Thank you for joining us for the Hexcel Second Quarter 2024 Earnings Conference Call. All lines are muted to minimize background noise. Following the speakers’ comments, we will have a question-and-answer session. Now, I would like to hand the call over to Patrick Winterlich, Chief Financial Officer. Please go ahead.

Thank you, Rob. Good morning everyone. Welcome to Hexcel Corporation's Second Quarter 2024 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 we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our CEO and President; and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our second quarter 2024 results detailed in our news release issued earlier this morning. Now let me turn the call over to Tom.

Thanks, Patrick. Good morning everyone, and thank you for joining us today as we share our 2024 second quarter results. I'm excited to be succeeding Nick Stanage as CEO and President of Hexcel and participating in my first Hexcel earnings call. Nick had a very strong tenure as CEO over the last 10 years and positioned the company for future leadership. The strong financial results this quarter reflect the efforts the Hexcel team has made over the last several years to recover from the pandemic. As you read in our news release earlier this morning, Hexcel's second quarter sales of $500 million were up more than 10% year-over-year on strong performance, especially in Commercial Aerospace where sales grew more than 21% year-over-year. At $0.60, our EPS was 20% better than Q2 2023. As a side note, the last time Hexcel quarterly sales exceeded $500 million was the first quarter of 2020. As we look ahead to the second half of 2024, some of our commercial aerospace customers are flagging continued challenges in the aerospace supply chain and slowing previously communicated production rate increases. Notably, on June 24, Airbus signaled a reduction in deliveries for 2024 from 800 to 770 aircraft, indicating it would impact all programs, including importantly for Hexcel, the A350, which is our largest individual program. Boeing deliveries have also been below plan for the first half of the year. Our initial 2024 guidance was based on sales from Airbus and Boeing continuing to grow throughout the year. That now appears to be less likely, and we expect sales and earnings in the second half of 2024 to be generally similar to the first half of the year. We have therefore, revised our guidance for 2024 accordingly based on a more cautious near-term outlook. Our revised guidance is as follows: sales of $1.9 billion to $1.98 billion. Previously, it was $1.925 billion to $2.025 billion. Adjusted diluted earnings per share of $2.02 to $2.18, previously $2.10 to $2.30; and free cash flow of around $200 million, previously greater than $200 million. We feel this revised guidance is a more prudent reflection of the softer market conditions for commercial aircraft production that we now expect in the second half of 2024. With that said, we remain confident in the midterm outlook for commercial aircraft and expect both Airbus and Boeing to continue to increase their production rates over the coming years. For example, Airbus has announced that the A350 will be reaching 12 aircraft per month by 2028. We are, therefore, not making any changes to the midterm guidance previously shared by the company at our February Investor Day and reconfirmed at the beginning of May. Underpinning our confidence in the mid-term outlook is the increased demand for new lightweight aircraft with around 14,700 aircraft now in backlog for Airbus and Boeing combined. Total Revenue Passenger Kilometers, or RPK, continues to grow, with IATA reporting record international passenger traffic. Domestically, the TSA reported a record level of security screenings earlier this month. This strong air traffic and healthy backlog are driving a recovery in aircraft production rates which should get us back to 2019 production levels during 2026. The outlook for commercial aerospace production in the midterm and beyond is tremendous, and Hexcel is well positioned to benefit as the aerospace supply chain continues to recover. Lightweight Hexcel advanced composite materials will enable enhanced sustainability and efficiency for decades to come as lighter aircraft and more aerodynamic architectures extend range, reduce fuel consumption and drive lower emissions. This compelling lightweight value proposition is one of the things that attracted me to Hexcel, and it will become even more powerful over time as the aerospace industry focuses more on emissions reduction and sustainable aviation. Every generation of aircraft over the last 30 years has used more advanced composite materials than the last. Advanced composites now represent more than 50% of the weight of both the A350 and the 787. We expect this trend to continue. I began my tenure as CEO of Hexcel about 11 weeks ago, and my initial priority has been visiting our sites to meet and listen to our employees and learn more about the operations, our innovation agenda, and the lightweight material solutions we provide that are so critical to current and future aerospace and defense programs. At my previous company, I was a significant user of advanced composites to make airframe and engine parts and structures. And now I have the opportunity to learn in-depth how these amazing materials are developed and produced. Hexcel is a highly technical advanced composite materials company with very high barriers to entry, making Hexcel an important partner to commercial and defense customers. Only a few companies make the premium carbon fibers and lightweight composite materials required by the aerospace and defense industry, and Hexcel has the largest and broadest portfolio of these products. Hexcel has 22 manufacturing sites, and so far, I have visited 12 of them in the US, Europe, and Morocco. I have met hundreds of employees and have had the opportunity to learn more about Hexcel's manufacturing value chain in depth, starting with precursor to producing carbon fiber to weaving to prepreg and then both honeycomb and engineered core. Just as importantly, I have had the opportunity to see firsthand how the One Hexcel culture ensures that these products are manufactured in one of the safest workplace environments that I have ever experienced. The foundation of the Hexcel culture is worker safety. All meetings begin with a safety message. Our teams constantly reinforce safety practices in a positive manner. Our Hexcel performance metrics for operations management incorporate safety metrics, and so many employees I have met have told me how committed they are not only to their own safety but also to the safety of those around them. In addition to safety, I saw firsthand the commitment this team has to operational excellence, with a very strong emphasis on quality. In our continuous process flow production system, we are literally conducting testing on batches of products 24/7. This commitment to safety and operational excellence has resulted in a continual focus on on-time delivery to ensure that Hexcel is never the weak link in the supply chain. I've been very pleased to see that we have the capacity in place and the staffing in our factories to meet all of our customers' near-term requirements. Our new staff have received their training and are gaining valuable on-the-job experience as production rates and efficiency continue to recover. I've also spent time at a number of our research and technology centers of excellence, meeting with our scientists and better understanding the lightweighting solutions being developed for next-generation applications. This is truly leading-edge material science technology, and we are continually working closely with many of our customers on the material systems for next-generation programs. Even though the launch and entry into service of some of these products might be years into the future, the discussions on material systems are happening right now. Besides site visits, I participated in Hexcel's annual management development review, enabling me to quickly get up to speed with understanding the strength of the Hexcel team. This was followed by the Annual Hexcel Strategic Plan Meeting or STRAP, as we call it. STRAP is primarily focused on the next five years, but also encompasses a 10-year strategic view of the aerospace cycle ahead. It is about how we execute on our commitments, how we innovate to ensure we lead the world in advanced composite technology, and how we identify the best opportunities to grow our business. In other words, it is all about how we win, how we build on what is working and how we continue to strengthen our engagement with our customers. STRAP is based on a multi-year planning horizon using a very comprehensive bottoms-up forecasting process. Hearing from our global leaders makes me more convinced than ever that modern commercial and defense aircraft and the potential for zero emissions aviation will utilize increasing quantities of the lightweight composite materials that Hexcel provides. And because of that, our market opportunities are compelling. As CEO, I intend to reinforce and optimize Hexcel's existing strategy. We are a global technology leader in advanced material composites with an unrivaled lightweighting product portfolio, especially for aerospace applications. We focus on innovation, and we benefit from a global scale along with deep customer relationships. We target markets undergoing secular growth where we can benefit from a sustainable competitive advantage. We are in sole-source positions by developing leading-edge solutions and delivering quality products on time. And we do this by focusing on our talented employees, a team that is highly experienced, engaged, and committed to what they do. In addition to meeting with employees, I've also met with many of you in our investor community in recent weeks at analyst conferences and individual investor meetings. We have had engaging conversations, and I look forward to continuing that dialogue. In addition, I have, of course, been active in reconnecting with many of Hexcel's customers in my new capacity. While I was in France last month, I had the opportunity to meet with Safran and attend the 50th anniversary celebration for CFM, which is the partnership between Safran and GE that produces the LEAP engine for the 737 MAX and the A320neo. CFM is extremely successful in a case study on partnerships. At that event, I also met with key leaders for many of our customers. And finally, I am flying to Farnborough tomorrow and have a full schedule of customer meetings in the coming days at the air show. Now let me take a moment to share a couple more highlights that are related directly to Hexcel. First in the area of sustainability. Hexcel has established a relationship with a composite material recycler called Fairmat, almost three years ago to recycle carbon fiber prepreg from our European operations. In May, we announced yet another agreement with Fairmat, this time in the US. It's a 10-year agreement to recycle carbon fiber composite materials from Hexcel Salt Lake City, for reuse in composite materials sold into various commercial markets. Our continued partnership with Fairmat further demonstrates our dedication to reduce landfill waste, which is part of our 2030 sustainability targets. Second, we were pleased to host Utah State Governor, Spencer Cox, and others at our Salt Lake City site as Project Alta was announced. This project is a coalition of industry leaders, policymakers, and community members working together to build a safe and collaborative future through advanced air mobility. Hexcel remains at the forefront of material science to support the development of electric vertical take-off and landing aircraft for use in advanced urban air mobility networks. This is thanks to our advanced lightweight composite materials that will help make energy-efficient, reliable, and cost-competitive air vehicles a reality. Finally, let me take a moment to reiterate a point from our earnings release earlier this morning, and that is capital allocation, and specifically our share repurchases. In the second quarter of 2024, we repurchased around $100 million of Hexcel stock. And in the first quarter, we had done the same, bringing the total repurchases to just over $200 million this year as we see value in Hexcel stock and returning excess cash to our shareholders. As we continue to recover back to 2019 levels of production, we will generate more cash. Our capital allocation strategy will be first to fund execution on our current customer commitments, drive productivity in our factories, and continue innovating to position Hexcel to provide material systems and solutions on next-generation platforms. We have a lot of organic growth potential. We will also look in a disciplined way at inorganic material science growth opportunities that meet our strategic and return thresholds and strengthen our competitive technology portfolio. But if the right opportunities do not materialize, we will continue to pay a dividend and review opportunities for future share repurchases. We currently have remaining authorization of $285 million. Now let me turn it over to Patrick to provide more details on the numbers.

Thank you, Tom. As a reminder, regarding foreign exchange exposure and I've explained in detail during previous earnings calls, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter time horizon. The year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. Our second quarter results demonstrated both year-over-year and sequential sales growth and margin expansion led by Commercial Aerospace. The commercial aerospace market represented approximately 64% of total second quarter 2024 sales of $320.7 million. Second quarter Commercial Aerospace sales increased 21.6% compared to the second quarter of 2023, with double-digit growth for both wide-bodies and narrowbodies. All of the major Commercial Aerospace platforms grew both year-over-year and sequentially. The Other Commercial Aerospace category increased 15.4% on strong regional and business jet demand. Space & Defense represented approximately 28% of second quarter sales and totaled $138.9 million, increasing 1.4% from the same period in 2023. Military helicopter programs were strong, both domestically and overseas, including the CH-53K and the Apache. V-22 sales were significantly lower as that program winds down, while new V-22 built is sun setting, we will continue to benefit from replacement rotorcraft blades from the existing V-22 fleet. F-35 was also down in the second quarter of 2024 compared to the prior year period. Our F-35 sales have a tendency to fluctuate from one quarter to the next as F-35 sales were particularly strong in the first quarter. So on a year-to-date basis, F-35 sales are higher than the comparable 2023 period. Industrial comprised 8% of second quarter 2024 sales and totaled $40.8 million increasing 21.8% compared to the second quarter of 2023. Automotive, largely aimed at high-end performance vehicles witnessed growth, while the remaining industrial submarkets were down. Gross margin of 25.3% in the second quarter of 2024 increased year-over-year and sequentially on improved operating leverage, combined with price realization, as we work to offset inflationary pressures. As a percentage of sales, selling, general, and administrative expenses and R&D expenses were 10.9% in the second quarter compared to 10.8% in the second quarter of 2023. Please note, we will incur a modest amount of expense in 2024 related to the CEO transition, which will hit our general and administrative costs. Adjusted operating income in the second quarter was $72 million or 14.4% of sales compared to $61.8 million or 13.6% of sales in the comparable prior year period. The year-on-year impact of the exchange rates in the second quarter to operating income was favorable by approximately 40 basis points. Sequentially, the adjusted operating margin improved 290 basis points on higher operating leverage and the absence of the first quarter stock-based compensation charge that is historically incurred at the beginning of the fiscal year. Now turning to our two segments. The Composite Materials segment represented 82% of total second quarter sales and generated an operating margin of 17.2%. The operating margin in the comparable prior year period was 16.2%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 18% of total sales and generated a 14.1% operating margin as compared to 8.9% in the comparable prior year period. Net cash provided by operating activities was $37.2 million for the first six months of 2024, which compares to $30.1 million in the first six months of 2023. Working capital was a cash use of $118.3 million for the first six months of 2024. For the comparable prior year period, working capital was a cash use of $113.9 million. Capital expenditures on an accrual basis were $41.1 million for the first six months of 2024 compared to $70.5 million in the comparable prior year period. Recall that in 2023, we purchased the land and building for our Amesbury, Massachusetts operation for approximately $38 million in the first half of the year. Free cash flow for the first six months of 2024 was negative $14.4 million, which compares to negative $44.7 million in the second quarter of 2023. Our accounts receivable collections were a little weaker than expected at the end of this most recent quarter, principally because the quarter ended on a Sunday. Collections in the first week of July were very strong. The Board of Directors declared a $0.15 quarterly dividend this morning. The dividend is payable to stockholders of record as of August 2, with a payment date of August 9. We continue to repurchase Hexcel stock, buying $101.1 million of common stock during the second quarter. Year-to-date through June 30, repurchases totaled $201.8 million. The remaining authorization under the share repurchase program, as of June 30, 2024, was $285.3 million. As Tom discussed, we decreased our 2024 sales guidance in relation to continued uncertainty in the aerospace supply term, and we decreased our EPS guidance principally lower on operating leverage combined with cost headwinds arising from this inefficient supply chain environment but also some additional costs associated with CEO transition. This also led us to modestly soften our position around our free cash flow generation. We thrive on predictable demand so that we can optimize our operations including our staffing and asset utilization. Much of our operations are continual flow, operating 24 hours a day, seven days a week, including holidays, and we are typically sole-source so we must hire ahead of our customer ramps. Last year, we had a strong first half of the year, but reductions in narrow-body demand ultimately led to a lower second half. Unfortunately, we are now experiencing a similar dynamic in 2024 with some softening or temporary pausing in the pace of forecasted rate ramps in the second half of 2024 for both narrow-bodies and widebodies. Our focus on training, efficiency, and factory throughput, however, will continue to ensure Hexcel's position as strongly as possible for when the ramp increases do take place. As a result, sales and earnings in the second half of 2024 are expected to be similar to the first half of 2024. So a flat second half rather than the growth we were previously forecasting. As Tom said, the near-term market disruptions are not significant enough to warrant a change in the midterm guidance that we issued in February this year.

Thanks, Patrick. These past few months of visiting Hexcel sites, meeting our people, and learning more about our technology in our markets has reinforced for me everything that I know about Hexcel is significantly more. I'm more convinced today that the opportunity for next-generation innovations in lightweighting are compelling and that Hexcel is well-positioned to meet this growing demand. With air traffic recovered from the pandemic and backlogs now higher than they were in 2019, the demand outlook over the next several years is very positive. However, based on recent announcements and deliveries from our commercial customers, our view is that the back half of 2024 will be softer than our original expectations, and so we have trimmed our guidance accordingly in light of this more cautious outlook. Going forward, our goals at Hexcel will be the following; first, continue our relentless focus on safety and quality; next, meet our customer production rate increases across all programs. We have a strong capital base and the staffing in place to do so, invest in productivity to make our factories more efficient as production rates ramp up. We will continue to invest in research and technology to advance Hexcel's lightweighting solutions and position ourselves to be part of the material systems for the next generation of aircraft, including narrowbodies, engines, UAVs, and space and defense. Explore additional growth opportunities in adjacent aerospace markets and select industrial submarkets. We will selectively look at inorganic growth opportunities but only when they bring high-quality margins and broaden or deepen our innovative material science portfolio to support our efforts to gain more than our fair share of future opportunities. And lastly, continue returning capital to shareholders through dividends and stock buybacks. In conclusion, this has been an incredible 2.5 months. I am more optimistic than ever about the future impact Hexcel's lightweighting materials can have on sustainable aviation future. This One Hexcel team is truly amazing, and I am fortunate and excited to have the opportunity to lead this team. Rob, we are now ready to take some questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Thank you. Good morning, Tom and Patrick. Tom, congratulations. Given this first quarter, I wanted to ask about profitability. You reiterated the midterm guidance, but how should we consider profit with 13% in the second half, as you mentioned? The consensus has been anticipating around 250 basis points expansion or about 25% EBIT growth. How do we approach that margin expansion if volumes don't meet expectations, especially since Hexcel has a 20% higher headcount per plane compared to pre-pandemic levels? I’m curious about how you balance the mid-term guidance for profitability.

Right. Well, Sheila, I think you highlighted the operating leverage that we have as we continue to recover and revenues go back towards the 2019 level. That drives an incredible amount of operating leverage to absorb fixed costs and improve margins. Now since we expect that the second half of '24 is going to be similar to the first half, the margins, therefore, will be similar as well. But as the production rates continue to increase and revenues increase next year and beyond, that's when we'll start to see the operating leverage kick in and margins really increase. So we are not changing our outlook for the mid-term that we outlined at the February Investor Day. We simply just trimmed the guidance for the second half of this year based on some communications particularly the one from Airbus on June 24.

Okay, great. I’ll stick to one. Thank you.

All right. Thank you.

Your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.

Thanks, good morning. Thomas, hoping you could follow up on that last comment you made about the Airbus June 24th announcement being the primary contributor. It seemed to be that their contribution commentary is more focused on the 320 and even the 330 or 220 than the 350 at the time. And I wonder, did the Leonardo pause on the 787 for the composite fuselage, did that have a material contributor to the change in the outlook? Or to your point was it really Airbus's June 24 communication?

It was really all of the above. We examined various demand signals from the market, including insights from Airbus, Boeing, and other customers. In the June 24 Airbus announcement, they didn't specify which programs were affected, only indicating it was all programs, which was later reiterated in their follow-up comments. We recognize that the A350 will be impacted, and it appears that the rate increases we anticipated later this year may be postponed or delayed. This was factored into our decision to adjust our guidance downward. Additionally, we reviewed the delivery reports from both Airbus and Boeing for Q2 and considered other announcements, like the one made by Leonardo. All of this led us to believe it was more prudent to adopt a conservative and cautious outlook for the second half of the year.

Okay. And I think one of the questions I get is, is the company being more conservative than what you are being told, or are you just basically mapping to what you're being told? And Tom, this is your first opportunity to sort of reset guidance and expectations. And so I think it is important to understand, are you embedding more conservative assumptions than what you are being told to absorb further deterioration, if any?

I think we are just being realistic based on what we're seeing and reading. And so we are not trying to be conservative or aggressive, it's just being realistic with the outlook. And what I would say is that the guidance change that we made was really more trimming it to align with what we are seeing. As I said, we've obviously got all the capital in place for higher levels of production, and we have the staffing in place to what we were originally forecasting. So if the supply chain does stabilize better in the second half and things are better, then we'll look for upside. But we are being realistic in terms of what the outlook is. But we are prepared in terms of our capital and our staffing for whatever the customer requirements are.

Okay. All right. Thank you.

Thanks, Myles.

Your next question comes from the line of Gautam Khanna from TD Cowen. Your line is open.

Hey, good morning. Tom, I was wondering if you could maybe elaborate. Last quarter, Nick mentioned what rate you guys thought you were on the 787. And likewise, on the 737, would you mind refreshing us on where you are right now? Are you still at five a month and low 30s respectively?

In the MAX, yes, we are still pulling really right now in the low 30s. On the 787, it has been in the 5 or 6 range. We are obviously continuing to monitor the outlook and the demand signals that we get from our customers. And we're staying closely aligned to that. We're literally in conversations every day with our customers on all the programs, and we are staying very closely aligned to what their demand and outlook is. But yes, that continues to be the same case this quarter, as it was last quarter for the MAX-787.

Okay. And just then to be clear on the guidance revision that you provided today, is this more just in anticipation of that, which will be conveyed to you at some point? Or is it as mentioned, just maybe just reflective of Airbus. I'm just curious.

It's reflective of everything that we are seeing in the market and also the demand signals that we are getting from both of our customers. So after the Airbus announcement, they have given us some indication of what the back half of the year will look like, and we are staying very aligned to them in terms of what will happen. Now it is important to, I think also reiterate that our delivery system is quite complex. So for example, on the MAX, we delivered at 30-plus locations. On the A320 over 80 locations and on the A350 more than 75 locations. So all of those might have a slightly different demand signal in the second half. We are looking at the totality of it, though, as we make our determination for our guidance. But we feel that again based on what we are seeing and hearing, that a more cautious outlook for the second half is prudent and realistic.

I appreciate that. I’m sorry, but I just want to follow up one more time. On the Boeing side, are you expecting to be below the rates you experienced in the first half for those two programs in the updated guidance?

Well, we are going to continue to just monitor what our customers are telling us and stay closely aligned with their production schedules in the second half.

To add to what Gautam mentioned, as we have communicated, we expect second half sales to be very similar to first half sales. Therefore, we are not anticipating reductions, as Tom pointed out. This situation is more about delays in ramp increases rather than actual reductions.

Fair enough. Thank you guys. Appreciate it.

Our next question comes from the line of Bert Subin from Stifel. Your line is open.

Hi, good morning and welcome, Tom.

Thank you, Bert.

Following up on Gautam's question, the midpoint of the guidance you provided suggests $485 million in sales per quarter for the remainder of the year, indicating a decrease from the second quarter. Is this primarily due to the mix across the programs and an expectation that the growth seen in the second quarter will moderate? It seems like there won't be significant reductions in program-specific production. I am seeking more clarity on the dynamics between the second and third quarters.

Well, what I would say is we expect the second half to look very similar to the first half, and that's at about the midpoint, if you double it. So as Patrick just said, we are not expecting any decreases necessarily. We are just expecting things to remain flat and for potential increases not to materialize until later.

Please keep in mind the seasonality effects. Q3 and Q4 are not identical; Q3 will be impacted by seasonal trends, particularly in Europe, whereas Q4 is expected to be stronger. It’s important to consider that Q4 will likely outperform Q3 due to these usual seasonal patterns. I understand the $485 million figure, but it shouldn't be viewed as a straight line projection.

Yes. Understood. And then just a follow-up on the defense side. Could you give us a little more color I mean, I think it was helpful the walk-through you did there in terms of talking about the F-35 and the V-22. But you had seen six consecutive quarters of double-digit growth, and that's stepped down to 1%, is that expected to sort of step back up or just some lumpiness in the second quarter? Obviously you stuck by your mid-single-digit guide, but just curious how you are thinking about defense for the rest of this year and in the midterm outlook is the view still sort of the same?

Yes. The mid-term outlook is still the same. We are still very bullish on defense. I think Q2 was just a bit lumpy. If you look at the first half of the year, it is still up 5%, 6%, which is very good solid growth. And by the way, that's solid growth over 17% last year. So defense is going just fine. There were a couple of programs that had some ups and downs in the quarter. But overall, defense and space are going to be a very strong segment for Hexcel going forward.

Thank you.

Your next question comes from the line of Matt Akers from Wells Fargo. Your line is open.

Hi guys, good morning thanks for the question. Tom, I guess I wanted to ask you, you've been around the industry for a long time. So as you go through some of these facility tours, where do you see kind of the biggest opportunity? Is there some opportunity to kind of streamline operations there? And how does that translate to kind of cost takeout or working capital or better throughput or however you kind of want to quantify it.

Right. Well, first of all, Matt what I’d say is that Hexcel has world-class facilities. These are premier factories that have the latest state-of-the-art equipment for making these advanced composite materials in all phases of production. It is a continuous process flow. And there is a lot of activity that's underway. There is a lot of continuous improvement activity, leveraging the best of LEAN as well as Six Sigma, as well as APQP in terms of quality and efficiency. And there are opportunities for continued digitization and automation. So one of the things that we are doing in fact, right now is upgrading the ERP and the MES systems, which are two critical systems to factory operations. And that's rolling out now across all the factories over the next 12 months to 14 months. So that will be one aspect of improving in the factories. The other thing is we've got an initiative which we call our Hexcel manufacturing initiative or future factory, which is really looking at what is the next level of technology to really improve the efficiency of our equipment and improve the output of these lightweight composite materials for the future. And the team has a lot of ideas, and we will be synthesizing those and putting them into an action plan that we'll be implementing over the next few years. So between continuous improvement, digitization, automation, and future investments in technology, all of those things represent an opportunity to continue to drive productivity in our factories as we go forward. Very exciting.

Great. Thanks. And I guess just one more on the Industrial, the guidance change there. Could you talk about specifically what end markets drove most of that change?

Well, if you look at Industrial, it is a smaller part of Hexcel's overall business today. Wind has declined a lot. The market has just changed, and it really is no longer leveraging the Hexcel premium fibers or material systems. So that has diminished a lot. Automotive was actually quite strong and is now the biggest component. And as we go forward on Industrial, we will continue to look for opportunities to focus on premium lightweight materials and where Hexcel can add a lot of value. And we do see some opportunities in some of the submarkets, but it's clearly changed, and that's why we guided to a double-digit decline this year.

I agree with Tom. The wind segment continues to decline, potentially even more than we anticipated. However, the main issue lies in the automotive sector, where we experienced a weaker first quarter. The growth in automotive won't be as robust as we initially forecasted when we provided our guidance in January. That is the main factor influencing our outlook.

Got it. Thank you.

Your next question comes from the line of John McNulty from BMO Capital Markets. Your line is open.

Yeah, good morning. Thanks for taking my question. So I guess the first one is around the cash flow and uses. So your buyback was more aggressive than we've seen in a while in the first half of the year, it's almost on pace to kind of match your full year free cash flow. So I guess, how should we be thinking about your comfort in continuing to kind of push on that buyback program, just given where the stock is right now as we look through the rest of the year.

I agree with your assessment. The buyback in the first half of the year closely aligns with our outlook for free cash flow for the entire year. We have a positive outlook for Hexcel stock and recognized a significant opportunity to buy during the first and second quarters. We will keep monitoring the situation and seek further opportunities for share repurchases. Your observation is spot on; we seized a great opportunity to buy in the first half.

Understood. Could you provide a bit more insight into the slowdown in Commercial Aerospace as reflected in your numbers, especially as we consider the first half? Looking ahead to the second half, with your delivery timelines being six months ahead of when customers require the product, is there a concern that the current slowdown could extend into the first half of 2025 due to supply chain challenges? It's somewhat speculative, but based on what you’re hearing from your customers, how are you approaching the possibility of this extending into the early part of the year?

We are not anticipating that. The messages that we are hearing were that the second half of '24 is going to be a little softer than expected. And so what I said is we are not seeing rates going down, but rather some of the increases being delayed and pushed out. Next year and beyond looks just as strong, if not stronger than before. And by the way, at the back half of 2024, if the supply chain stabilizes and there is upside, we'll be prepared to deliver on. So we trimmed our guidance because of what we are hearing, but that's only really related to the second half of '24. '25, '26 and beyond still look very strong given the strong recovery in air traffic and the backlog and the increase in production rates that we see coming.

Got it. Thanks very much for the color.

Your next question comes from the line of Gavin Parsons from UBS. Your line is open.

Hi, thanks. Good morning.

Good morning.

Tom, it sounds like you have some guidance from the OEMs, but that maybe you are still having to guess as to what production rate might be. And I know you talked about the complexity to ship to locations, but is there any way you can improve visibility or line of sight on that front?

Well, it has been a challenge for the whole industry over the last couple of years. Despite the fact that there is strong air traffic recovery, there is huge demand for aircraft that's reflected in orders in the backlog. It has just been a little bit harder to predict production and deliveries because of a lot of supply chain disruption. And so I wish we all had a crystal ball to see a little bit better, but that's just the reality of the situation. And so we try to be pragmatic and realistic about what the second half of 2024 looks like in terms of tripping our guidance. But the medium and longer-term outlook hasn't changed. Air traffic has recovered to well above 2019 levels. The backlog is bigger than it was pre-pandemic and production rates are going up across all the programs over the next few years. So Hexcel has the capital in place to meet that demand. We have the staffing in place for short-term requirements. And the outlook is very good. It is just the back half of '24 is a bit softer than we originally expected, and we trimmed the guidance quarterly.

Got it. That makes sense. Any way that you can quantify how labor efficiency or utilization has improved over the last few quarters after the hiring in the second half of '23?

Well, you see it reflected in the improvement in the margin, and that's really a reflection of the operating leverage that we get. So don't forget, back in 2019, Hexcel's revenue was about $2.35 billion. And we had the same capital in place, and the headcount was a little bit higher but the margins were in the 18% level. So as the revenues recover, you'll see the operating leverage drive margin improvement, and some of that will be due to labor productivity and efficiency as well.

Thank you.

Your next question comes from the line of Scott Mikus from Melius Research. Your line is open.

Good morning. Patrick, are you taking any conservatism into guide for a potential strike at Boeing and how that could impact their demand for it?

The simple answer is no. I think that would be a step too far. We are very aware of the upcoming negotiation. We will stay close and align ourselves with our key customers, including Boeing. However, we have not factored in a strike, but we will remain vigilant and respond as necessary. I believe it would be excessive to include that in our guidance.

Okay. And then for Tom, when you were at Spirit, you were to diversify the sales mix to get more aftermarket in defense where at Hexcel, do you think there needs to be some aftermarket exposure that you could get through inorganic meetings? And then if so, has the Board given you the mandate to pursue that goal through M&A?

Well, the discussions I've had with the Board are very much focused on continuing to drive growth at Hexcel. And we're going to do that in a variety of ways. You mentioned defense and space. That's a key opportunity for Hexcel. We've got a very good platform in base, and last year grew 17%. We are going to expect continued growth as we go forward. So that's one big opportunity. We'll continue to look for other adjacencies. Aftermarket is probably a little tougher for Hexcel given the lightweight materials that we provide. There aren't as much obvious opportunity in that. We'll look for it. But the opportunity for us to continue expanding our lightweight materials in next-generation programs and expanding into some adjacencies, including defense and space and some industrial submarkets. That's where our focus is. And that's clearly what the Board wants to see is more growth as we go forward with continued profitability and margin improvement as we get the operating leverage with revenue recovery and continue to drive efficiency in our factories.

Thanks for taking my questions.

Your next question comes from the line of Ken Herbert from RBC Capital Markets. Your line is open.

Hi, good morning, Tom. It’s Steve Strackhouse on for Ken Herbert. I was wondering if you could give us a little bit more broader detail of what you are seeing at Hexcel from an OE build rate perspective now as compared to when you kind of first joined. And then if you can kind of further bridge that between what you were seeing at Spirit when you had left there as well. I think that might be really helpful from an industry perspective.

You mean in terms of what we're getting on build rates from the team?

The build rates or just the supply chain generally as well. I think all of that kind of commentary would be helpful as we kind of dissect the build rates here.

But what I would say is that the communication and the relationship and the partnerships with all of our customers, including the major commercial OEMs, Boeing and Airbus is very strong at Hexcel. We have a very active dialogue. We stay connected to them in terms of what their build rates are and what their future outlooks and plans are. And so I would say, the dialogue and the information and the transparency is the same as I've seen elsewhere on that. And that's very important, and we are going to continue to do that because this is a very dynamic environment. It is extremely volatile. There is still some instability in the supply chain. And we want to stay very close to our customers and make sure that we are aligned to what their current outlook is and continue to evolve with them.

I would like to point out that Hexcel's role as a materials supplier is distinct from other suppliers, including Spirit. We operate earlier in the supply chain, typically four to six months ahead, although this can vary. It's important to keep that timeline in mind regarding Hexcel's positioning in the supply chain.

Okay. And then maybe just one follow-up as well. I realize you guys have done about $200 million in share repurchases, with about $285 million less than the authorization. Do you anticipate any change in the capital allocation priorities, maybe you're looking to expand that $285 million?

Well, the $285 million gives us plenty of headroom to do a lot more share repurchases. And our goal is to keep our leverage in the 1.5% to 2% range. And to look at what our free cash flow generation is to determine how we want to allocate the capital. Right now share repurchases are a very good use of cash. And we obviously did a lot of it in Q1 and Q2, and we'll continue to look at the opportunity in Q3 and Q4 as we go forward.

Your next question comes from the line of Pete Skibitski from Alembic Global. Your line is open.

Hi, good morning everyone. Hi Tom, just in the way of thinking about other kind of land mines that are out there or risk factors? And maybe this first one, I think I know the answer, but the storms that rolled through Houston, it's a big commodity town, big oil and gas towns. Are you guys anticipating any material availability issues as a result of the storm rolled through there?

Not right now. No. I mean, we obviously monitor the situation. We're in close touch with our suppliers on our resins and in our materials, those kinds of commodities. And we're not hearing anything right now that gives us any concern from those storms at all.

Okay. Okay. And then kind of with your unique vantage point, as Spirit, we all anticipate Spirit to be absorbed by Boeing and partially by Airbus can you foresee any kind of issues with production rates as a result of that dynamic?

No, we don't. We expect that to be a smooth transition, and the contracts will just carry on as they were before. So we don't anticipate any issues whatsoever.

Okay, thanks for the color.

Your next question comes from the line of Michael Ciarmoli from Truist Securities. Your line is open.

Hi, good morning. Thanks for taking my questions. Tom, regarding the 2026 targets you inherited, it seems we've faced several challenges in the supply chain. Achieving those targets appears to be more back-loaded now. Should we be thinking more along the lines of the lower end of the expectations? It seems like reaching the higher end could be difficult, especially with delays in neo rates. I believe we need to adopt a more conservative outlook on the supply chain. Should we focus more on the lower end? Additionally, is the expectation for cash flow generation still above $800 million?

Yes. Well, look, I wouldn't change the mid-term outlook at all. We are very confident in the outlook. I wouldn't be saying low-end, I would be saying the same if not even better. The demand is there and the plans are in place to increase the build rate. So we said $800 million over the three years, and we're going to keep to that and look to exceed it. We're very bullish on the midterm outlook. And we feel confident in it. Some softness obviously in the back half of 2024, but the outlook for 2025, 2026, and 2027 still remains very strong, if not stronger, based on the recent orders and the recent indications on production rates. It will be interesting to see what happens in Farnborough and what kind of orders come up, particularly for widebodies, and that's probably, if anything, just going to improve the outlook.

Got it. Got it. Just the last one on the cash. Given your product has a shelf life, given this kind of softness in the back half. Any kind of destocking risk or any kind of thing moving around with inventories that we should be aware of?

No, I don't think so. In terms of the shelf life for the product, it is a fairly long time. It is kept in freezers. It can last for over a year. And there is plenty of freezer capacity out there because everybody was producing at much higher rates before the pandemic. So that is not an issue whatsoever.

Okay, got it. Thank you guys.

This does conclude today's conference call. Thank you for your participation. Everyone, you may now disconnect.