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Date
Friday, July 25, 2025 at 1:00 p.m. ET
Call participants
Chief Executive Officer — Tom Gentile
Chief Financial Officer — Patrick Winterlich
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Risks
Gross margin pressure— Gross margin declined to 22.8% in the second quarter of 2025 from 25.3% in the second quarter of 2024 (GAAP) due to lower sales, reduced operating leverage, inventory reduction actions, and initial impacts from increased tariffs.
Commercial aerospace demand softness— Commercial aerospace sales dropped 8.9% year over year to $293 million in the second quarter of 2025, with A350 and Boeing 787 programs identified as primary drivers of lower volume.
Tariff headwinds— Management forecasts a tariff impact of $3 million-$4 million per quarter going forward, with “the tariff situation remains uncertain, with more potential changes to come.”
Cash flow deterioration— Negative free cash flow of $46.6 million for the first six months of 2025 compared to negative $14.4 million in the first six months of 2024, reflecting lower cash generation so far in 2025.
Takeaways
Sales— Total sales (GAAP) were $489.9 million in the second quarter of 2025, with commercial aerospace representing approximately 60% ($293 million, down 8.9% year over year in constant currency) of sales, and defense, space, and other comprising 40% ($196.8 million, up 7.6%).
Gross margin— Gross margin declined to 22.8% in the second quarter of 2025 from 25.3% in the second quarter of 2024 (GAAP), driven by reduced sales, inventory actions, and underutilization of carbon fiber assets.
Adjusted operating income— Adjusted operating income fell to $4.2 million (11.1% of sales) in the second quarter of 2025 from $72 million (14.4%) in the second quarter of 2024.
Segment margins— The Composite Materials segment posted a 14.1% adjusted operating margin in the second quarter of 2025, compared to 17.2% in the second quarter of 2024; Engineered Products reported an adjusted operating margin of 10.9% in the second quarter of 2025, compared to 14.3% in the second quarter of 2024, both excluding the Belgium closure impact.
Cash flow— Free cash flow for the first six months of 2025 was negative $46.6 million, compared to negative $14.4 million in the first six months of 2024; working capital was a $124.5 million use of cash in the first six months of 2025. Capital expenditures totaled $31.8 million in the first six months of 2025.
Tariff impact— Tariffs began to impact results in the second quarter of 2025, with a projected impact of $3 million-$4 million per quarter going forward, as discussed in the Hexcel second quarter 2025 earnings call.
Headcount— June 30 headcount was below year-end 2024 and declined sequentially from the first quarter of 2025; end-of-year headcount will be more than 400 below the original plan for 2025.
Plant closure and restructuring— The Belgian facility closed, incurring a $24 million restructuring charge in the second quarter of 2025, with production and sales fully transferred to other sites; closure will reduce structural costs in the Engineered Products segment.
Share repurchases— $50.5 million in share repurchases in the second quarter of 2025 brought the trailing eighteen-month total to $350 million (about 6% of shares outstanding), with $134 million remaining under the current authorization.
Dividend and tax— Declared a 17¢ per-share quarterly dividend; effective tax rate guidance reaffirmed at 21% for the third and fourth quarters of 2025, “expect the average adjusted effective tax rate (ETR) for the full year 2025 to be lower than 21%.”
A350 program dynamics— Management expects third quarter demand to be soft due to destocking, with a “pretty strong fourth quarter” in the fourth quarter of 2025 as destocking ends and Airbus increases production rates to seven aircraft per month.
Defense outlook— Defense, space, and other sales rose 7.6% in the second quarter of 2025, with management highlighting “broad strength across a number of domestic and international programs,” citing rising global defense spending and growth in several key platforms.
Long-term cash generation and growth— Management reiterated the expectation to generate over $1 billion in cumulative cash over the next four years, with significant leverage as airframe production rates rise.
Summary
Hexcel(NYSE:HXL) reported lower commercial aerospace revenue and margin erosion in the second quarter of 2025, primarily on destocking and softness in key programs, while defense segment sales grew meaningfully. Restructuring, including the Belgium plant closure and elevated tariff impacts, weighed on adjusted profitability and near-term cash flow in the second quarter of 2025, but are expected to reduce costs in the future. Headcount management, contract renewal activity, and tactical share repurchases were cited as measures to address challenging conditions and support earnings per share targets despite ongoing production disruptions and market uncertainty.
Management reaffirmed full-year 2025 guidance, stating, “We are reaffirming our 2025 guidance with the caveat that we are still reviewing the recent change in tax laws.”
Winterlich stated that approximately 85%-90% of the $24 million restructuring charge in the second quarter of 2025 is expected to result in cash outflows, with the majority occurring in the third quarter.
The company was recognized with an Airbus supplier award for best performance in delivery and quality.
Hexcel hedging policy leaves it 80%-85% hedged for the remainder of 2025, with a build toward 75% hedged entering 2026.
Gentile described the ongoing contract renewal process, with 15%-20% of contracts up for renewal each year and the average life at seven years, emphasizing efforts to incorporate price escalators and volume protections.
Divestitures of the Australian glass fiber prepreg/recreation business and additive manufacturing in Connecticut are proceeding as part of a strategic focus on core aerospace and defense businesses.
Free cash flow is typically negative in the first half; management maintains the projection of over $1 billion in cumulative cash generation over the next four years.
Industry glossary
Shipset— The complete set of composite or structural material components supplied for a single aircraft build.
Destocking— The process by which downstream customers reduce inventory by pulling fewer shipments than their current production rates, resulting in lower near-term supplier demand.
Adjusted EBITDA— Earnings before interest, taxes, depreciation, and amortization, excluding certain one-time or non-operating items, used as a proxy for core operational profitability.
Prepreg— Fiber reinforcements pre-impregnated with a resin system, used in advanced composite manufacturing for aerospace applications.
LTAs (Long-Term Agreements)— Multi-year contracts governing supply terms—including pricing and performance metrics—between Hexcel and key aerospace OEM customers.
Full Conference Call Transcript
Tom Gentile: 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 defense spending. Starting with Boeing, there is 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.
Solid progress also continues to the 787 build rate as Boeing moves towards producing seven aircraft per month in 2025 on the apparent resolution of supply chain issues. For Airbus, the outlook for the A320 ramp is also becoming more encouraging in terms of the growing availability of engines in the second half of 2025 to enable Airbus to increase the build rate and then push monthly build rates through the sixties in 2026. Airbus continues to project they will achieve a production rate of 75 aircraft per month on the A320 NEO program by 2027. The A350, Hexcel’s largest program, is currently one of our major challenges.
If 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 destocking impact in Europe in the second quarter based on high levels of inventory for A350’s certain parts, including the wing. As previously communicated, we expect this destocking to continue through the third quarter. Airbus has indicated that the destocking should end as we go into Q4, and they are still targeting to achieve a build rate of 12 aircraft per month on the A350 program by 2028.
Remember that the shift set for Hexcel, 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 requirement 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.
Demand within other commercial aerospace is also solid, and second-quarter revenue saw growth both year over year and sequentially. As a reminder, the modern large cabin business jets now have extensive composite content with shipset values between $200,000 and $500,000 per shipset. The 2025 saw strong defense sales, with broad strength across a number of domestic and international programs. Military and defense budgets around the globe continue to strengthen. Notably, NATO members in Europe indicated that they will increase defense spending to 5% of GDP, which ultimately translates to higher sustained build rates for most platforms. Development of new platforms is also encouraging, such as sixth-generation fighters and autonomous drones. Hexcel participated in the Paris Air Show last month.
We provided a confident outlook for the aerospace industry, where we reinforced existing relationships, announced new relationships, and highlighted recent advances with our innovative technology for lightweight material. Some items of note included Embraer and Hexcel celebrated fifty years of Hexcel supplying lightweight composite solutions by signing a preferred supplier agreement for composites. Hexcel has been a long-standing 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 C390 military transport and the KC390 tanker, the E2 jet family of narrow-body regional aircraft, and the Vietnam 300 business jet.
We also signed a long-term agreement with Conifer, the Norwegian defense and aerospace systems provider. The agreement covers the supply of Hexcel’s lightweight engineered honeycomb and prepreg products for strategic production programs over five years. This is just one example of Hexcel’s strong European presence in relation to the increasing defense spending in Europe. In addition, we announced a collaboration with Flying Whale and Hexcel on an exciting project to develop an advanced solution for modern airship structures. The project will utilize a broad range of Hexcel’s products and especially Hexcel’s lightweight carbon fiber, which has been selected for the pultruded tube that composes the skeleton of the Flying Whale airship.
Each airship is forecast to have a shipset of more than a million dollars. Looking at our financial results for Q2 2025, we generated sales of $490 million and adjusted diluted EPS of 50¢ per share. As we highlighted at our last earnings call, aircraft production rates in 2025 will not meet the initial expectations due to supply chain disruption. Commercial aerospace sales in 2025 were $293 million, down 8.9% on a constant currency basis in the same period in 2024. Lower sales year over year were primarily due to the A350 and the Boeing 787. However, this was partially offset by a 5.1% increase in sales within the other commercial aerospace from international demand.
To share some additional color, commercial aerospace sales were up on a sequential basis. The Boeing 787, the 737 MAX, and the Airbus A320 NEO all increased sequentially, as did other commercial aerospace. The A350 sales were lower as anticipated due to channel destocking. In defense space and other, sales totaled $197 million, up 7.6% in constant currency in the same period in 2024. Growth was driven by the T853 KS, two international fighter programs, and a strong quarter for space, including launchers, rocket motors, and satellites. Conversely, the B22 Osprey continues to weaken as expected as that program comes to the end of its production life.
However, the overall continued growth in defense underscores the capabilities and value Hexcel’s lightweight materials bring to the military market. 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 operation and controlling costs as we navigate reductions in near-term production for commercial aerospace programs, notably the A350, before the production rates continue to increase in the second half of 2025. Our gross margin of 22.8% for Q2, down from 25.3% in 2024, was negatively impacted by lower operating leverage from the lower sales, combined with actions that we are taking to reduce inventory levels.
And then margins also were impacted by this lower overhead absorption. In addition, we are now beginning to feel the impact of tariffs. As production rates increase in 2025 and into 2026, the increased volume will drive operating leverage and expanded margins. While production rate increases for original equipment and commercial aerospace have experienced delays in 2025, the commercial aerospace industry outlook and confidence levels appear to be getting stronger. Given this backdrop, we continue to remain extremely vigilant about 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.
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 so. We are also introducing more escalation and pass-through clauses for our sales contracts whenever we can. 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 their term.
As we have mentioned in recent quarterly calls, we are managing headcount very tightly and will only add people when the demonstrated production rate clearly justifies 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 below our original plan for 2025. As of June 30, our headcount was below the fiscal year-end 2024 level 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.
We also continue to move forward on our future pack factory efforts, which will see significant cost per unit improvements over the next several years, in part through the adoption of more automation, digitization, robotics technology, and the incorporation of artificial intelligence at our production site. In relation to continued efforts to optimize our production and overall facility footprint, we have now completed the legal process required in Belgium and have announced the closure of our engineered product facility in that country. Production stopped at the end of June, and the majority of our employees have departed, 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 site. This Belgium site was operating as part of Hexcel for a decade, but over time, the cost structure became untenable. 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 that 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 Tocqueville, Pennsylvania. So there is no impact on our top line.
The previously announced divestiture of our Australian glass fiber prepreg and recreation business is continuing, and we plan to provide an update later this year. We also recently divested our additive manufacturing business in Hartford, Connecticut, as part of our overall streamlining of 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 positions. We have world-class production facilities across the US 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. 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 contract or 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. 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 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, almost 6% of our outstanding stock, in the last eighteen months. With that, let me turn it over to Patrick to provide more details on the numbers. Patrick?
Patrick Winterlich: 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 sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact. Sales. The commercial aerospace market reported approximately 60% of total second-quarter sales in 2025 to $489.9 million. Second-quarter commercial aerospace sales of $293 million decreased 8.9% compared to the second quarter of 2024. We experienced lower sales year over year with each of the four major commercial aerospace programs, including the Airbus A350 and A320, and the Boeing 787 and 737 MAX.
As the overall aerospace supply chain continues to experience challenges ramping as quickly as the market demand supports, A350 sales declined year over year and sequentially as expected on channel destocking as Airbus has faced supply challenges causing delays in the rate ramp. As Tom mentioned, 787, A320 NEO, and 737 MAX all increased sequentially. Sales for other commercial aerospace in the second quarter increased 5.1% year over year, led by international demand. Defense space and other represented approximately 40% of second-quarter sales and totaled $196.8 million, increasing 7.6% from the same period in 2024. For rotorcraft, the CH 53 K and Blackhawk program, year over year partially offset by the sunsetting V22. And a softer quarter for Apache.
The space market grew strongly year over year, including both from the traditional defense prime and private space companies. Growth was across multiple space applications, including launches, rocket motors, and satellites. Gross margin of 22.8% in 2025 decreased from 25.3% in 2024 as lower sales and inventory reduction actions negatively impacted operating leverage. 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, to create operating leverage and drive increased margins as we go through the year.
As a percentage of sales, selling, general, and administrative expenses, and R&D expenses, were 11.7% in 2025 compared to 10.9% in the comparable prior year period. Upgrade to financial and mass manufacturing IT systems combined with some additional professional fees contributed to higher operating percentage expenses as a percentage of sales. The closure of the engineered product facility in Belgium drove the other operating expense of $24.2 million in the second quarter of 2025. These costs consist primarily of severance expenses, with the majority of cash outflows expected to occur in the second half of 2025. Let me reiterate what Tom said.
There will be minimal impact on 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 was a high-cost market for the product being manufactured. Adjusted operating income in the second quarter was $4.2 million or 11.1% of sales compared to $72 million or 14.4% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the second quarter to operating income was favorable by approximately 10 basis points. Now turning to our two segments. The constant material segment represented 80% of total second-quarter sales and generated an adjusted operating margin of 14.1%.
This compares to an adjusted operating margin of 17.2% in the prior year period. The engineered product segment, which is comprised of our structured and engineered core businesses, represented 20% of total sales and excluding the impact of the Belgian plant closure, generated an adjusted operating margin of 10.9%. This compares to an adjusted operating margin of 14.3% in the prior year period. Net cash used by operating in the first six months of 2025 was $5.2 million, compared to net cash provided of $37.2 million in the first six months of 2024.
Working capital was a cash use of $124.5 million in the first six months of 2025, compared to a cash use of $118.3 million in the first six months of 2024. 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 prior year period. Free cash flow in the first six months of ’25 was negative $46.6 million, which compares to negative $14.4 million in the first six months of 2024. We typically use cash in the first half of the year, and this year was no different. Adjusted EBITDA totaled $172.5 million in the first six months of 2025 compared to $204 million in 2024.
We used $50.5 million to repurchase stock during the second quarter. The remaining authorization under the share repurchase program as of 06/30/2025, was approximately $134 million. The board of directors declared a 17¢ quarterly dividend yesterday. The dividend is payable to stockholders of record as of August 8, with a payment date of August 15. We are reaffirming our 2025 guidance with the caveat that we are still reviewing the recent change in tax laws. Our initial assessment is that our cash taxes will be lower in 2025 than our full taxes due to the deductibility of past R&D costs. With what is, in essence, a one-time catch-up.
I would also like to clarify that our guidance of an effective tax rate of 21% is the underlying ETR we are currently assuming for the third and fourth quarters of 2025. Therefore, given some discrete adjustments in the first six months of 2025, we expect the average adjusted ETR for the full year of 2025 to be lower than 21%. And as I have just indicated, we will update our forward ETR guidance if needed once we have fully digested the impact of recent and floor changes. We continue to forecast the tariff impact of $3 to $4 million per quarter. However, the tariff situation remains uncertain, with more potential changes to come.
Our regional sourcing helps us to insulate us from the impact of tariffs, and we will continue to work on mitigation and pass-throughs, so that takes time. And finally, I would like to share a reminder of the typical third-quarter sales seasonality that arises from European summer vacations. With that, let me turn the call back to Tom.
Tom Gentile: Thanks, Patrick. Despite the challenging first half of the year and the near-term softer-than-expected demand for the A350, the fundamental outlook for Hexcel remains robust. Backlog for new aircraft is at an all-time high, and every new commercial and military aircraft program brings more demand for advanced lightweight composite materials than the older generation it replaces. And as defense budgets around the world continue to get stronger, this provides an additional tailwind for Hexcel. Given this landscape, we are extremely confident that with Hexcel’s unrivaled portfolio of technology and lightweight product offerings, and given the production footprint we already have in place, requiring minimal capacity increases, over the next several years.
There is a great opportunity for Hexcel to generate strong incremental margins, drive growing EBITDA, and generate significant free cash flow for many years to come. Repeat, we expect that we will generate over a billion dollars of cash flow in the next four years. Hexcel has the technology, the lightweight product portfolio, customer relationships, qualification, and the team to deliver as commercial production rates fully recover and defense spending increases. We appreciate your engagement with us today. With that, we’re ready to take your questions.
Operator: Thank you. If you would like to withdraw your question, simply press 1 again. 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. Your first question comes from Ken Herbert of RBC Capital Markets. Your line is open.
Ken Herbert: Yes. Hi. Good morning, Tom and Patrick.
Patrick Winterlich: Morning, Ken.
Ken Herbert: 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?
Tom Gentile: Yes, Ken. Sure. So as we’ve said, that’s a program that has changed. Airbus announced back in November that they were bringing down their schedule, and then in February, they announced again another reduction in the schedule. So we 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 sixties for the full year. But what we do see is that we think that destocking should end in the third quarter. Airbus has said that they’re gonna get to seven aircraft per month in the September time frame.
And so we’re expecting a pretty strong fourth quarter, probably twenty to twenty-one 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 destocking.
Ken Herbert: Great. That’s very helpful. And is there any reason to think that we shouldn’t see continued growth within the defense space and other portfolio in the back half of the year? I think the run rate’s been very nice to start the year.
Tom Gentile: 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.
Ken Herbert: Great. Thanks, Tom.
Tom Gentile: Thanks, Ken.
Operator: The next question comes from David Strauss of Barclays. Your line is open.
David Strauss: Thanks. Good morning. Good morning. Following up on Ken’s question there. Tom, with destocking that you’ve seen in the destocking on the A350 you’ve seen in Q1, Q2, what rate were you effective shipping at in the first half of the year for the A350?
Tom Gentile: Yeah. Well, the ring, it’s always a little bit different because we’re a little bit ahead of everybody by six to 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. Don’t forget, you know, those are the rates, and what they actually shift can be different. 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 sixes in Q1 and high fives in Q2.
David Strauss: So just to clarify, so those aren’t the stated Airbus rates. Those are the rates you’re actually shipping at.
Tom Gentile: Yeah. What Tom was talking about is what we’re shipping at. And we’re shipping more in the US than we are in Europe. And let me clarify. This is the destocking aspect because what’s the stated Airbus rates are could be one level, but what they’re pulling from us at because they’re destocking is another level. And so our results kind of reflect the lower number, which is the destocking. So our results won’t reflect what Airbus is reporting as their shift rates because they are destocked.
David Strauss: Perfect. That’s what I was getting at. Thank you. And then, Patrick, on currencies, so you’re still seeing a bit of a tailwind given your hedging. When would you expect the currency comparison to flip negative here given the weakening in the dollar that we’ve seen?
Patrick Winterlich: We have continued to benefit, and it really does kind of speak out 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. If rates stay where they are, we’re gonna see that flip or start to flip, I think, next year in ’26, David.
David Strauss: Thank you very much.
Operator: The next question comes from Gautam Khanna with TD Cowen. Your line is open.
Gautam Khanna: Yes. Thanks. Good morning, guys. I was wondering to follow-up on the prior two questions. Do you guys have any expect can you give us any framework for thinking how the decoupling to underlying rates on the A350 progresses in 2026, do you think you’ll be at that seven-ish rate that you implied for Q4 for much of 2026 irrespective of where Airbus is. I’m just curious, like, you know, there’s a destock, and then there’s a recoupling. Right. Right. The pace of decoupling, if you will.
Tom Gentile: Right. So our sense is that we’ll get through the destocking in Q3 and start to get closer in terms of that coupling that you mentioned in Q4 and through next year. So, yeah, Airbus looks like they’re gonna enter 2026 at seven on the A350, probably raise it to eight sometime during the course of the year. And we’d expect that we’ll be closely more and more coupled with them throughout ’26.
Gautam Khanna: Gotcha. Okay. And then just on the other major programs, like, say, the 787, can you update us on where you are and how you see that progressing into 2026?
Tom Gentile: Right. Well, you know, to be honest, the first half year was probably a little soft for on July. Just in terms of what they were pulling. But Boeing is getting up to rate seven, 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 787. Boeing has been reporting very strong production rates on that. So, you know, our pull was probably a little softer in Q1 and Q2, but production rates on that program look very strong and are expected to grow.
Gautam Khanna: I think you mentioned something on the pricing side. In the prepared remarks. 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?
Tom Gentile: Right. Well, as I mentioned, our average contract length is about seven years. We’re doing about 15 or 20% of the contract renewals every year. And when contracts come up, we always take the opportunity to reset the terms and also negotiate price to reflect some of the inflation that we’ve been seeing. Make sure we’re getting a fair return on our investment. But it’s, I’d say, an ongoing gradual process. About 15 or 20% of the contracts per year. 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.
The least the A350 contract originally goes back to 2008. So that was a very long-term contract. Going forward, that’s not been the case. Our contracts, as I said, average about seven years now. And about 15 or 20% come up each year for renewal.
Gautam Khanna: Gotcha. Thanks so much. I appreciate it, guys.
Operator: The next question comes from Myles Walton with Wolfe Research. Your line is open.
Myles Walton: Thanks. Good morning. Tom, you mentioned the award from Airbus for the best supplier for schedule and quality. I’m just curious, how do you use that to your advantage? And what conditions on the ground would have to exist such that on your Airbus contracts in particular, because they’re so onerous and so long-dated, where you would say, we’re your best supplier. We’re not getting value for what we’re delivering. And we need to renegotiate.
Tom Gentile: Well, look. I think the key right now for commercial aerospace, Boeing and Airbus, is to get the production rates back up. And to do that, they need the supply chain delivering and performing. And we’re very proud on Airbus, as I mentioned, is that we received an award for best performer. This was in the materials category for our quality and delivery. And that’s very important to support Airbus as they’re increasing the rate across all their programs. And so we’re gonna continue to do that. At the same time, we always want to work 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 on productivity initiatives where we can jointly share the benefit. So the contracts do go through 2030, but that doesn’t mean we’re not working on productivity to drive mutual benefit in the meantime.
Myles Walton: Okay. And just to circle the square on the A350 deliveries, so 2021 in the fourth quarter, 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?
Tom Gentile: Not an issue. We’ve got plenty of capacity in place. We got a trained workforce. That’s one of the things. I mean, because the volumes have been a little bit lower than we expected, we’re essentially overstaffed. You know, we could have probably taken out 50 or 100 people, but we didn’t. We know the rates are going up in the back half, and we’re gonna need those folks. So we didn’t want to have to rehire and retrain them. But we are absolutely, we’ve got enough capacity and staffing to meet the demands as they come up in Q4 2025, but also all through ’26.
Myles Walton: Okay. And one last one, Patrick. The 24 million restructuring, how much of that is cash that you have to spend in the second half?
Patrick Winterlich: Yeah. A large majority of it, 85, 90% will end up with cash. The majority of that cash, I would expect to move in the third quarter.
Myles Walton: Okay. Thank you.
Operator: The next question comes from Michael Ciarmoli with Truist Securities. Your line is open.
Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the question. Just to further clarification on the A350. Does the full-year guidance contemplate low 60s? Or do you think you end up at 68? And then just from a seasonality perspective, does Q3 look a lot weaker kind of across the board than normal?
Tom Gentile: Q3 does look weaker. We’ve got the destocking, as Patrick mentioned, these echoes holidays that always take place in Europe. So Q3 does look softer. Yes. The full year, we think, is kind of low to mid-sixties overall. But as I said, expecting a fairly strong Q4. Airbus is planning a rate break to seven in September. And the destocking should really be behind us by that point. And so Q4 should be strong, and that leads into 2026.
Michael Ciarmoli: Okay. And then just for clarification, the tariff headwind, I mean, it sounds like you’re trying to offset. You 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?
Tom Gentile: 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 3 or 4 million a quarter. 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. We’ve left it out. But you could probably extrapolate and say it could be up to 10 million.
You know, our EPS target is $1.95 or $1.95. And so there could be some pressure in that brings us toward the lower end of the range if the full tariff impact hits. But we just don’t know. So we didn’t want to build it into the guidance and then have to change it based on what we 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, it just seemed to us to be a little bit premature, especially since it’s only 3 or 4 million a quarter and we’re at the low end of the range.
Michael Ciarmoli: Got it. Helpful. Thanks, guys.
Operator: The next question comes from Richard Safran with Seaport Research Partners. Your line is open.
Richard Safran: Thanks. Tom, Patrick, Kurt, good morning. I just have one two-part question for you guys on defense. 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? Given the increase in the U.S. and Europe, 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? Thanks.
Tom Gentile: 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. You were seeing it, you know, strength across the board in some of our big programs like the CH 53 K where we do the whole material system. Or the F 35 where we provide all the carbon fiber for the material system. And then some of the space and the missiles have also been strong. So we expect that to continue, if not accelerate.
Because the underlying defense spending and the demand is so great. We’re also seeing that in Europe. You know, we have a big work share on the Rafael program, which is the fighter jet from Dassault. And that was up a lot. And the demand for that is significant. Many countries are turning to that aircraft as they go forward. So we expect that to continue throughout the year. I don’t know if it’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. Right now, defense is about 30 to 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 gonna 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.
Richard Safran: Well, thanks very much, Tom. Appreciate the color.
Tom Gentile: Thank you.
Operator: The next question comes from Scott Deuschle with Deutsche Bank. Your line is open.
Scott Deuschle: Hey. Good morning. Patrick, to get to the midpoint of the EPS guide, I have to assume like a 45% incremental operating margin in the back half. I guess, does that math sound directionally right? And then if it is, can you walk through what’s going to drive that type of operating leverage? Thank you.
Patrick Winterlich: Yeah. We clearly need a step up in the second half. We’ve got the seasonality sales effect in Q3, but with cost and management, we will drive and follow 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 A320 moves towards 60, and hopefully works sort of getting aligned on the 38 on the MAX. So that should drive pretty strong leverage as we exit the year and deliver what we see as a positive fourth quarter.
So yeah, I agree roughly with your numbers. As Tom said, sort of the $1.95, well, that’s the tariff impact. Is really where we’re expecting to finish the year.
Scott Deuschle: Okay. And then, Patrick, can you give the latest split in cost of goods sold between energy and raw materials? Direct labor, overhead, and the like, then has energy become a meaningfully larger share of that cost breakdown, or has that been fairly stable as a percentage of your overall cost of goods sold?
Patrick Winterlich: Yeah. I mean, we’ve never shared the details of that, but materials continue to be the largest part of our COGS. Followed by people cost, labor cost, I mean, energy is still single-digit. I’ll say that much. I think we’ve indicated that before. It sets up with the European impact of the Ukraine war a few years ago now. And it’s still at that level. So it hasn’t certainly hasn’t materially changed in the last year or two, but it’s in that sort of mid just above mid-single-digit level.
Scott Deuschle: Okay. Thank you.
Operator: The next question comes from Scott Mikus of Melius Research. Your line is open.
Scott Mikus: Morning, Tom and Patrick. Tom, to dig in a little bit on the pricing protections and the LTA negotiations, historically, some suppliers have had a pass-back productivity with Boeing and Airbus as part of their LTAs. And you mentioned that some of your Airbus contracts share the productivity benefits with them. So as you renegotiate these LTAs and they come due, or you bid for new programs, are you making sure that you get to keep the productivity that you drive in your own four walls?
Tom Gentile: Well, it’s a little bit of both. I mean, I would say as we get into renegotiations, we’re trying to learn from the past. And so we’re building in volume adjustments because certainly that was a big issue from the pandemic. We’re also looking to ensure that there’s appropriate escalation protection for things like inflation in labor or if we were just talking energy, or logistics. And or tariffs as we have learned. So those are the ways that we’re looking at it. The thing on productivity is that this is a tough industry. And you always need to be running fast to stand still. And our customers expect ongoing productivity.
So while if we can get the buying protection and we can get escalation, we certainly have to be willing to work jointly with them to get productivity that we share. And that’s been a hallmark of our contracts with all of our big customers in the past, and I expect it will be in the future as well.
Patrick Winterlich: Yeah. Because if 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, speed up our lines, change our parameters, we need those signed off and approved by the customer. So we do tend to work with them. And to Tom’s point, ultimately, it’s a competitive advantage if we can give them some benefit as well as clearly keep as much as we can for ourselves. So, normally, we do have to collaborate.
Scott Mikus: Okay. And then thinking about build rates, we saw GE raise its commercial OE sales growth and reaffirm the LEAP delivery guidance. Boeing’s production rates have been surprising to the upside. And you mentioned the A350 destocking 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 737 and 787 while destocking on the A350 is entirely behind you?
Tom Gentile: Well, when you mean when you say restocking, you mean just the build rates going up?
Scott Mikus: Well, I mean, customers, some of the sub-suppliers that you ship to, maybe have burned down excess inventory and need to rebuild higher levels of buffer inventory to support future higher production rates.
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 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 different parts of the chain building at different rates.
Patrick Winterlich: Yeah. 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 and significant. Restocking is very gradual over a period of time as the network has to chain build up for a higher rate.
Tom Gentile: But I would say, you know, just to your point, is we are starting to see this inflection point with the rates going up in a sustained way across all the major programs at Boeing and Airbus. And so that’s very positive. We’re still in a final process 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 A350. The A320, the 787, the 737. It’s been a long recovery period. We’re finally getting to the point where it’s going up.
Scott Mikus: Thanks for taking the questions.
Patrick Winterlich: Thank you.
Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.
Sheila Kahyaoglu: Good morning, guys, and thank you. 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, it’s actually flat versus 2019 levels. Obviously, headcount is down because revenues are down, but the actual number of aircraft people produce are the same. So it implies that you’re actually getting a net price decline of 6% where other companies in the sector are probably up multiples of that. So I guess, how do we think about when that fixes itself to get the margins back up? Not only based on volume, but this contract renewal process, Tom, if that makes sense.
Tom Gentile: Yeah. 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. We shipped 112 A350s, and our revenue was $2.35 billion. And we had all the capacity in place to support that level of production. Where we are now is a much different place. I mean, obviously, last year, Airbus delivered 57 A350s. And so we’re utilizing only a portion of the capacity, probably two-thirds to three-quarters. And so we’re not getting the operating leverage that we should get both in terms of headcount, but overall. And that’s what’s impacting our margin.
So I think as our margins or our revenues and build rates recover, where they were in 2019, you’ll see us get the operating leverage, and that’ll improve revenue per headcount. And it’ll also improve margin. Now as we’ve said, because we’ve experienced some inflation in labor and in material and in utilities, even when we get back to the previous levels of revenue, we’re still gonna have some headwinds. A couple of 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 some of that as well.
That’s how I would lay it out.
Sheila Kahyaoglu: That makes sense. And then I guess maybe if I could ask as the destocking alleviates itself, from the Q2 levels, what program has the most operating leverage? And then how do we think about the Belgian factory payback?
Tom Gentile: Well, I mean, the destocking and upper, I mean, it’s really an A350 story for us, primarily. It’s our biggest program. We invested significant amounts of money from 2010 to 2019 to support the industrialization to go up to 13 aircraft per month, and the rates have been far below that. As you know, since the pandemic. And so that’s the biggest issue in terms of operating leverage, and I’d say the A350 is probably been the biggest issue in terms of destocking. Just to give you some quick math, it’s not perfect, but look at last year’s numbers. We reported that our results for the A350 we delivered about 72 shipsets in 2024. Airbus only delivered 57.
So it’s not an exact comparison, but that’s essentially what’s destocking right now.
Sheila Kahyaoglu: Got it. Thank you so much.
Tom Gentile: Thanks.
Operator: The next question comes from Gavin Parsons of UBS. Your line is open.
Gavin Parsons: Great. Thank you. Good morning.
Tom Gentile: Good morning, Juan.
Gavin Parsons: Tom, pretty healthy pace of buybacks, but I thought in the prepared remarks, you maybe sounded a little more front-footed on M&A. So just wanted to know how you think about that trade-off and how you’re contemplating the size of maybe bolt-ons for something more significant.
Tom Gentile: Right. M&A, yeah, 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 disciplined. We’re gonna look for things that are strategic, that advance our advanced material science focus. Have a heavy emphasis on aerospace and defense, and meet our return thresholds, which are quite high. But if we can’t find something that fits that criteria, we have been doing share buybacks, and we’ll continue that.
But that’s how we’re thinking about it is we think it could be a good if the right opportunity surfaces, but we’re gonna be very disciplined in the absence of that, we’ll continue to fund our productivity, our innovation, our organic growth, and then do continue to do share buybacks on a select basis.
Gavin Parsons: Okay. And then it seems like Kinston is the main bottleneck on the A250. Wondered 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.
Tom Gentile: And 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. And I think that’s probably the case.
Gavin Parsons: Thank you.
Operator: The next question comes from Ron Epstein of Bank of America. Your line is open.
Alexander Christian Preston: Hi, guys. This is Alex Preston on for Ron today. Good morning.
Tom Gentile: Morning.
Patrick Winterlich: Morning.
Alexander Christian Preston: I was wondering. We talked a little bit about the direct impact of tariffs. Maybe if you’re considering or you’re seeing 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 here?
Tom Gentile: Well, as we’ve said in the past, that’s our bigger concern. It’s 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 and see. Obviously, there is no deal yet with the European Union. We’ll have to wait and see what that is, and then what the treatment is of aerospace trade that goes back and forth. One thing I’ll say is over the years, aerospace has been a great industry for the U.S. It’s probably the biggest net importer for industrial industries, with over $120 billion of net exports.
And it’s relied on zero tariffs, and that’s certainly 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 could be yet.
Alexander Christian Preston: Got it. Thanks for the help.
Operator: The next question comes from Kristine Liwag of Morgan Stanley. Your line is open.
Kristine T. Liwag: Hey, good morning, everyone. 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, 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 margin?
Patrick Winterlich: Yeah. So we enter a year roughly 75% hedged. So if I look at 2025 for the back half of ’25, we are gonna be hedged more than that at this point. With just those two quarters remaining. So we’re probably 80, 85% hedged. It’s not 90% now through the end of 2025. We’re building up our hedge profile for 2026, and by the end of this year, as I said, I would expect to enter 2026 around 75% hedged. The vast majority of our sales in Europe are in dollars, and with the decline of the wind energy business, that was actually a source of euros that has now gone away.
So if anything, our need to sell dollars to cover our European 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. 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 gonna speculate on the size of that at this juncture.
Kristine T. Liwag: Great. Thank you. And, you know, if I could 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. 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?
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?
Tom Gentile: Well, as you go into any contract negotiation, your goal is always to maximize the value of the contract. But, of course, you have to negotiate that with the other party. And so there’s trade-offs to be made. But our goal is always to make sure that we get a fair price that reflects the value we provide and the huge 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 and logistics. So the goal is always to maximize price. And you take into some account other considerations. So for example, this is a long-cycle business. There are only a few players in it.
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 gonna be the narrow body, and that’s gonna be a huge program. So that’s another trade-off that you factor in. But again, our goal, Kristine, I can assure you, is always to maximize price in contract negotiations subject to where our counterparties will let us go.
Kristine T. Liwag: Thank you, Tom, and good luck.
Tom Gentile: Thanks.
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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