peak build rates across all their programs.
Speaker Change: Excel will see in additional 500 million dollars in annual revenue.
Speaker Change: That is without winning another contractor program.
On top of this organic growth. We also believe that there is a pay a place for targeted and disciplined m&as.
We continue to be vigilant for appropriately, priced assets, that would provide synergistic benefits to hexyl and complement. What we do today in the sphere of advanced material science technology,
Tom Gentile: In the meantime, we have continued our periodic repurchase of Hexcel stock, 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 decade.
Patrick Winterlich: With that, let me turn it over to Patrick to provide more details on the numbers. Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. continue to hedge foreign exchange exposure over a 10 quarter time horizon. The year-over-year sales comparisons I will provide are in constant current. thereby removed the foreign exchange impact. 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. We experience lower sales year-over-year with each of the four major commercial aerospace programs. including the Airbus A350 and A320 and the Boeing 787 and 737 MAX.
Today, 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 hexyl stocks in indeed we bought back another $50 million of shares in the second quarter. This now brings our repurchases to a hundred million dollars for the year and 350 million or almost 6% of our outstanding stocks in the last 18 months.
Speaker Change: With that, let me turn it over to Patrick to provide more details on the numbers. Patrick
Patrick: As a reminder, regarding foreign exchange exposure XL 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.
Patrick: The commercial Aerospace Market reported approximately 60% for total second, quarter sales in 2025 at 489.9 million.
Patrick: Second quarter, commercial Aerospace, sales of 293 million, increased 8.9% compared to the second quarter of 2024.
Patrick Winterlich: As the overall aerospace supply chain continues to experience challenges ramping up as quickly as the market demands for A350 sales declined year-over-year and sequentially, as expected, on Channel D stocking, as Airbus has faced supply challenges causing delays in the rate Tom mentioned 787, A320neo and 737MAS all increase frequency. Sales for other commercial aerospace in the second quarter increased 5.1% year-over-year, led by international demand. The defence, space and other represented approximately 40% of second quarter sales and totalled $196.8 million. increasing 7.6% from the same period in 2020. For rotocrafts, the CH53K and Blackhawk programs grew year over year, partially offset by the sun setting V22, and a softer quarter for a The space market grew strongly year-over-year, including both from the traditional defence primes and private space markets.
Patrick: We experienced lower sales year-over-year with each of the 4 major commercial Aerospace programs, including the Airbus a350 and 8320, and the Boeing 787 and 737 Max.
As the overall Aerospace supply chain continues to experience challenges, ramping as quickly as the market demand supports.
Patrick: 8350 sales, declined year-over-year and sequentially as expected on channel D stocking. As Airbus has say Supply challenges, causing delays in the rate ramp
Patrick: As Tom mentioned, 7878320 Neo and 737 Mass all increased sequentially.
Sales for other commercial Aerospace in the second quarter increased 5.1% year-over-year led by International demand.
Patrick: Defense space and other represented approximately 40% of the second quarter sales and total. The 196.8 million increasing 7.6% from the same period in 2024.
Patrick: For Roto, C. The ch53k and Blackhawk programs through year-over-year. Partially offset by the sun setting, 322 and a softer quarter for Apache.
Patrick Winterlich: Growth was across multiple space applications, including launchers, rocket motors, and Gross margin of 22.8% in the second quarter of 2025 decreased from 25.3% in the second quarter of 2024. As lower sales and inventory reduction actions negatively impacted operating levels. Specifically, this softer 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. We 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 2020.
Patrick: The space markets grew strongly year-over-year, including both from the traditional defense primes and private space companies.
Growth was across multiple space applications, including launches Rocket motors and satellites.
Patrick: Gross margin of 22.8% in the second quarter of 2025, decrease from 25.3% in the second quarter of 2024, as lower sales and inventory reduction. Actions negatively impacted operating Leverage.
Patrick: Specifically this softer gross margin reflects, the impacts of our underutilized, carbon fiber assets, and the initial impact of increased thales was started in the second quarter.
Patrick: We expect upcoming production rates increases especially in commercial aircraft to create operating leverage and drive increased margins as we go through the year.
Patrick Winterlich: 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 percentages.
Patrick: As a percentage of sales selling General and administrative expenses and warranty, expenses were 11.7% in the second quarter of 2025 compared to 10.9% in the comparable prior year period.
Patrick Winterlich: © The Bulletproof Executive 2013 The closure of the Engineer Products Facility in Belgium drove the other operating expense of $24.2 million in the second quarter of 2020. These costs consist primarily of severance expenses, with the majority of cash outflows expected to occur in the second half of 2020. 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 plant closure will help us reduce our engineered product cost structure as Belgium is a high cost market for the product being manufactured.
Patrick: Upgrades to financial and mass manufacturing, it systems combined with some additional professional fees contributed to higher operating percentages expenses as a percentage of sales.
Patrick: The closure of the engineered product facility in Belgium drove the other operating expense for 24.2 million in the second quarter of 2025.
Patrick: These costs consist primarily of severance expenses with the majority of cash out, flows expected to incur to occur in the second half of 2025.
Patrick Winterlich: Adjusted operating income in the second quarter was $54.2 million, or 11.1% of sales. We paid $72 million, or 14.4% of sales, in the comparable five-year period. The year-over-year impact of exchange rates in the second quarter to operating income Now turning to our two segments, the Competent Materials segment represented 80% of total second-quarter sales and generated an adjusted operating margin of $14.1 million. This compares to an adjusted operating margin of 17.2% in the prior year period. The engineered product segment, which is comprised of our structures and engineered corpus. represented 20% of total sales, and excluding the impact of the Belgian plant closure, generated an adjusted operating margin of 10.9%.
Patrick: Let me reiterate what Tom said they will be minimal impact to sales with the closing of this facility as production is transferred to other hexyl sites and longer term. This plant closure, will help us reduce our engineered product cost structure. As Belgium was a high cost market for the products being manufactured
Adjusted operating income in the second quarter was 54.2 million or 11.1% of sales compared to 72 million or 14.4% of sales in the comparable Pi year period.
Patrick: The year-over-year impact of exchange rates in the second quarter to operating income was favorable by approximately 10 basis points.
Patrick: Now, turning to our 2 segments, the competent material segment represented. 80% of total second, quarter sales and generated an adjusted operating margin of 14.1%
2% in the prior year period.
the engineered product segment, which is comprised of our structures and engineered core businesses represented, 20% of total sales and
Patrick Winterlich: This compares to an adjusted operating margin of 14.3% in the prior year. Net cash used by operating activities in the first six months of 2025 was $5.2 million. has the net cash provided of $37.2 million in the first six months. Working capital with a cash use of $124.5 million in the first compared to a cash use of $118.3 million in the first quarter. Capital expenditures on an accrual basis were $31.8 million in the first six months of 2025. compared to $41.1 million in a comparable five-year period. The free cash flow in the first six months of 2025 was negative...
Patrick: and including the impact of the Belgian plant closure generated and adjusted operating margin of 10.9%.
Patrick: 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 for 124.5% of 2025 compared to a cash used of 1119.3 million in the first 6 months of 2024.
Capital expenditures on an acral basis, were 31.8 million in the first 6 months of 2025 compared to 41.1 million in the comparable Pi year period.
Patrick Winterlich: $1.6 million, which compares to negative $14.4 million in the first six months. We technically use cash in the first half of the year, and this year we... The adjusted EBITDA totaled $172.5 million in the first six months of 2025, compared to $204 million in the 2030s. 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, was approximately $134 million.
Patrick: free cash flow in the first 6 months of 2025 was negative -46.6 million, which compares to negative -4.4 million in the first 6 months of 2024,
Patrick: We technically use cash in the first half of the year and this year was no different.
Adjusted ebit are totaled 172.5 million in the first 6 months of 2025 compared to 204 million in the 2024.
Patrick Winterlich: The Board of Directors declared a $0.17 quarterly dividend yesterday. The dividend is payable to stockholders as a record as of August 8th, with a payment date of August 1st.
Patrick: We used 50.5 million to repurchase stock during the second quarter. The remaining authorization under the share repurchase program as of June, 3020, 2025 was approximately 134 million.
Patrick Winterlich: We are reaffirming our 2025 guidance with the caveat that we are still reviewing the recent changes. Our initial assessment is that our cash taxes will be lower in 2025 than our book . due to the deductibility of past R&D.
Patrick: The board of directors, declared a 17 Cent quarterly dividend yesterday. The dividend is payable, to stockholders of records as of August 8th with a payment date of August 15th.
Patrick Winterlich: with what is in essence a one time I would also like to clarify that our guidance of an effective tax rate of 21.5% is the underlying ETR we are currently assuming for the third and fourth quarters of 2025. Therefore, given some discrete adjustments in the first six months of 2025, we expect the average adjusted ETR for the full year of 2025 to be lower than 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 laws.
Patrick: We are reaffirming our 2025 Guidance with the caveat that we are still reviewing. The recent change to tax laws. Our initial assessments is that our cash taxes will be lower in 2025 than our book taxes due to the deductibility of past r&t costs.
Patrick: With what is in essence, a 1-time catch up.
Patrick: 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.
Patrick: 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%.
Patrick Winterlich: We continue to forecast a tariff impact of $3 to $4 million per quarter. However, the tariff situation remains uncertain, with more potential changes. Our regional sourcing helps us to insulate us from the impact of tariffs, and we will continue to work on mitigations and pass-throughs so that...
Patrick: 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 as harass impacts of 3 to 4 million dollars per quarter. However, the Tariff situation remains uncertain with more potential changes to come.
Patrick Winterlich: And finally, I would like to share a reminder of the typical third quarter sale seasonality that arises from European summer.
Patrick: Our regional sourcing helps us to insulate us from the impact of towers and we will continue to work on mitigation and pass throughs. So that takes time.
Tom Gentile: With that, let me turn the call 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. The 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 than the older generation. And as defense budgets around the world continue to get stronger, this provides an additional tailwind.
Patrick: And finally, I would like to share a reminder of the typical third-party sales seasonality that arises from European summer vacations.
Tom: With that, let me turn the call back to Tom.
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 the 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 than the older generation. It replaces
Tom Gentile: 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 a billion dollars of cash flow in the next... Hexcel has the technology, the lightweight product portfolio, customer relationships, the qualifications, and the team to deliver as commercial production rates fully recover and defense spending increases.
Tom: and as Defence budgets around the world continue to get stronger, this provides an additional Tailwind for hexa.
Tom: Given this landscape. We are extremely confident that with hex cells 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 to drive growing Evita and generate significant free cash flows for many years to come to repeat, we expect that we will generate over a billion dollars of cash flow in the next 4 years.
Tom: Excel has the technology the lightweight product portfolio customer relationships, the qualifications and the team to deliver at commercial production rates fully recover.
Tom Gentile: We appreciate your engagement with us.
Operator: With that, we're ready to take your questions. Thank you.
Tom: And defense spending increases. We appreciate your engagement with us today.
Tom: Take your questions.
Operator: If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again.
Operator: Please ensure that your phone is not on mute when called upon. We ask that you please limit yourself to one question and one follow-up. Thank you.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad, if you would like to withdraw your questions, simply press star 1 again.
Please ensure that your phone is not on mute when called upon.
Ken Herbert: Your first question comes from Ken Herbert of RBC Capital Markets. Your line is open. Yeah, good morning, Tom and Patrick.
We ask that you please let yourself to 1 question and 1 follow-up. Thank you.
Ken Herbert: Your first question comes from Ken Herbert of RBC Capital markets. Your line is open.
Ken Herbert: Yeah. Hi. Good morning. Uh, Tom and Patrick
Tom Gentile: Hey, 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 So we had built our plan around 84 and we dropped that to 68. at our last call. What we're seeing now is something in the low. for the full year. But what we do see is that we think that de-stocking should end in the third quarter.
Speaker Change: Hey, Tom maybe or Patrick just to start off. Can you outline specifically what the assumption is on on either build rates or delivery rates or sort of the, the growth in the second half, uh, for the a350 program.
Speaker Change: Uh, yes and sure. Um, so as we've said, that's a program that has 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 had built our plan around 84, and we dropped that to 68.
Speaker Change: Uh, in our in our last call, what we're seeing now is is something in the in the low 60s uh for the full year.
Tom Gentile: Airbus has said that they're going to get to seven aircraft per month in the September time. And so we're expecting a pretty strong fourth quarter, probably 20-21 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 seven in September, that Q4 should be pretty strong as we get past the destockage. Great, that's very helpful.
Speaker Change: Uh but what we do see is that we think that these stocking 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, in the fourth quarter of of demand pull from us. And so that's how we see the year shaping out. It's, 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 dto.
Tom Gentile: 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's been been very nice to start the year. It has been. It's been probably a little bit higher than we expected, and I think it should 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.
Speaker Change: Great. That's very helpful. And is there any reason to think that we shouldn't see continued growth within the uh, defense space and other portfolio in the back half of the year? I think the Run rate's been been very nice to start the year.
It has been, it's been probably a little bit higher than we expected and I think it should continue. I mean, defense spending around the world on all programs is going up, so we're very encouraged with the Q2 results and and extremely optimistic about the rest of the year.
Tom Gentile: Great. Thanks, Tom.
Great. Thanks. Tom.
Thanks again.
David Strauss: The next question comes from David Strauss of Barclays. Your line is open. Thanks. Good morning. Following up on Ken's question there, with the, Tom, with destocking that you've seen in, you know, the destocking on the A350 you've seen in Q1, Q2, what rate were you effectively shipping at in the first half of the year? for the A350? Yeah. Well, it's always a little bit different because we're a little bit ahead of everybody by six, eight months, just because of the type of material we provide. But in the first quarter, the rates were kind of in the low sixes, and then in the second quarter in the high fives.
Speaker Change: The next question comes from David Strauss of Barkley's, your line is open.
Speaker Change: Thanks. Good morning following up on um, on Ken's question there with the Tom with destocking that you've seen in in, you know, these socking on E350 you've seen in, q1 Q2, what what rate were you effectively shipping out in the first half of the year?
Speaker Change: For the 8350. Yeah.
Speaker Change: well, the the rate, it's always a little bit um um different because you you we're a little bit ahead of everybody by 68 months, just because of of the type of material we provide, but in in the first quarter,
Tom Gentile: But don't forget, those are the rates, and what they actually ship can be different, and it also depends on whether they can ship. 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 and Q1 and kind of high 5s. And the thing I would just mention is we've got a disparity between what we're shipping in the U.S. and what we're shipping in Europe. So the de-stocking is largely Europe, and so we were shipping at a lower rate in Europe, whereas we're getting pulled still at a relatively high rate in the U.S.
Speaker Change: Uh, the rates were kind of in the, in the low low, low sixes. And then, in the second quarter in the High 5,
Um, but don't forget, you know, those are the rates and and what they actually ship can be different. And it also depends on whether they can ship. Sometimes, for example, they've talked about the fact that they have some shortages on Laboratories or things like that. Uh, so that can all Impact it, but those are the kind of rates we saw so low sixes and q1 and kind of high fives and Q2 and the thing I just mentioned is is, is we we've got a disparity between what we're shipping in the US and what we're shipping in Europe. So these docking is largely Europe and so we would ship shipping at a lower rate.
Tom Gentile: This is very fun. Okay, guys, so just to clarify, so those aren't the stated Airbus rates, those are the rates you're actually shipping at? Yeah, what Tom was talking about is what we're shipping at, and we're shipping more in the U.S. than we are in Europe. Yeah, and let me clarify, and this is the de-stocking aspect, because what the dated Airbus rates are could be one level, but what they're pulling from us at, because they're de-stocking, is another level. And so our results kind of reflect the lower number, which is the de-stocking. So yeah, so our results won't reflect what Airbus is reporting as their shift rates because they are Yeah, perfect.
In Europe. Whereas we're getting pulled still at a relatively High rate in in a higher rate in the US as um that there's a spirit plant catches up.
Okay, got it. So, so just to clarify, so those those are the ACT. Those aren't the stated Airbus rates, those are the rates you're actually shipping at
Yeah. Well, Tom was talking about is what we're shipping out. And, and we're shipping more in the US than we are in Europe. Yeah. And and let me, let me clarify, and this is the, the stocking aspect because what the dated Airbus rates are could be 1 level. But what they're calling from us at because they're destocking is another level. And, and so the our results kind of reflect the lower number, which is the D stacking.
Speaker Change: So so our our results won't reflect what Airbus is reporting as they're shipped rates because they are desktop.
Tom Gentile: That's what I was getting at. Thank you.
Patrick Winterlich: And then, Patrick, on currency, so you're still seeing, you know, you're still seeing a bit of a tailwind given your hedging.
Patrick Winterlich: When would you expect the currency comparison to flip negative here, given the, you know, the weakening in the dollar that we've seen? We have continued to benefit, and it really does kind of speak up for 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.
Would you expect the, uh, the currency comparison to flip negative here? Give them given the, uh, you know, the weakening and the dollar that we've seen.
Patrick Winterlich: If rates stay where they are, we're going to see that flip or start to flip, I think, next year in 2020.
Patrick Winterlich: Thank you very much.
Speaker Change: We we have continued to benefit and and it really does kind of speak up for for the Merit of the of the currency hedging that we do. So it was a Tailwind again. Um, I think we will actually continue to see a net Tailwind this year. Um, if rates stay where they are, we're going to see that flip or or start to flip. I think next year in 2016 Davis.
Speaker Change: Yeah, thank you very much.
Gautam Khanna: The next question comes from Gautam Khanna with TD Cowan. Your line is open. Yeah, thanks. Good morning, guys. Which one are you? to follow up on the priority questions.
Speaker Change: The next question comes from Gautam Cana with TD Cowen. Your line is open.
Gautam Cana: Yeah, thanks. Good morning guys. I was wondering uh
Gautam Khanna: Do you guys have any expected, can you give us any framework for thinking how the recoupling to underlying rates on the A350 progresses in 2026? Do you think you'll be at? that seven-ish array that you implied for Q4. for much of 2026, irrespective of where Airbus is. I'm just curious, like, There's a destocking and then there's a re-coupling, and I'm just wondering the pace of re-coupling, 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.
To follow up on the priority questions.
Gautam Cana: Do you guys have any expect? Can you give us any framework for thinking? How
Gautam Cana: The recoupling to underline rates on the 1850.
Gautam Cana: Progresses in 2026. Do you think you'll be at
That 7 ish rate that you implied for Q4.
Gautam Cana: For much of 2026 irrespective of where Airbus is. I'm just curious like
You know, there's a desktop and then there's a recoupling and just wondering if the case of recoupling if you will.
Tom Gentile: 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.
Speaker Change: Right. So our sense is 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, the Airbus looks like they're going to enter.
Speaker Change: 2026 at 7 on the 8350, probably raise it to 8 sometime during the course of the year. And we'd expect that we'll be closely more and and more coupled with them throughout 26.
Tom Gentile: Gotcha. Okay.
Tom Gentile: And then just on the other major programs, like, say, the 787. Can you update us on where you are and, you know, how you see that progressing into 2026? Great. Well, you know, to be honest, the first half of the year was probably a little soft for us on 787, just in terms of what they were pulling, but Boeing is getting up to rate 7 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 the 87. Boeing has been reporting very strong production rates on that.
Speaker Change: Gotcha. Okay. And then just on the other
Speaker Change: Major programs like there's a 787.
give you update us on where you are and you know how you see that progressing into
Speaker Change: 2026.
Speaker Change: Right.
Well, you know, to be honest, the the first half of the year was probably a little soft for us on 787, uh, just in terms of what they were pulling, but Boeing is getting up to rate 7 and they have plans to continue all the way up to to rate 10 and Beyond.
Tom Gentile: So, you know, our poll was probably a little softer in Q1 and Q2, but the production rates on that program look very strong and are expected to grow.
Speaker Change: Uh so again we're expecting the back half of the year to be stronger on the 87. Uh, Boeing has been reporting, uh very strong production rates on that. So you know, our our our, our poll was probably a little softer in q1 and Q2, but the production rates on that program looked looked very strong and are expected to to grow.
Tom Gentile: And last one, I think you mentioned something on the pricing side in the prepared remarks. Is there any... Is there any reset that you can point to, you know, 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. Well, as I mentioned, our average contract length is about seven years, so we're doing about 15 or 20 percent 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 to make sure we're getting a fair return on our investment.
Speaker Change: and last 1, I I think you mentioned something on the pricing side in the, in the prepared remarks
Speaker Change: is there any, uh,
is there any reset that you can point to, you know, with respect to a time? Is it like in 2026?
Speaker Change: You start to see kind of a reset.
Speaker Change: on pricing or anything, you can speak to on how pricing might change and when
Tom Gentile: But it's, I'd say, an ongoing gradual process, about 15 or 20 percent of the contracts per year. The one exception on that would be some of our Airbus contracts, our bigger Airbus contracts, including for 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 So, that was a very long. Going forward, that's not been the case. Our contracts, as I said, average about seven years. and about 15 or 20% come up each year.
Right. Well, is is is I mentioned or average contract. Length is about 7 years, so we're doing about 15 or 20% of the contract, renewals every year. And with 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 refer a fair return on our investment, but it it's it's uh, I'd say an ongoing gradual process about 15 or 20% of the contracts per year. The 1 exceptionalists
Uh, so that was a very long-term contract going forward. We that's not been the case, our contracts, as I said, average about 7 years now um and about 15 or 20% come up each year for renewal.
Tom Gentile: Gotcha. Thanks so much. I appreciate it, guys.
Speaker Change: Gotcha. Thanks so much. I appreciate it, guys.
Tom Gentile: The next question comes from Miles Walton with Wolf Research. Your line is open. Well, look, I think the key right now for commercial airspace, for Boeing and Airbus, is to get the production rates back. 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 performer. 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.
Speaker Change: The next question comes from Mi Walton with wolf research, your line is open.
Mi Walton: Thanks. Good morning. Tom. You mentioned the um the award from Airbus, for the best supplier uh for scheduling quality and just curious how how do you use that to your advantage? Um, and what conditions on the ground would have to exist?
Mi Walton: Such that on the, your Airbus contracts in particular because they're so owner. And so long dated where you would say we're your best supplier. Uh, we're not getting value for what we're delivering, and we need to renegotiate.
Tom Gentile: 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 due to 2030, we're constantly working productivity initiatives where we can jointly share the… So the contracts do go through 2030, but that doesn't mean we're not working productivity to drive mutual benefit.
Mi Walton: And to do that they need the supply chain delivering and Performing and we're very proud on on Airbus, as I mentioned is that we received a war, an award for best performer, and this was in the materials uh, category for our quality and delivery. And and that's very important to support Airbus as they're increasing the rates across, all their programs. And so we're, we're going to continue to do that. At the same time, we always want our our working with our, our customers, including Airbus to, 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 benefits.
Mi Walton: So, the contracts do go through 2030, but that doesn't mean we're not working productivity to drive. Mutual benefits in the meantime.
Tom Gentile: 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% upslope that you anticipate, or is that something that's not really a test of the system for you? Not an issue. We've got plenty of capacity in place. We 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 over. 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.
Speaker Change: Okay. And and just to circle the square on the a350 deliveries. Um, so 2021 and the fourth quarter, your 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 of the system for you, not an issue. We've got plenty of capacity in place. We got to train work force and that, that's 1 of the things. I mean, because of the volumes have been a little bit lower than we expected, we're, we're essentially over staff.
Patrick Winterlich: But we are absolutely, we've got enough capacity and staffing to meet the demands as they come up in Q4 25, but also And one last one, Patrick, the $24 million in restructuring, how much of that is cash that you have to spend in second half? Yeah, a large majority of it, 85-90% will end up as cash. The majority of that cash I would expect to move in the circuit. Okay, thank you.
Speaker Change: You know, 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 it.
Speaker Change: But we are absolutely. We've got enough capacity and Staffing to to meet the demands as they come up in q425 but also offer 26.
Speaker Change: Okay, and 1 last 1, Patrick the 24 million and restructuring how much of that is cash that you have to spend in the second half.
Speaker Change: Yeah. Um a large majority of it 85.9% will end up as cash. The majority of that cash, I would expect to move in the third quarter to miles.
Okay, thank you.
Michael Ciarmoli: The next question comes from Michael Ciarmoli with Truist Securities. Your line is open. Hey, good morning, guys. Thanks for taking the question. Just a further clarification on the A350. Does the four-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 Patrick mentioned, you've 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-60s overall.
The next question comes from, Michael charmoli with truist Securities. Your line is open.
Michael Charmoli: Hey, um, good morning, guys. Thanks for taking the question. Uh, just just a further clarification on the 8360 does, does the full year guidance contemplate, low 60s, or do you, do you think you end up at, at 68? And then just from a seasonality perspective, does 3 Q look a lot weaker, um, kind of across the board than normal
Tom Gentile: But as I said, we're expecting a fairly strong Q4. Airbus is planning a rate break to 7 in September. And the de-stocking should really be behind us by that point, and so Q4 should be strong, and that leads into... Okay, okay.
Speaker Change: Uh, Q3 does look weaker. We've got the destocking as as Patrick mentioned, you've got the seasonal holidays that always take place in Europe. So Q3 does look look softer. Yes, the the full year we think is kind of low to mid-60s. Um, overall, but as I said, we're expecting a fairly strong Q4 Airbus is planning a rate break to 7 in September and, you know, and and the destocking should should really be behind us by that point. And so Q4 should be strong and that leads into 2026.
Tom Gentile: 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 you kind of indicated you're starting to feel it. How should we think about just the earnings guidance? 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... 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 three or four million a quarter.
Okay, okay. And then just for clarification that the Tariff headwind. I mean, it, it sounds like you're trying to offset you, you've got some Regional sourcing but the kind of indicated, you're starting to feel it. How should we think about, um, just the earnings guidance that that do we think the low end comes into play? Or is that range doable? If you kind of get the full brunt of character,
Speaker Change: Right. Well, the tariffs, I mean it's it's
Tom Gentile: There's three quarters. We said we're at the low end of the range 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... $100.95 And so there could be some pressure that brings us toward the lower end of the range if the full tariff impact.
Speaker Change: They are changing frequently and so we're trying to keep up and, and, and, and, and figure out what what they are. As we said, the direct impact on us is about 3 or 4 million a quarter, there's 3 quarters. Uh, we said we're at the low end of the range, this quarter. So we, we anticipate kind of giving things in the Outlook right now. Is maybe it's 10 million dollars 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 negotiation
End up. So we've left it out but you could, you could probably extrapolate and say it could be up to 10 million, you know, our our EPS Target is
Speaker Change: is 1.95 or 195. Um,
Tom Gentile: But we just don't know. And so we didn't want to build it into the 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 seemed to us to be a little bit premature, especially since it's only three or four million dollars a quarter and we're at the low end. Got it.
And and so there could be some pressure is that brings us towards the lower end of the range if the full tariff impact hits but we just don't know. And so we didn't want to build it into the into the guidance and then have to change it based on what we've learned. Uh, 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 seemed to us to be a little bit premature, especially since it's only 3 or 4 million dollars a quarter and we're at the low end of the range.
Tom Gentile: Helpful. Thanks, guys.
Got it helpful. Thanks guys. Thanks guys. Thanks.
Richard Safran: The next question comes from Richard Safran with Seaport Research Partners. Your line is open. Thanks. Tom, Patrick, Kurt, good morning.
Speaker Change: The next question comes from Richard. Saffron with Seaport research Partners, your line is open.
Tom Gentile: 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's spending on defense and the increases you've been mentioning in European defense spending impact your longer-term outlook? You know, given the increase in U.S. and Europe, you know, I just would have to think it's 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?
Richard Saffron: Good morning. Um, I just have 1.
Speaker Change: 2-part question for you guys on defense.
Speaker Change: Um, this morning first, um, Tom you touched on this, um, a couple of times for 2025, uh, this morning. But could you discuss a bit more about how the administration spending on defense and the increases you've been mentioning in European Defence spending impact your longer term Outlook, you know, given the increase in us and Europe, you know, it's just would have to think it's
Tom Gentile: Thanks. Well, there's no doubt that the defense spending has increased, the recent budget has 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 strength across the board in some of our big programs, like the CH53K, where we do the whole material system, or the F35, where we provide all the carbon fiber for the material system. And then some of the space and the missiles have also been strong. So we expect that to continue, if not accelerate.
Speaker Change: infinitely better than than when you started the year and second, um, would you be willing to provide some comment on your view of the long-term growth and Market potential margin potential for your, uh, for your defense business? Thanks?
Tom Gentile: because the underlying defense spending and the demand is so great. But we're also seeing that in Europe. You know, we have a big work share on the Rafale program, which is the fighter jet from Dassault, and that was up a lot, and the demand for that is up significantly. Many countries are returning to that aircraft as they go forward, so we expect that to continue throughout the year. I don't know if it'll 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.
Well, there's no doubt that the defense spending has increased. The recent budget has a, a higher amount and then there's the uh, the supplemental funds as well. So I think that is definitely driving the current, uh, performance and the outlook for the rest of the year. Uh, there's there's, there's no doubt about that you. We're seeing it, uh, you know, strength across the, the board in some of our big programs, like the C8 53k, where we do the whole material system or the F-35, where we provide all the carbon fiber for the material system, um, and then some of the the space and the missiles are have also been strong, so we expect that to continue if, if not accelerate
Speaker Change: Because the the underlying defense spending and the demand is so great, but we're also seeing that in Europe.
Tom Gentile: Right now, defense is about 30-35% of our total revenue. We 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 is defense both in the U.S. and in Europe. By the way, it's not just Europe. We also have some very good defense contacts in Turkey, in India, and we expect those to continue to grow as well.
Speaker Change: Um, you know, we have a big, uh, work share on the Rafael program, uh, which is the fighter jet from do and that was up a lot. And the demand for that is is up significantly. Many countries are are turning to that aircraft as they go forward. So we expect that to continue throughout the year. Uh, I don't know if it'll be the same level of increase that we saw in Q2, but we certainly expect to see strength and as we translate into that into the long term, I think that's a key aspect right now. Defense is about 30, 35% of our total revenue
We 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 US and in Europe,
Speaker Change: Is going to benefit our defense growth in the future and we see that probably as our top core organic growth. Opportunity is is defense both in the US and in Europe, by the way, it's not just Europe. We also have some very good uh, defense contacts in Turkey in India and and we expect those to continue to grow as well.
Tom Gentile: Well, thanks very much, Tom. Appreciate the color.
Speaker Change: Well, thanks very much Tom, appreciate the caller.
Speaker Change: Thank you.
Scott Deuschle: The next question comes from Scott Deuschle with Deutsche Bank. Your line is open. Hey, good morning. Patrick, to get 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?
Speaker Change: The next question.
Speaker Change: Open.
Patrick Winterlich: And then if it is, can you walk through what's going to drive that type of operating leverage? Thank you. Yeah, we clearly need to step up in the second half. We've got the seasonality sales effect in the Q3, but with costs and management, we'll drive as solid a Q3 as we can. And then as Tom has said at least a couple of times this morning, we're leaning into a strong fourth quarter as we exit the year, as the build rates go up, as the wide bodies kind of move towards seven, the 320 moves towards 60, and hopefully we're sort of getting aligned on the 38 on the max.
Speaker Change: Hey, good morning. Patrick did you get to the midpoint of the EPS guide? I have to assume something like a 45% incremental operating Motion in the back half? I guess. Does that mask sound directly to, right? And then if it is, can you walk through what's going to drive that type of operating leverage, thank you.
Patrick Winterlich: So that should drive pretty strong leverage as we exit the year and deliver what we see as a positive fourth quarter. So yeah, I agree roughly with your numbers. As Tom said, sort of the 195 less the tariff impact is really where we're at. Okay.
Patrick Winterlich: And then Patrick, can you give the latest, excuse me, split in cost of goods sold between energy, raw materials, direct labor, overhead, and the like? And then has energy become a meaningfully larger share of that cost breakdown, or has that been fairly staple as a percentage of your overall cost of goods sold? Yeah. I mean, we've never shared the details of that, but materials continues to be the largest part of our COGS, followed by people costs, labor costs. I mean, energy is still single digit. I'll say that much. I think we've indicated that before. It stepped up with the European impact of the Ukraine war a few years ago now, and it's still at that level.
Yeah, we we clearly need to step up in the second half. Um, we've got the seasonality, um, sales effect in the Q3, but with cost and and management. We we'll drive a solid a Q3 as we can. And then, as Tom says, uh, at least a couple of times this morning, we're leaning into a strong fourth quarter as we exit the year, as the build rates, go up as the wide bodies, kind of move towards 7. Um, the 320 moves towards 60 and and hopefully we're sort of getting aligned on the 38 on the max so that should drive pretty strong, leverage. As we exit the year and and deliver what we see as, as as as a positive, um, fourth quarter. So yeah, I I agree roughly with your numbers as Tom says, sort of the 195 less, the Tariff impact is really where we're expecting to finish the year.
Patrick Winterlich: So it hasn't, certainly hasn't materially changed in the last year or two, but it's in that sort of mid, just above mid single digit.
Speaker Change: Okay and then Patrick can you give the latest his new split in cost of goods? Sold between energy raw materials, direct labor, overhead, and the like and then has energy become a meaningfully larger share of that cost breakdown. Or is that been fairly stable as a percentage of your overall cost of goods sold? Yeah. I mean, we, we've never shared the details of that, but materials continues to be the largest part of our cogs. Um, followed by people cost labor costs. Um, I mean, energy is still single digit. I'll say that much. I think we've indicated that before it sets up, um, with the European impact of the Ukraine war, um, a few years ago now, and 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, um,
Patrick Winterlich: Okay, thank you.
Mid just above mid single digit level.
Speaker Change: Okay, thank you.
Scott Mikus: The next question comes from Scott Mikus of Melius Research. Your line is open. Morning, Tom and Patrick. Tom, to dig in a little bit on the price and protections in the LTA negotiations. Historically, some suppliers have had to pass back productivity to Boeing and Airbus as part of their LTAs. And you mentioned that some of your Airbus contracts, you're sharing the productivity benefits with them. So as you renegotiate these LTAs when they come due, or you bid for new programs, are you making sure that you get to keep the productivity that you in your own four walls?
Speaker Change: Your line is open.
Speaker Change: Morning Tom and Patrick Tom to dig in a little bit on the pricing protections and the LTA negotiations. And historically, some suppliers have had to pass back productivity to Boeing and Airbus as part of their LTA. And you mentioned that some of your Airbus contracts, you're sharing the productivity benefits with them. So as you renegotiate these LTA when 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?
Tom Gentile: Well, it's a little bit of both. I mean, I would say as we get into renegotiation, 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 as we were just talking, energy or logistics. and or tariffs as we have learned. So so those are some of the ways that we're looking at it. The thing on productivity is that you know this is a tough industry and and you always need to be running fast to stand still and our customers expect ongoing productivity.
Well, it's it's a little bit of both. I mean I would say as we as we get into renegotiations, we're, we're trying to learn from the past and so we're we're building in volume adjustments. Uh, because certainly, that was a, a big issue from the pandemic. We're also looking to ensure that there's appropriate, escalation protection for things like inflation and labor, or material or if we were just talking energy or or Logistics.
Tom Gentile: So well if we can get the 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 with all of our big customers in the past. Because you have to remember, Scott, most of the time, with all our qualified products and processes, to make changes, we need the cooperation of our customers. Now, if we can do it in-house, and it's 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.
Speaker Change: Um, and, or or tariffs as we have learned. So, so those are some of the ways that we're looking at it. The thing I had productivity is that, you know, this is a tough industry and and, and you always need to be running fast to stand still and our customers expect ongoing productivity so well, if we can get the buying protection and we can get escalation protection, we certainly have to be willing to work jointly with them.
Tom Gentile: 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 it.
Speaker Change: To get productivity that we share. And that's been a Hallmark of our contracts with, with all of our big customers in the past. And I expect it will be in the future as well. Yeah, because you have to remember Scott, most of the time, with all of our qualified products and processes to make changes. We need the cooperation of our customers. Now, if we can do it in-house and it's 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 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 collaborate
Tom Gentile: Okay, and then thinking about build rates, we saw GE raised its commercial OE sales growth and reaffirmed the leap delivery guidance. Boeing's production rates have been surprising to the upside. And you mentioned the A350 destocking could 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 A137 and A87 while destocking on the A350s entirely behind you? Well, when you say restacking, you mean just the build rates going up? Well, I mean, customers, some of the sub suppliers that you ship to, maybe a burn down excess inventory and need to rebuild higher levels of buffer inventory to support future higher production rates.
Speaker Change: 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 e350d stocking. Have you ever by the fourth quarter?
Speaker Change: So could we see a possibility maybe an early 2026, where you start to see a restocking benefit actually on the 7337 and 87, while D stocking on the a350s entirely behind you?
Speaker Change: Uh, well, when you mean, when you say restocking, I mean just the the build rates going up.
Tom Gentile: Oh, yeah, 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 is to get synchronized so that we're all at the same rates, not with different parts of the chain building. And restocking is a very gradual process, Scott. It takes time. There might be a little bit of it, but it's not like destocking, which is tough and abrupt.
Speaker Change: Well, I mean customers some of the the sub suppliers that you ship to maybe have burned, down excess inventory, and need to re uh build higher levels of buffer inventory to support future, higher production rates.
Tom Gentile: restocking is very gradual over a period of time as the network and Bill Bell. Bye. But I would say, just to your point, we are starting to see this inflection point with the rates going up in a sustained 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... Thanks for taking the questions.
Speaker Change: Oh, uh, yeah. I mean it remains to be seen. I 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 I, I don't think so. I think the goal for everybody in the supply chain is to get synchronized. So that we're all at the same rates, not in a different parts of the chain, building, a different rate. Yeah. And, and and restocking is a very glad to gradual process, Scott. It takes time there might be a little bit of it, but it's not like these stocking, 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 a higher rate. But but I would say, you know, just to your point because we are starting to see this inflection point with the rates going up in in a sustained uh, way across all the major programs are pulling an Airbus. And so that's very positive. We're, we're still in the kind of final throws here of the destocking on the a350. But it looks very strong.
Speaker Change: Q4 as we've said in in 2026 and it's not just a 350, it's a 320, the 787 737, you know, it's been long recovery period, but we're finally getting to the point where it's going up.
Speaker Change: Thanks for taking the questions.
Sheila Kahyaoglu: The next question comes from Sheila Kahyaoglu with Jeffreys, your line is open. Good morning, guys, and thank you. 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.
Sheila Kalu: The next question comes from Sheila, kalu with Jeffrey's. Your line is open.
Sheila: Good morning, guys, and thank you. Um,
Sheila: Tom Patrick. Sorry I'm gonna 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
Tom Gentile: 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 makes sense.
Tom Gentile: Well, I think there's two things going on. One is just operating leverage, because if you go back to 2019, we peaked in terms of our revenue and our production. 112-8350. and our revenue was $2.35 billion. And we had all the capacity in place to support that level. Where we are now is in a much different place. I mean, obviously, last year, Airbus delivered 57. So we're utilizing only a portion of the capacity. you should get in terms of headcount, but overall. That's what's impacting our margins. So I think as our margins, revenues and bill rates recover to where they were in 2019, you'll see us get the operating leverage, and that will improve revenue per head.
Sheila: 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, um, if that makes sense.
Tom Gentile: And it will also improve margins. Now, as we've said, because we've experienced some inflation. in labor and in materials. Even when we get back to the previous levels of revenue, we're still gonna have some headwinds, a couple hundred 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 that. That's how I would. Yes, that makes sense.
Tom Patrick: Yes, well I think there's 2 things going on. Um, you know, 1 is just operating leverage because if you go back to 2019, we peaked in terms of our revenue and our production, we shipped 112 8350 and our Revenue was 2 2.35 billion and and we had all the capacity in place to support that level of production where we are now is is a much different place. I mean, obviously last year Airbus delivered 57 8350 and so we're utilizing only a portion of the capacity, you know, probably 2/3 to 3/4 and so we're not getting the operating leverage that we should get well in terms of headcount but but overall and that's that's that's what's impacting our margins. So I think, as our margins, or our revenues and and build rates recover to where they were in, 2019, you'll see us get the operating leverage and that will improve Revenue per headcount, and it will also improve margins. Now, as we've said, because we've experienced,
Sheila: Some inflation.
Tom Patrick: And in, in labor, and in material and in utilities, uh, even when we get back to the previous levels of of Revenue, we're still going to have some headwinds, a couple hundred 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, our contracts is is is to use price to help offset some of that as well, but that's how I would I would lay it out.
Tom Gentile: 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 and I mean, it's really an A350 story. 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.
Speaker Change: Yeah, that makes sense. Um and then I guess maybe if I could ask as the desking alleviates itself from the Q2 levels what what program has the most operating leverage and and then how do we think about the Belgian Factory? Um, Payback
Tom Gentile: 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 ships that day. Airbus only, delivered. So it's not an exact comparison, but that's essentially what's destocked. Got it.
Well, I mean the the stocking and operate. I mean it's really an 8350 story for us primarily. It's our biggest program. Uh, we we invested uh 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 uh as you know, since the pandemic. And so so that's the biggest issue in terms of operating leverage and I'd say 8350 has probably been the biggest issue in terms of these stocking just to give you a some some quick math. It's it's not perfect but look at last year's numbers. We we reported that our results for the a350. We delivered about 72, ships sets, in 24, Airbus only delivered 57.
Speaker Change: So it's not an exact comparison, but that's essentially what's destocking right now.
Tom Gentile: Thank you so much.
Speaker Change: Got it. Thank you so much.
Gavin Parsons: The next question comes from Gavin Parsons of UBS. Your line is open. Great. Thank you. Morning.
Speaker Change: The next question.
Speaker Change: Comes from Gavin Parsons of UBS. Your line is open.
Great. Thank you morning.
Tom Gentile: Tom, pretty healthy pace of buybacks, but I thought in the prepared remarks you maybe sounded a little more front-footed on M&A, just wanted to know how you think about that trade-off and how you're contemplating size of maybe bolt-ons versus something more significant. M&A, as I said, we're looking at it. We think it could be a good complement to the organic growth that we're gonna experience both from the recovery and build rates and the growth in defense spending. But we're gonna be very. We're going to look for things that are strategic, that advance our advanced material science.
Speaker Change: Uh Tom pretty healthy pace of BuyBacks but I thought in the prepared remarks you may be sounded a little more front footed on m&a. Just wanted to know how you think about that trade-off and and how you're, uh, contemplating size of maybe bolt-ons for something more significant.
Speaker Change: Right.
Speaker Change: M&a, as I said, we're we're looking at it.
Speaker Change: you think it could be a
Speaker Change: Growth that we're going to experience both from the recovery and build rates and the growth in defense spending, but we're going to be very disciplined.
Tom Gentile: have a heavy emphasis on aerospace. and meet our return thresholds, which are quite high. But if we can't find something that fits that criteria, we have been doing share buybacks and we'll continue that.
Tom Gentile: That's how we're 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 buyback. Okay.
We're going to look for things that are strategic that Advance our Advanced Material Science. Focus. Uh, have a heavy emphasis on Aerospace and defense and we are returned thresholds, which are are, are quite high. But if we can't find something that fits that criteria, we have been doing share BuyBacks, and and we'll continue that. But, uh, that that's how we're thinking about it is we, we think it could be a good compliment 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 and then do continue to do. Share buybacks on a selected basis.
Tom Gentile: And then it seems like Kinston is the main bottleneck on the A350. I wonder if you could share some insights on the improvement timeline, 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've said is that once the deal closes and they take full control of that operation, they'll be able to drive more productivity. Thank you.
Speaker Change: Okay, and then it seems like Kinston is the main bottleneck on the a350 on her. If you could share some insights on the Improvement timeline, given your familiarity with that facility. And if you think that's contingent upon the transaction closing,
Speaker Change: And I think Airbus has pointed to that in the past but they they could probably provide more insight on to it. Uh, 1 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 I think that's probably the case.
Speaker Change: Okay, thank you.
Alex Preston: The next question comes from Ron Epstein of Bank of America. Your line is open. Hi, guys. This is Alex Preston.
the next question comes from Ron Epstein of Bank of America, your line is open,
Tom Gentile: I'm for Ron today. Good morning. I was wondering, we talked a little bit about the direct impact of tariffs. Maybe if you're considering or you've seen any impact indirectly on, I'm thinking especially like Airbus demand in the U.S. and sort of maybe how you're thinking about that in the early stages. Well, as we've said in the past, that's our bigger concern, is not the direct impact of tariffs on us, but if there's any indirect impact that could impact build rates for Airbus or Boeing. At this point, it doesn't look like that will be the case, but we need to wait.
Alex Preston: Hi guys, this is Alex Preston on for Ron today. Good morning.
Speaker Change: um,
I was wondering, we talked a little bit about the direct impact of tariffs. Um, maybe if you're considering, or you seen any impact indirectly on, I'm thinking, especially, like, Airbus demand in the US and sort of maybe how you're thinking about that in the early stages here.
Speaker Change: Well, as we said in the past, that's our bigger concern, is not the direct impact of tariffs on us, but if there's any indirect impact that could impact buildings for Airbus or bonds,
Tom Gentile: 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 aerosol.
Tom Gentile: One thing I'll say is over the years, aerospace has been a great industry for the U.S. is probably the biggest net importer for an industrial industry. with over $120 billion of net exports, and it's relied on zero tariffs, and that's served 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 or $4 million a quarter. The indirect could be bigger, but we don't know what that is. Got it. Thanks for the help.
Speaker Change: Uh at this point it doesn't look like that will be the case but we we need to wait and see obviously there 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 1 thing I'll say is over the years Aerospace has been a great industry for the US. It's it's probably the biggest net importer for in industrial uh Industries with over 120 billion dollars of of net exports and it's relied on zero errors and and that's served the industry. Well so we'll see where we end up.
Speaker Change: Um, but at at this point it's it's it's hard to say and for us, as I said, the direct impact of tariffs is relatively minimal 3 or 4 million dollars a quarter. The indirect could be bigger but we don't know what that could be at.
Speaker Change: Got it. Thanks for the help.
Christine Lewog: The next question comes from Christine Lewog of Morgan Stanley. Your line is open. Hey, good morning, everyone.
The next question comes from, Christine leewa of Morgan Stanley. Your line is open.
Patrick Winterlich: 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 you know, also, as you know, 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 be weaker for longer, how we should expect that to result in your margins? Yeah, so we enter a year roughly 75% head. So, if I look at 2025, for the bank half of 2025, we are going to be hedged more than that at this point, with just those two quarters remaining, so we're probably 80-85% hedged, if not 90% now through the end of 2025.
Christine leewa: Hey, good morning everyone. Maybe. Um, I'll kick off with a uh um, a currency question. I mean, can you remind us your mismatched with your European business? How much, um, of the European footprint are actually sold in dollars. And, you know, also as a, you know, 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 be weaker for longer. Um, how we should expect that to to uh, result in your margins.
Patrick Winterlich: 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. 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 The need to sell dollars to cover our European cost base in Euros and Pounds 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.
Christine leewa: So we we enter uh a year roughly 75% hedged. Um so if I look at 2025 for the the bank account for 25 we we we are going to be hedged more than that at this point with with just those 2 quarters remaining. So we're probably 80 85% ahead. Um 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 we I would expect to enter 2026 around 75% hedged. Um, we the vast majority of our sales um in Europe are in dollars and with the decline of the um the wind energy business that was actually a source of Euros that has now
Away. So, if anything, our
Patrick Winterlich: 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 onto the size of the dollar.
Christine leewa: Need to sell dollars to cover. Our European cost base in euros and pounds is actually grown a little bit, not massively, but but it's grown a bit, but our hedging, uh, policy Remains the Same. It's very disciplined over 10 quarters, uh, and we layer it in each quarter as we move forward, uh, 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 to the, uh, the size of that at this juncture.
Tom Gentile: Great, thank you. And, you know, if I could follow up on the contract negotiations. I mean, Tom, you know, 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, you know, when you're doing these contract negotiations, are there offsets that you have to factor in?
Tom Gentile: Like, why can't you get more pricing through when it seems like a lot of your peers are getting that pricing? And ultimately, you know, the OEMs can't really change out their material input at this point. And, you know, 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. 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.
Great, thank you. And, you know, if I could follow up on the contract, negotiations, I mean, Tom, you know, hearing from your tone, it sounds like you're you're a bit more, um, uh, conservative or maybe more balanced, uh, 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 they're significant pricing, uh, increases for these contracts as the oems really want to ramp. I guess, I want to understand, um, you know, when you're doing these contract, negotiations are there offset that you have to factor in? Like, why can't you get more pricing, uh, through. Um, when it seems like a lot of your peers are getting that, uh, pricing and ultimately, you know, the oems can't really change out their material, uh, uh, input at this point, uh, and you know, they're pretty, you've got that, uh, that strategic advantage.
Christine leewa: Message. So why can't you get more pricing?
Christine leewa: Well, as you go into any contract negotiation, your goal is always to maximize the value of the contract.
Christine leewa: But of course, you have to negotiate that with the other parties.
Tom Gentile: and the huge investment 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. So the goal is always to maximize price and you take into account other considerations. So for example, this is a long cycle business and there are only a few players. And the programs come up only once every few decades. And so we're always 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.
And so there's 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 and the and the huge investment that we've made and also takes into account the cost increases that we see over the last few years and and labor and material and utilities and Logistics.
Christine leewa: For example, this is a long cycle business and there are only a few players in it.
Christine leewa: And the programs come up, only once every uh, few decades.
Tom Gentile: So that's another trade-off that you factor in. But again, our goal, Christine, I can assure you, is always to maximize price in the contract negotiations, subject to where our counterparties will let us.
Christine leewa: And so, we're always also trying to get on the 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 factored in. But again, our goal Christie and I can assure, you is always, to maximize price in the contract negotiations subject, to where our, our, our counterparties will let us go.
Tom Gentile: Thank you, Tom, and good luck.
Speaker Change: Thank you, Tom, and good luck.
Operator: That is all the time we have for questions. This concludes today's conference call. We thank you for joining. You may now disconnect.
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