Hexcel Corporation Price & Performance (HXL)

Hi, Krista. Thank you. Hello, everyone. Welcome to Hexcel Corporation's first quarter twenty twenty five Earnings Conference Call. Before beginning, let me cover the formalities. I want to remind everyone about the Safe Harbor provisions related to any forward looking statements may make during the course of this call. Certain statements contained in this call may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent for that request. With me today are Tom Dentely, our Chairman CEO and President and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our first quarter twenty twenty five results detailed in our news release issued yesterday.

Now let me turn the call over to Tom. Thanks, Patrick.

Hello, everyone, and thank you for joining us today as we discuss our twenty twenty five first quarter results.

Hexcel's value proposition is strong. We have a broad and unrivaled product range of lightweight innovative aerospace composites protected by robust intellectual property as well as considerable know how gained from decades of experience. That position Hexcel extremely well meet the expanding demand for advanced lightweight composites in aerospace and defense as the industry continues its recovery from the COVID-nineteen pandemic and returns to higher production rates across all commercial and military programs. We are well positioned with sole source life of program contracts across a large number of commercial aircraft programs. Hexcel will benefit as Airbus and Boeing increase production in the coming years to address their significant backlog. Taking the shipset values by program that we disclosed, and the peak build rates announced by Airbus and Boeing, for key platforms. There is roughly $500,000,000 of incremental annual sales from existing contracts ahead of Hexcel. When compared to our 2024 sale. For example, a three fifty is Hexcel's largest program with a chipset value between 4 and a half and $5,000,000 Airbus delivered 57 a three fifty aircraft in 2024. And recently reiterated that they still expect to achieve 12 aircraft per month for the A350s by 2028. Which would result in approximately 32 deliveries.

This is business we already have contracted as production rates ramp the future for the A350 and other Airbus and Boeing commercial program. Defense and business jets and space and other existing and new markets are all additive. In terms of defense, we see significant opportunities as both The U. S. And European governments look to increase spending. We are US domiciled, vertically integrated to support U. S. Defense production with existing positions on most current military programs that use lightweight composite material. We also have deep relationships with European defense contractors and a strong vertically integrated manufacturing presence in Europe. To support our overseas defense customers. Our ability to generate cash combined with our conservative financial policy, underscores Hexcel's solid balance sheet. As sales grow over time and our capital expenditures remain subdued, as we have already invested in the plant and equipment necessary to support higher production rates the multiyear cash generation profile of Hexcel is compelling. Based on the value we perceive in Hexcel's common stock, and our confidence in the future cash generation potential of the business, we utilized $50,000,000 to repurchase shares of common stock in the first quarter. We have additional authorization to purchase a further $185,000,000 We also addressed a pending debt maturity by refinancing a $300,000,000 fixed rate note was maturing later this year at attractive interest rate spreads.

As a reminder, we are changing how we report sales by market and will now report two markets. Commercial aerospace and defense space and other. Which is the market that now includes our industrial business.

This industrial business will consist primarily of performance oriented automotive sales once we conclude the divestiture of our wind and recreation focused facility in Austria we expect to be later in Q2. Looking at our financial results for the first quarter of twenty twenty five. We generated sales of $457,000,000 and adjusted diluted EPS of 03/2025 is turning out to be another year in which production rate increases for commercial aircraft will not meet initial expectations, due to ongoing supply chain disruption. Commercial aerospace sales in the first quarter of twenty twenty five were $280,100,000 down 6.3% on a constant currency basis from the same period in 2024. Lower sales year over year were primarily due to the Boeing seven eighty seven and the seven thirty seven MAX. However, this was partially offset by a 7.1% increase other commercial aerospace from international demand.

To share some additional color, commercial aerospace sales were up nominally on a sequential basis. Airbus A350 a three twenty, and a two twenty all increased sequentially as did other commercial aerospace. Boeing seven thirty seven MAX sales were unchanged sequentially consistent with our expectations whereas the Boeing seven eighty seven sales were significantly lower. In defense space and other, sales were $176,400,000 up 2.7% in constant currency from the same period in 2024. In defense and space, realized sales growth of 3.3% in constant currency compared to Q1 of twenty twenty four. Driven by the by the CH 53 k the classified programs, number of space programs, an international fighter program. This continued growth underscores the capabilities and value Hexcel brings to the defense market. Particularly our vertically integrated capabilities for both US and European defense programs. Within industrial, we had growth year over year in automotive, offset by further deterioration in wind and recreation remained soft. With lower than expected sales volume in our commercial business, we now see 2025 as a year where we need to remain focused on the fundamentals of our business and controlling costs we navigate reductions in near term demand commercial aerospace programs.

Including the A350. Our gross margin of 22.4% for the first quarter down from 25% in the same period last year, was negatively impacted by lower operating leverage from the lower sales line. Additionally, we experienced a power outage in January at our Decatur, Alabama facility which disrupted our manufacturer of PAN. The precursor element for our carbon fiber production line. This resulted in additional expense to restart production at the facility which is now complete and the plant is once again operating efficiently. With respect to hiring, we are carefully managing any additional increase in headcount to ensure we do not get ahead of the revised production levels of our customers. While maintaining our ability support future rate ramps. Our current headcount is about 300 heads or 5% lower than where our annual plan forecasted from the March. For 2025 overall, expect to run significantly below our previous plan year end headcount. The Hexcel team is actively managing cost reduction and cash, by driving material usage efficiencies minimizing discretionary spend, revisiting planned capital expenditures, and optimizing our sales inventory and operations planning. To right size working capital. Before I move into guidance, I want to address the issue of tariffs.

The situation remains fluid as U. S. Policy continues to evolve. We have a cross functional team analyzing the potential impact and our strategy to manage tariffs. As a reminder of what I shared earlier this year, resins in acrylonitrile are two of our top purchases and we source these regionally to support local production. Both in The U. S. And in Europe. To illustrate further, over 85% of our 2024 spend was in The U. S. And five European countries where we have the vast majority of our assets employees and production. I share these figures to provide some perspective on the potential direct tariff impacts on Hexcel. Further, our total combined purchases from Canada, Mexico, and China were only just above 1% of our total 2024 spend so we sourced very little from those three countries that have been specifically targeted for tariffs. There was no impact from tariffs in the first quarter results as the new U. S. Tariffs were not announced until April. And due to the fluid situation and uncertainty with tariffs, our guidance does not include any tariff impact potential impact from tariffs enacted after 03/31/2025. Based on current information, we expect the direct impact from tariffs will be about $3,000,000 to $4,000,000 per quarter.

We do not know what the indirect impact that tariffs could have on other parts of the aerospace supply chain and OEM production rates, however. Additionally, we continue to streamline our footprint to minimize our costs and position the business for future stronger margins. In Q1, we completed the divestiture of our three d printing facility in Hartford, Connecticut and we continue to work on the divestiture of our Neumarkt, Austria site which primarily supplies the wind and recreation market. In addition, we are continuing the evaluation of our Belgium facility which makes Engineered Core. We announced our 2025 guidance this past January. Subsequently, Airbus significantly revised their demand forecast with substantially lowered A350 production in 2025. We built our plan in 2025 with an assumption of 84 A350 material ship sets. We now expect this to be around 68 material shipsets in 2025. This lower a three fifty production is the primary driver revising our 2025 guidance downward. As we have significant shipset value on the A350 of between $4,500,000 and $5,000,000 per chipset. Patrick will go into more detail on the revised guidance in his remarks. Despite these near term headwinds that we have in 2025, Hexcel is well positioned to generate significant future cash flows as the commercial OEMs ramp up production we are aligned and focused to grow in other markets such as the basins defense and space we continue to see opportunities to expand.

Before turning it over to Patrick, I would like to thank again our customer Embraer the recognition of the hard work the Hexcel team does every day in producing high quality parts that are delivered on time. We are honored and humbled to receive the Best Supplier of the Year award for Embraer for their materials category. I was at the Embraer headquarters last week in Sao Paulo, to accept this prestigious honor. I'd also like to thank and congratulate our customer Gulfstream retaining certification of their G800 large cabin business jet.

It's quite an amazing aircraft and utilizes our lightweight composite material extensively. Now let me turn it over to Patrick to provide some more details on the numbers. Patrick?

Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a ten quarter time horizon. The year over year comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. The commercial aerospace market represented approximately 61% total first quarter twenty twenty five sales of $456,500,000 first quarter Commercial Aerospace sales were $280,100,000 decreased 6.3% for the first quarter of twenty twenty four. The overall aerospace supply chain continues to recover in fits and starts, leading to delayed rate ramps across our commercial aerospace customers. Boeing seven eighty seven sales declined meaningfully year over year MAX sales remained low as excess inventory is consumed with our expectations as we lag Boeing ramp rates. Airbus A350 sales declined modestly year over year or less than the equivalent of one half of one ship stack. Sales for other commercial aerospace in the first quarter increased 7.1% year over year led by strength from a few of our international customers. The newly designated market of defense, space and other represented approximately 39% of first quarter sales totaled $176,400,000 increasing 2.7% from the same period in 2024.

Within this market, Defense and Space grew 3.3% with growth both domestically and internationally. For rotorcraft, the CA-fifty three ks and Blackhawk programs grew year over year, partially offset by declining V-twenty two sales. Acute based programs drove additional growth as did an international fighter program. Industrial increased in automotive tempered by lower wind and recreation sales. Much of our industrial business is with European customers, as illustrated by sales being down year over year from a weakening dollar whereas on a constant currency basis, sales were nominally up. Gross margin of 22.4% in the first quarter of twenty twenty five deteriorated year over year from the negative impact of lower operating leverage a vendor quality issue in our Engineered Products segment as well as a generally unfavorable sales mix. In addition, a rare power outage at our Decatur, Alabama facility cost us between 2,000,000 and $3,000,000 Tom said in his remarks that Decatur plant operations were restored quickly. Gross margins in the comparable prior year period was 25%. As a percentage of sales, selling, general and administrative expenses and R and D expenses were 12.5% in the first quarter of twenty twenty five. Compared to 13.6% in the comparable prior year period with the year over year reduction primarily reflecting lower employee costs including lower stock based compensation charges.

Adjusted operating income in the first quarter was $45,300,000 or 9.9% of sales compared to $54,100,000 or 11.5% of sales in the comparable prior year period. The year over year impact of exchange rates in the first quarter to operating income was favorable by approximately 60 basis points.

Now turning to our two segments. The Composite Materials segment represented 80% of total first quarter sales and adjusting for non recurring charges, generated an adjusted operating margin of 14.2%. This compares to an adjusted operating margin of 16% in the prior year period. The Engineered Products segment, which is comprised of our Structured and Engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 6.8%. This compares to an adjusted operating margin of 14.3% in the prior year period. As previously mentioned, a vendor quality issue and poor sales mix impacted the Engineered Core segment this quarter. Net cash used by operating activities in the first quarter of twenty twenty five was $28,500,000 compared to a use of $7,000,000 in the first quarter of twenty twenty four. Working capital was a cash use of $97,700,000 in the first quarter of twenty twenty. 5 compared to a cash use of $84,500,000 in the first quarter of twenty twenty four. Capital expenditures on an accrual basis $17,100,000 in the first quarter of twenty twenty five. Compared to $18,600,000 in the comparable prior year period. Free cash flow in the first quarter of twenty twenty five was negative $54,600,000 which compares to a negative $35,700,000 in the third quarter of twenty twenty four.

We typically see cash used in the first quarter of the year and this year was no different. Adjusted EBITDA totaled $4,800,000 in the first quarter of twenty five, compared to $98,200,000 in 2020. Four. During the first quarter, we refinanced the $300,000,000 fixed rate note that was maturing later this year. The transaction was significantly oversubscribed and we achieved good interest rate spread. Demonstrating Hexcel's strong credit profile. We are pleased to have removed this refinancing as of potential risk. Our net debt maturity is not until 2027. We used $50,400,000 to repurchase stock during the first quarter the remaining authorization under the share repurchase program as of 03/31/2025 was $184,500,000 The Board of Directors declared a $0.17 quarterly dividend yesterday The dividend is payable to stockholders of record as of May 2, with a payment date of May 9. Expanding on Tom's comments regarding the year and our guidance revision, 2025 is going to be another transition year for the commercial aerospace industry and for our commercial aerospace business. So in recognition of this, we are pivoting and managing the business for the realities of today. We are focusing on strong control of operating costs and tightly managing For the 2025 sales guidance, reduced the midpoint by $85,000,000 Most of this sales reduction is attributable to Airbus cutting their 2025 demand for A350 materials.

For 2025, we expect A350 sales to be lower than 2024 with the decrease to be particularly noticeable in the second and third quarters twenty twenty five. There was also a reduction in the A320 build rate for 2025 compared to our original assumptions. There are a few other areas of softness including the Boeing seven eighty seven and automotive. Much of our automotive business is with European based high performance automotive manufacturers that import their automobiles into The U. S. For any additional tariffs likely to have a significant impact. By market, 2025 Commercial Air aerospace sales are now expected to be unchanged or flat compared to 2024 as our 2025 sales [indiscernible] and other. Lower sales negatively impact cost absorption resulting in margin deterioration and the downward revision to EPS guidance. The midpoint of our EPS guidance is now €0.20 lower. Our operating footprint capacity supports peak announced build rates and some growth beyond. However, we will be very deliberate before adding any headcount about where we ended 2024. Free cash flow guidance is now expected to be around $190,000,000 Note also that our guidance excludes any further sales from Neumark from the Neumark, Austria facility which we are continuing to work towards divesting.

Sales for Austria originally assumed to be approximately $40,000,000 for the year.

And just to repeat, our guidance does not include the impact of any new tariffs announced after 03/31/2025, due to the fluid and uncertain nature of tariffs globally. With that, let me turn the call back to Tom.

Thanks, Patrick. In my annual letter to shareholders, I outlined three key strategies for Hexcel this year. Deliver, innovate, and grow. That are central to us navigating the current challenges and positioning Hexcel for the future. We are focused on operational excellence ensuring we meet production schedules, maintaining high quality, upholding our commitment to the safety of our employees as we deliver on our commitments to our While we do this, we have been streamlining our footprint to position Hexcel for higher margins in the future. We are innovating through our investments in research and technology to develop new materials and processes that will drive the next generation of aerospace and defense products.

We will grow as build rates increase on existing programs address historically high levels of backlog and as we pursue opportunities in the medium term, in markets including defense and space, regional and business jets, and E VTOL aircraft. Longer term growth come from the next generation narrow body aircraft and propulsion that will incorporate increasingly more lightweight composite material. As the only U. S.-owned maker of lightweight carbon fiber composite used extensively in all of the top commercial and military programs, Hexcel is well positioned to benefit from the continued recovery the COVID-nineteen pandemic and the increase in production rates across all programs. As we move forward, I'm confident in our team's ability to navigate the challenges and seize the opportunities ahead. Deliver strong and meaningful cash flow, over the coming years and to generate strong shareholder returns. We appreciate your continued engagement with us today. Operator, we're now ready to take Thank you. We will now begin the question and answer session. Your first question comes from Sheila Kahyaoglu with Jefferies. Please go ahead. Good morning, Tom Patrick. Thank you so much. Popular topic today. So on tariffs, Tom, you talked about it a little bit. And Patrick, you noted $4,000,000 per quarter.

How do we think about your overall tariff impact and what your base assumption would be if you were to include it into guidance? On that $4,000,000 And how you think about profitability in Q1, 9.9% margin they expand 200 or two fifty basis points depending on whether you include tariffs on flattish sales in the next three quarters. So what drives that margin improvement?

Let me just start with the tariffs. As as we said, as we've gone through and analyzed our total spend, and just matched it to the tariffs currently in effect for each country. We came out with with that impact of 3 or $4,000,000 per quarter. As as as I mentioned in my prepared remarks, most of what we buy in The US is US sourced. Most of what we buy in Europe for production sourced in Europe. There's not a lot of cross border flow. And as I also mentioned, the the amount that we buy from China, Canada, and Mexico is only a little bit over 1%. So the direct impact is is fairly minimal. It's, as I said, 3 or $4,000,000. And while that's a big number, that's a number that we can offset over the course of the year with our productivity improvement. But we didn't include it in our guidance because there's a lot of uncertainty as to what the final tariffs will be by country. And also, and probably more importantly, is what's the indirect impact of tariffs gonna be on the rest of the aerospace supply chain and on production rates at the OEM.

That's something that we just can't determine at this point, and so we we didn't wanna try to guess. And so we've left that out of our guidance. The the the the margin that you mentioned for first quarter, was was depressed primarily because the the revenue was lower than we expected, and we didn't get the kind of operating leverage that we expected. As you know, we peaked in production back in 2019. We have all the capital and equipment in place to support much higher levels of production And we're only about 80% recovered back to those levels. So we're not getting the operating leverage. We didn't get it in q one. And that's why we saw the depressed operating Got it. Thank you very much. Your next question comes from the line of Michael Ciarmoli with Truist. Please go ahead.

Hey, good afternoon guys. Thanks for taking the question. Just to follow-up on what Sheila was asking on tariffs. Lots of uncertainty. Do you have any levers to pull in terms of pricing [indiscernible] versus, or in addition to productivity?

Well, what what I would say, Mike, is that we have in our contracts and our incoterms most of them, for example, out of Europe are x works.

So the buyer is responsible for the tariffs. And so they they would get passed on to the to the buyer in that case. In addition, we have a lot of contracts which are essentially pass through. And so for some of our our bigger items, like acrylonitrile or some of our paper for our core, contracts are set up so that we can pass through costs including tariffs. So that that creates a little bit of a natural hedge for us. And that's most of our aerospace contracts are are fixed for the period of time that they're in effect. And so that doesn't offer the the contract opportunity for raising price. But as I said, most of our income terms out of Europe are ex works, and so the tariff is the responsibility of the buyer. And we can't for some of our bigger commodities pass through the price, including tariffs to the customer.

Okay. Perfect. And then maybe, on the flip side, is there an opportunity to potentially gain some domestic share if, you know, these tariffs are making, you know, composites from other global suppliers more expensive. I mean, it that kind of in the realm of your thought process right now?

It it's it's a possibility, but, of course, depends on what the impact of the tariff is on those foreign sources. And at this point, I would say it's still uncertain.

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

Thanks, Mike. Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead.

Hey. Good morning. You have Lou Raffetto on from Miles.

Hi, Matt. Hi.

You called out the lower production rates in the A350 as the driver, main driver of the revised guidance. I'm just curious, is this the rates flattening or are you actually seeing any destocking there? Well, what we're seeing is in terms of what we're gonna deliver is a reduction of about 16 units. So in the in in January when we had our call for the fourth quarter, I mentioned that we built our plan around an assumption that we would deliver 84 chipsets of material to Airbus in 2025. What we're seeing right now is a demand for about 68. Units. And so if you just take a look at the the midpoint of our of our of our ship set, [indiscernible] is 4 and a half to $5,000,000. 16 times the 4,750,000.00 is $76,000,000. So our our our revenue guidance dropped from midpoints by $85,000,000, 76,000,000 of that is due just simply to the reduction that we've seen the a p three fifty production rate. As Patrick said, we've also seen a reduction in the A320 of about 30 units. And again, if you look at the midpoint, of what we said our ship set value is at $350,000, 30 units is about $10,000,000.

So just the a three fifty and the a three twenty reductions and what we're seeing as demand accounts for the $85,000,000 drop in our in our revenue guide.

I appreciate that color, Tom. And then maybe just a follow-up on corporate expense. Usually, it's a lot higher in 1Q. I know you mentioned lower stock comp. I don't know if anything slipped out of the quarter.

Should we expect some sort of flattening? Any reason corporate expense will be up year over year in the back half now?

No. I mean, essentially, we had one or two credits come through, and and there is a stock comp difference between Nick and Tom. Because of Tom's tenure with the company. And so that will make a difference with Tom's costs are now going to be spread out So it was two or three things, but the largest thing was really around the difference between Tom and Nick I mean, the other thing kind of also picking up on something Sheila said, q one is is is normally our softest margin quarter because we're taking those stock comp charges, which we did again this year. They were just a little bit lower. And that's what you're seeing in the lower corporate charges in 2025.

Thank you, Patrick. Your next question comes from the line of John McNulty with BMO Markets. Please go ahead.

Yes, thanks for taking my question.

Tom, historically, Hexcel has always been very conservative when it comes to kind of its staffing and whether it tears back for temporary changes in in orders or production levels from the customers. It seems like you guys are taking a much more aggressive approach. Now admittedly, the A350s got a pretty significant cutback. But I guess, is this is this a change in terms of how you think should be managed as you go forward and where you're a little bit more nimble? And if not, how do you get comfortable that you can ramp up quickly enough when things start to get better? I I think we are taking a stronger line on in terms of aligning our headcount with what we see current production at and how we see it evolving. So that is is true. We're we're we're we're being a little bit more, I'd say, practical and realistic in terms of of where we are. Now that said, we remain very well positioned to support our customers in terms of whatever production rates they they just determine that they can achieve. We have higher levels of inventory. You can see that on our balance sheet.

That gives us a bit of cushion. We also have all the capital in place, so that's not an issue. And we're not gonna reduce headcount per se, but we're just not gonna increase it. We've we've made a few reductions in Europe of of contract labor We made in one of our plants in The US, we made a small furlough. But for the most part, we're just not increasing, and we're allowing attrition to take place. So we're about running 300 heads below where the plan was, and we'll stay that way we see evidence that production rates will increase. Again, with that high level of inventory, we have more than enough cushion to be able to respond to our customers. One thing I wanna make very clear, we're not trying to second guess our customers on their rates and and their schedule. We are absolutely prepared to meet all of our customers and the production rates that they that they put out there. We're just managing our own cost base so that we not getting ahead of them on Got it. Fair enough. No. Makes sense. And then maybe just as a follow-up on the CapEx reduction.

I mean, looks like you're taking CapEx down by 10% or maybe even more than that. I guess, you give us a little bit of color as to where that trimming is taking place? It it's in a whole variety of areas across dozens of projects. And the the the fact is is if you look at Hexcel between, say, 02/2008 when we won the a three fifty program up to 2018, We made massive investments to tool up for the a three fifty industrialization. Those investments are all behind us. We're still not using all that capacity. So we don't have that sort of capital expenditure. And we we had a hundred million dollars in the plan. Given that this year is soft, we've obviously sharpened the pencil and we prioritized the projects. We pushed some things out. And and we were able to take $10,000,000 out of the CapEx budget for the year. But it was just through blocking and tackling on a a wide variety of projects. Nothing major or significant. But we also don't have any big capital expenditures in front of us for capacity because all of those were made in the past.

Got it. Thanks very much for the color.

Thanks.

Next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Yes. Hi. This is actually Catherine Keeler on for Matt this morning. So I guess back to the guidance you talked about the reduction in SIP shipsets on the Airbus side, but could you speak to what you seeing on the Boeing side, and what you're assuming in terms of production rates there? Right. Well, on the Boeing side, for July, we said that we were planning and building our plan around an assumption that they would be in the low thirties. And and and that's about where we we still We we we haven't seen a change in that. Boeing is doing very well on their production. They're they're they're getting up in rate. They still have that cap of 38 aircraft per month, and that'll be something really to watch during the course of the year is is is are they able to get approval from the FAA to go above that? Even if they get above it in the back half of the year, we still think the overall average for the course of the year will be in the low third And so that hasn't changed. On the July, we built our plan around an assumption of about 84 units of delivery.

So roughly seven a month. What what what Boeing has said is that they are delaying the increase in their rates. By three to six months. So so that could impact five to 10 units over the course of the year. And our ship set value is 1 to $2,000,000. So at a million and a half, that could be another 7 and a half to $15,000,000. But but that's that's those are the assumptions that we have used in terms of constructing our plan.

Okay.

Understood. And then I guess, on the f 47 and GAD and and the FAX, X, guys have any opportunity to to supply those programs, the future?

Yes. We do have opportunity. There it's still obviously very early. They've just been awarded. And so there have been no decisions made. But as you as you know, we are the the a supplier for the f 35 material. And we we provide the the carbon fiber for for that. And and so as as Boeing and and whoever wins the Navy and get program, decide on their material system, we will certainly have discussions with them to advocate that that our our material system for lightweight composite material would be very suitable for those applications. And as I mentioned before, and I think this is important in in this context is we're the only US owned maker of aerospace grade carbon fiber composite. And so with with everything going on in in in the geopolitical environment today, having a a source that is owned and controlled in The US certainly has its advantages.

Great. Thanks.

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

Yes. Hi, good morning, Tom and Patrick and Kurt.

Morning, Pat. Just Maybe you wanted just to drill again deeper on the A350. If you are looking at obviously a step down in about 16 units this year, What's your confidence level in terms of inventory at Airbus or other customer sites that that couldn't phase incremental headwind if the ramp at Airbus goes a little slower than expected? I guess how much inventory do you see in the channel at your customer on this program? And how much of that does the revised guide imply is worked off this year?

Well, I think and what we're seeing is that there is some inventory there, and some destocking going on, which is why we built our plan where it is. So our plan and where we built it takes into account some level of of destocking. That that will occur.

So we're we're we're confident. And the thing is is Airbus just reiterated in their in their recent annual meeting report that they are still planning to get up to 12 aircraft per month in 2028. And so, of course, that means the ramp is gonna be steeper now in in these in these few years to that point. But they're they're confident that they're gonna do it, and we are certainly prepared to do it. So that creates enormous opportunity for us.

I would just say this, I said, on the basis of that, so we're going from last year, they delivered 57 aircraft They're gonna get up to 12 aircraft per month in 2028, is about a 32 units. And that creates a lot of of potential for Hexcel. When you look at that, in terms of our cash flow generation capability, you know, we see and and expect that we could deliver a billion dollars in cash flow over the four year period between 2025 and 2028 principally on the back of that a three fifty ramp. So that's why we're we're really so optimistic about Hexcel's position is we're on that program. It's gonna ramp up. It has been slower, frustratingly slow.

To ramp up, but haven't changed their outlook for 2028. And so that gives us, as I said, a billion dollars of cash flow over the next four years. And and and we we see that as as very compelling.

Yeah. Thanks for that, Tom. And as you look, obviously, at that 2028 ramp, Airbus obviously hasn't been at those levels before on the A350. Is there incremental capacity you have to put into support 12 a month assuming Airbus is eventually able to get there? No.

We're we're absolutely capacitized to that. In fact, a a little bit more. That's where that's where we capacitized in 2039. But if you look at if you go back to 2019, in fact, the the a three fifty deliveries were about a 11 which translates into 10 a month. So the system has generated very high levels of production. Everybody does have the capacity it's really just a question of getting the supply chain stabilized and achieving it. But I'm we for Hexcel, we are absolutely capacitized to achieve those levels and even a little bit higher. And remember, Ken, that we're completing a fiber line that we announced pre pandemic, and that will be online in the next two to three years, which will also give us additional capacity for other sort of military growth opportunities, business jet growth opportunities So as Tom said, we will be comfortable on the capacity footprint for some years to come.

Great.

Thank you.

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

Yes, thanks. Good morning, guys. Was wondering on the A350, you shipped you know, well in advance of final assembly, what are you expecting by the end of this year, you'll be shipping at for 2026? Like what do you think they're gonna get to? In terms of what they're gonna buy at, what rate per month? Later in the year? I know you've said the impact is biggest in Q2 and Q3 on the negative side.

But presumably it picks back up in Q4 in anticipation. Of higher rates. I think the numbers are going to be higher for next year, but certainly don't want to try to provide any guidance for 2026 at this point. We'll just say right now, it'll be higher. And we will be prepared to support it.

Okay.

And I know you have a number of different ship tos on the a three fifty. 40 suppliers or so. Are they all coming down in rate? Are they all kind of or are you still seeing excess taxes over variable. You can imagine 40 different supply or plants are are at different levels of production. But there are some plants that are actually behind and we see quite a bit of a higher rate at those. And others maybe where they built ahead a little bit, and so we're seeing a lower rate. So it really is quite variable across the it's about 35 locations that we deliver to for the a three fifty. But it's it's highly variable. But the the average is is what we are building our plan around, which is 68.

Got you. Thank you very much.

Welcome.

Your next question comes from the line of Scott Micas with Melius Research. Please go ahead.

Hey, Tom, Patrick.

Quick question. You've been very good partner to Boeing and Airbus over the years.

You've also had to absorb a big inflation headwind over the past several years. In addition to just the chaotic aero ramp.

And have you approached Boeing and Airbus about repricing some of these LTAs particularly on the a three fifty?

Right. Well, we are under contract, as you know, on all of our programs with our long term agreements. And on the Boeing side, they tend to be a little shorter. And so when we see those expiration, we have been negotiating with Boeing on price to reflect the current market conditions, including inflation. And so we've been able to reach mutually satisfactory outcomes on that. On the a three fifty, which is our biggest program, that goes out to 2030. With Airbus. And and the pricing is is is locked in. Well, there's some, variables due to volume. But what we do there is we put in place joint productivity program. Where they have to invest engineering resources. We put our own engineering resources in. And then we split the savings. And that's how we are able to to drive productivity. And and and and improvements in those long term contracts with with Airbus. And as you said, it's it's very important to maintain strong relationships with with our biggest customers We we want to support them. They're in a tough competitive situation. At the same time, we are in discussions with them about long term programs. We wanna make sure that we secure positions on on the long range programs as well.

So combination of all those things, we do get price when contracts expire. For the longer term contracts like day three fifty, we work on joint productivity improvement programs where we can both benefit through our investments.

Okay. And then Europe is trying to essentially rebuild its own indigenous defense industrial base. If you can't sell that Austrian facility at a reasonable price, could you repurpose it to support growth on some of these European defense programs like the Rafale?

Not really. It's a the the the the facility in in Austria is really aligned better to industrial production. It's a prepreg So it really was very good for the wind market and the recreation market when when when those were were bigger. It's it's not really tailored to aerospace grade carbon fiber.

The production of carbon fiber. So no, it it it wouldn't help on the capacity. We have sufficient capacity in Europe. To support defense growth. And we would invest in more if if the market would justify it. But that's an exciting opportunity for us, and because we are indigenous in Europe, with production facilities and and labor in in in Europe, We think we're well positioned to support any increase that the European defense firms decide to take. Alright. Thank you.

Your next question comes from the line of Gavin Persons with UBS. Please go ahead.

Hey guys, good afternoon. On the cost out, the headcount sounds like that's more just kind of aligning with the new revenue guide for the year, maybe not driving incremental efficiency on a per head basis? Just wanna ask about, you know, initiatives to actually improve, you know, per head efficiency and other opportunity to take cost out of non labor areas.

Right. We we are investing quite a bit in what we call our future initiative and continuous improvement. So we've got dozens of lean projects across the plants to drive efficiency and and and take cost out to improve unit cost. So that's really the the the mechanisms Basic blocking and tackling, It's a plant. It's it's very defined levels. To take cost out to improve the short term productivity. Longer term, we're looking at digitization and automation and new ways of of of structuring our production flow that will take even additional cost out and reduce the capital that's required for production. But in the short term, just dozens of continuous improvement projects with Lean and Six Sigma manufacturing that that will will take cost out and create efficiency. There's there's just no shortcut to it. You just have to grind away at it. Got it. And and just a clarification on the tariff impact. The three to more 3 to $4,000,000 per quarter would be inclusive of reciprocals? No.

No. That would be the as Tom called out, that would really just be the direct impact that we can sort of sensibly estimate today. I mean, when you get into indirect impact and reciprocal tariffs, then you're in another realm of assumption. So the 3,000,000 to €4,000,000 is kind of ring fencing, giving a magnitude around sort of the the the the direct impact that we can see today.

I think that highlights how fluid the situation is. You We we don't know what the tariffs are gonna be by individual country. We don't know if there will be reciprocals. So what we've done is analyzed what we know, the by country, what the direct impact is, and that's the 3 to 4,000,000. Other things are speculative and and will remain to be seen. As the situation continues to evolve.

I mean, the 3 to 4,000,000 had some speculation in it because we don't know where the tariffs are going to settle. But it's it's a sensible ballpark.

Thank you. Your next question comes from the line of David Strauss with Barclays. Please go ahead.

Thanks, Catherine.

We've obviously seen a pretty big weakening in The U. S. Dollar and I know that's a negative. I know you're hedged out, but [indiscernible] give some color around how that could potentially impact as you look to hedge going forward?

Well, our hedging profile will continue as we've done for many years, and that's protecting us to a significant degree today. And I think in this quarter, you saw FX was actually a headwind for us given our tailwind, I should say, given our hedges that were in place Now, obviously, if the dollar stays weak for any sort of extended period of time, ultimately, our new hedges will reflect that weaker dollar position And in twelve months' time, our average FX rate will be weaker. And and so, yes. So we will manage it appropriately as we've done for many years. But certainly through 2025, given our previous hedging profile, we're in a good position.

Okay. And it looks like [indiscernible] updated guidance reflects 11.5 to 12%, I think, margins for the full year. Is right?

And That's the right ballpark. Yeah. Yeah. Okay.

And how and and how does Okay. And how how should we expect that to kind of ramp from here? Do we have the typical seasonal Q3 slowdown or lower margins?

Well, as we said, Q1 is often the weakest quarter of the year because of the stock comp charges. That was mitigated this quarter by some slightly lower corporate expenses going through. We've also highlighted that Q2 and Q3 are going to be the most significantly impacted by the reduced A350 sales and so the volume leverage and therefore yes, I would expect the margin ultimately to get stronger as the year goes on. We know we have the European vacations, which can impact Q3 anyway. So yes, we would expect a strong sort of improvement in margins as we come to the end of the year and we see higher volumes going into [indiscernible] All right. Thanks very much.

Our final question comes from Scott Duchel with Deutsche Bank. Please go ahead.

Patrick, sorry if I missed this, but did you lower your guidance assumptions on July at all?

To reflect the softer start there in the first quarter?

We do have slightly I mean, we called out the March and the 03/20. Those are really the driver of the €85,000,000 And then what I would say is we have some puts and takes And and so within the puts and takes, the $7.87 is down. Whereas some of our defense business is up to offset it. So it's down a bit, but but not massively, and it and it's more than offset offset. So really, as Tom called out, the $3.50 and the $3.20, explain the revenue guidance it does. And the adjustment on $7.87 is really just due to the delay of three to six months that Boeing signaled. On the production rate.

Okay. Is there current level of purchase order activity supporting that that ramp back up on $7.08 7?

Well, we saw a softer q one Now we'll obviously see what we do for the remainder of the year, but we're expecting them to kind of somewhere in the seventies for the full year. Reflecting that push out that Tom spoke Okay. Thank you.

And ladies and gentlemen, thank does conclude today's conference call.

Thank you for your participation and you may now disconnect.