Thank you for joining us for the Hexcel Third Quarter 2024 Earnings Conference Call. All participants are currently in listen-only mode. After the speakers' comments, we will have a question and answer session. This conference call is being recorded. I will now hand the call over to Patrick Winterlich, Chief Financial Officer. Thank you, and please proceed.

Thank you, Julian. Good morning, everyone. Welcome to Hexcel Corporation's third 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 as 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 third quarter 2024 results detailed in our news release issued yesterday. 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 third quarter results. I have now been with Hexcel nearly 6 months, and my excitement continues to grow as I learn more about this world-leading technology company, our talented team, and Hexcel's innovative lightweighting solutions. I have visited more than 80% of Hexcel sites in the U.S., Europe, and Africa. And I can say the technology, innovation, operational expertise, and focus on execution is truly outstanding. Just last week, I was at our state-of-the-art technology center in Salt Lake City with the Hexcel leadership team and our global R&D leaders, reviewing the latest technology developments across the company and setting priorities for the future. As a relative newcomer to Hexcel, I can tell you the extent of innovation across the company is incredible and something we intend to continue investing in and promoting strongly going forward. Hexcel is on a long-term growth trajectory. And with every new generation of commercial and military aircraft using more advanced composite materials for improved fuel efficiency and range for emissions reduction and for aerodynamic structural design benefits. The medium- to long-term future for Hexcel and our innovative lightweighting solutions is remarkable, and the cash generation and shareholder return potential is compelling. IATA's latest global air traffic statistics illustrated that global passenger air travel has exceeded pre-pandemic peaks and that airline load factors reached a record in August. This probably comes as no surprise to you as I'm sure we are all experiencing full flights whenever we travel. Consistent with this picture of robust health for airline passenger demand, the backlog for new Airbus and Boeing aircraft is at an all-time high of just under 15,000 aircraft on order. That's a lot of planes to build with a lot of composite materials. However, as we all know all too well, despite the strong demand for new fuel-efficient planes, ongoing and new supply chain challenges, including the strike at Boeing, continue to disrupt planned increases in production rates. Coming out of 2023, there was a sense in the industry that we were finally achieving some stability after the pandemic. Both Boeing and Airbus publicly pointed to signs of improvement within the supply chain. By late 2024, however, new challenges emerge in the supply chain, including the supply of engines, casting, speeds and landing gear to name just a few, that have pushed the recovery in production rates further to the right. At Hexcel, our job is to focus on what we can control, driving operational excellence, maintaining quality standards, keeping a robust grip on costs, and delivering to our customers on time. And I am determined to maintain and reinforce the strong focus that has been in place for many years at Hexcel. As we have communicated previously, we are working hard to ensure that we are ready to satisfy the demand in front of us. We are typically sole sourced and with that comes a responsibility for on-time delivery. To this end, earlier in the year, we recruited the next wave of direct labor that we needed to meet the forecasted strong demand ahead of us. And we've continued to focus on training and expanding shop floor experience to prepare for the eventual higher production rates, which our customers are publicly forecasting in their schedules. It takes time for our new employees to learn our processes and become efficient and productive on the shop floor. As we have highly technical operations that require significant training and experience. Therefore, we need to hire 2 or 3 quarters ahead of when we expect the demand to develop. As we have said before, this start-stop-start and delayed ramp-up environment means that periodically, we will carry too much labor and overhead infrastructure costs, which will be a near-term headwind to margins. We believe we are making the correct decision regarding the timing of adding and training new labor. Although the production rate increases are slower than we would like, there is no question our demand is on an upward trajectory, and we are confident we have taken the right steps to support our customers. We will continue to monitor how those production rates evolve and align our headcount and cost base accordingly. In September, we held our annual strategic review with the Hexcel board. One of the key areas of focus that came out of that strategic review was the importance of our Defense and Space business. As the only vertically integrated U.S.-based Advanced Composite Company, Hexcel has significant and unique opportunities to develop and sell more critical composite technology into the defense and space markets. During our strategic review, we also made some decisions about our current market focus. For many years, Hexcel has produced material for select industrial markets, including wind energy and certain recreational markets such as winter sports. These businesses historically focused on high volumes of glass fiber, which no longer align with our strategic priorities. We are, therefore, currently exploring strategic options for our plant in Austria which produces material for these markets and which we believe will be better served with different ownership. I will now turn to our third quarter results released last night.

Hexcel's third quarter sales of $457 million were up more than 8% year-over-year on solid performance, especially so in commercial aerospace, where sales grew 17% year-over-year. At $0.47, adjusted EPS was over 20% better than Q3 2023 with strong adjusted EBIT leverage. While third quarter sales grew strongly year-over-year, they also reflected the normal third quarter seasonality we typically experience from the European summer vacation period. In addition, there are the ongoing supply chain challenges impacting the commercial aerospace market; the latter part of the quarter was marginally impacted by the Boeing strike. Given the previously discussed higher overhead infrastructure and labor levels being carried right now at Hexcel, combined with the expected lower third quarter sales run rate, we experienced an anticipated reduction in our margins in the third quarter on a sequential basis. Overall, the third quarter of 2024 came in generally close to our expectations. So it should be noted that our adjusted EPS benefited from tax planning work coming together in the period. Given all the challenges we see in the marketplace, we expect our 2024 results will be within our current guidance but at the lower end of the range and benefiting from the lower effective tax rate of 19% versus 22%. Commercial Aerospace sales of $296 million increased 17% in constant currency compared to the third quarter of 2023. Our three key commercial aerospace programs, the A350, the A320 neo and the 787, all generated double-digit sales growth year-over-year. We should note that the work we do for Airbus programs is nearly 3 times as large as the work we do for Boeing. And our Boeing work is about half focused on the 787, which is built in Charleston, South Carolina, a plant which is not involved in the current Boeing strike in the Puget Sound area of Washington State. Secular growth from business jet composite adoption is driving the growth in other commercial aerospace, which grew 9% in the third quarter. Turning to Space & Defense. Sales of $128 million were essentially flat in constant currency. While select key programs grew, including the Lockheed F-35 and the Sikorsky CH-53K and Black Hawk helicopters, the space mix subsegment was broadly soft, including launchers, satellites, and rocket motors. The V-22 is also a headwind as that program winds down. During the quarter, we were excited for 2 of our plants, Pottsville, Pennsylvania, and Salt Lake City, Utah to be awarded the Sikorsky 2023 Elite Supplier status based on best-in-class on-time delivery and quality. Such rewards reflect our endless pursuit of operational excellence and fuel our passion for continuous improvement. We are also 1 of only 15 suppliers nominated by Airbus for a prestigious transformation award at their annual supplier conference in Toulouse 2 weeks ago.

I would now like to address the medium-term guidance that we presented in February of this year. The foundation for that guidance was the best demand and production rate forecast available at that time, which supported a growing sense of confidence in the supply chain and production rates. We believe that the guidance we provided was a conservative view on the growth outlook. Now 8 months on from providing that guidance, it is clear that the world is not where we had expected it to be. Turbulence in the commercial aerospace OEM supply chain has continued unabated. As I noted earlier, issues over the last 4 to 6 months with engines, casting seats, planning here and now the Boeing strike are constraining any sustained near-term improvement in the commercial aerospace supply chain, and we have seen further delays to production rate increases such as those announced by Airbus this past June. We now have had time to assess the situation and more deeply review the current data and outlook for Hexcel. It is clear that the assumptions that were the basis for our mid-term guidance are no longer balanced. We are therefore withdrawing our previously issued mid-term guidance, and we will provide guidance for 2025 with our Q4 earnings in January. With that said, we remain confident in the outlook for commercial aircraft and expect both Airbus and Boeing to continue to increase their production rates over the coming quarters, and continue to do so for many years to come in order to deliver on their historic backlog. We also retain our confidence in Space and Defense markets as well as our conviction in the cash generation ability of Hexcel. Reflecting this confidence and strong belief in the value proposition for Hexcel, we repurchased around $50 million of Hexcel stock during this quarter in 2024, which brings the total stock repurchases to just over $250 million this year, a significant return of cash to our shareholders. Our expectation is for Hexcel to generate strong EBITDA margins and cash flow for years to come. Since we have already invested the capital to support the production rates in effect in 2019, we expect capital expenditures to remain below $100 million per year for the foreseeable future. We will focus on optimizing our capital deployment where our priorities remain unchanged, namely funding organic growth when required and then considering M&A and inorganic growth in a very disciplined and strategic manner. Also, we will continue to pay a dividend with a notional target payout ratio of roughly 20% of net income in the medium to longer term. This will be accompanied by a program of periodic share repurchases, while we operate within our targeted net debt-to-EBITDA leverage ratio of 1.5 times to 2 times. We remain confident in a strong future with robust growth and strong shareholder returns. 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 have explained in detail during previous earnings calls, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter first-time horizon. The year-over-year sales comparisons I will provide are in constant currency, which removes the foreign exchange impact to sales. The commercial aerospace market represented approximately 65% of total third quarter 2024 sales of $456.5 million. The third quarter commercial aerospace sales increased 17% compared to the third quarter of 2023 with double-digit growth in our three key platforms, the Airbus A350, A320, and the Boeing 787. The 737 MAX is a smaller program for us as it is predominantly a metal plane launched in the 1960s when composites were still in their infancy. The majority of our content is with the LEAP engine in nacelle. In the third quarter of 2024, our MAX sales were marginally impacted by the Boeing strike and lowered both year-over-year and sequentially, though the materiality of the impact is less than the decline in our other key programs would have been. The other commercial aerospace category increased 9.1%, led by robust latest generation business jet sales. To share some further perspective on our commercial aerospace business year-to-date, wide-body sales comprised just under 40% of total year-to-date commercial aerospace sales. Narrow-body sales were just over 30% and other commercial aerospace, including business and regional aircraft, was approximately 20%. Space & Defense represented approximately 28% of third quarter sales and totaled $128.2 million, decreasing just under 1% from the same period in 2023. As we have previously said, this market can be volatile quarter-to-quarter. In the third quarter of 2024, CA-63K and Black Hawk program both experienced growth, including Black Hawk replacement helicopter blades, a good aftermarket business for us. The Bell V-22 program is winding down. So that is a headwind for us in terms of year-over-year sales comparisons. And in the third quarter, the space submarket was weaker both domestically and abroad, including satellites, launches, and rockets. Production volumes are lower in space and can be lumpy, leading to greater quarter-to-quarter volatility in our sales historically. Industrial is a much smaller part of our business, comprising only 7% of third quarter 2024 sales and totaled $32.4 million, decreasing 17.3% compared to the third quarter of 2023. We experienced softness across all the submarkets, including high-end performance automotive. Turning back to total company sales. And as we expected, summer holidays led to a sequential sales decline as demand softened seasonally from our European-based commercial aerospace, business jet, space and defense, and industrial customers. Gross margin of 23.3% in the third quarter of 2024 favorably compared to the prior year period gross margin of 21.8%. The improvement reflects the operating leverage from higher sales. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 11.7% in the third quarter of 2024 compared to 11.6% in the comparable prior year period. As I mentioned last quarter, there is a modest cost impact from the CEO transition that will recur in the fourth quarter of 2024 and then conclude at year-end. Adjusted operating income in the third quarter was $52.9 million or 11.6% of sales compared to $42.8 million or 10.2% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the third quarter to operating income was favorable by approximately 10 basis points. Now turning to our two segments. The Composite Materials segment represented 81% of total third quarter sales and generated an operating margin of 14.4%. The operating margin in the comparable prior year period was 12.3%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 19% of total sales and generated an 11.2% operating margin as compared to 7.8% in the comparable prior year period. Net cash provided by operating activities was $127.3 million for the first 9 months of 2024, which compares to $98.1 million for the same period in 2023. Working capital was a cash use of $93.1 million for the first 9 months of 2024 and was a cash use of $112.1 million for the comparable prior year period. Capital expenditures on an accrual basis were $59.6 million for the first 9 months of 2024 compared to $88.7 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. Free cash flow for the first 9 months of 2024 was $58.9 million, which compares to $3.7 million for the first 9 months of 2023. Inventory remains higher than I would like, and we have work to do to improve our inventory days as sales expand. While I'm on the topic of inventory, our three commercial aerospace platforms, including the A350, A320, and the 787s are all on an upward growth trajectory as our customers work to increase production rates to meet the strong demand for these aircraft. We feel that channel inventories for our material are generally aligned with the growth outlook. Remember, it is production rate increases that are being pushed out. Rates are not being cut. Channel destocking occurs when production rates are cut. The Board of Directors declared a $0.15 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November 1 with a payment date of November 8. We continued repurchasing Hexcel stock, acquiring $50 million of common stock during the third quarter. Year-to-date through September 30, repurchases totaled $252.2 million. The remaining authorization under the share repurchase program as of September 30, 2024, was $234.9 million. As we discussed last quarter, fluctuating end market demand limits our ability to optimize our operations and results in a higher cost base near term that is not aligned with current production levels. This dynamic is continuing to play out as new shortages develop within the greater aerospace supply chain, leading to ramp rates being pushed out by some of our customers. For example, one narrow-body engine supplier publicly reduced their original 2024 shipment forecast from up 20% to 25% to instead be flat to up 5%, which illustrates how supply chain disruptions are impacting aircraft build rates. As we grow into our cost base, we will continue to focus on employee training and driving efficiency improvements throughout our business. While we are maintaining our 2024 guidance despite these headwinds, we expect sales and adjusted EPS to be at the lower end of the previously communicated range. Admittedly, the adjusted EPS guidance is supported by a more favorable tax rate as we now expect the 2024 tax rate to be around 19% rather than the previously communicated forecast of 22%. This lower rate reflects effective overseas and R&D tax planning. As Tom discussed, our mid-term guidance issued in February should no longer be relied upon, reflecting recent impacts and the continued uncertainty in the overall aerospace supply chain outlook. One final point is that we continue to expect accrued capital expenditures to be below $100 million annually in both 2025 and 2026, supporting cash generation and strong cash conversion over time. With that, let me turn the call back to Tom.

Thank you, Patrick. As I mentioned at the start of today's call, I've now been with Hexcel just shy of 6 months. We have bought a home near Hexcel's corporate headquarters, and I'm in the process of relocating to Stamford, Connecticut. I've admired Hexcel from afar for a long time and felt very fortunate to be selected as the next CEO. I feel exactly the same way today. This is truly an amazing and unique company with talented and engaged workforce, strong culture, and truly innovative lightweighting solutions. There are significant financial opportunities ahead for years to come via secular growth and cash generation. Hexcel makes a product that is more relevant than ever. Lightweighting future transportation is a critical need in today's world, and Hexcel's technology is front and center in achieving the goal for a more sustainable aviation future. To close, we are faced with some near-term caution as commercial aerospace OEMs moderate their growth rate ramps due to supply chain constraints. However, the medium- and long-term outlook is strong for both secular and cyclical growth. Market demand is not the issue. Experience levels throughout the supply chain will continue to grow, and the commercial aerospace OEM build rates will increase to meet the enormous backlog demand for new aircraft. Our focus at Hexcel remains firmly on execution of current programs, innovation to win positions on the next generation of programs, growth, cost control, and cash generation. Operator, we're now ready to take questions.

Our first question comes from Myles Walton from Wolfe Research. Please go ahead. Your line is open.

Taking a more conservative view on the '26 guidance. I think it's important. In terms of the end market growth that's implied in the '24 guidance, could you give us what those new numbers are today as you sit there? It doesn't look like you'll be far off on the commercial side, but I guess the defense and the industrial side, I'm more curious about. And then as we look to '25, what should we think about in terms of the divestiture headwind from the industrial side?

As we consider the growth for 2024, Myles, looking at the various programs, we observed that the A350 was at 7 in Q3, and we anticipate that it will maintain this pace into Q4. The 787 was also at about 7, which should continue as well. The A320 was just under 53, and we expect that to remain stable. The notable exception is the MAX, which averaged 30 in most of Q3, though it had a higher rate of 36 in Q2. There was a decline in September, and we will monitor the situation regarding the strike’s resolution and its impact in the fourth quarter. We have conservatively planned for the fourth quarter with no contributions from the MAX. If the strike concludes before year-end, we expect some improvement, but we opted for a conservative approach in our forecasts. In terms of defense, the U.S. defense market remains robust, showing strength in the F-35, CH-53K, and Black Hawk programs. The V-22 Osprey has seen some softness as it approaches the end of its cycle. Overall, however, the U.S. market has seen growth for us. On the other hand, we experienced some weaknesses in the European market, particularly with a couple of customers seeing reduced sales for the year; we anticipate a turnaround next year. Regarding 2025, in relation to your question about industrial, the Austrian plants we plan to sell represent about a third of our revenue in that sector. This could mean a headwind of approximately $30 million to $40 million for next year, which we have already factored into our planning. That summarizes our outlook for the industrial sector.

And Myles, just to kind of pick up on the guidance point, which I think you kind of started with. As you say, we should be close to the mid-teens percentage on commercial aerospace. I mean, we might not quite make it, call it, 5% mid-single digits. We should be pushing towards that as long as we have a reasonable fourth quarter in Space and Defense. Clearly, industrial now is going to be down strong double digits for '24. So that's kind of the picture I would paint relative to that originally.

Yes. And just let me add one thing on the industrial while we're on that topic. The Austrian plant really has been a focus for wind energy, recreation, and marine. And so those will be markets that we will deemphasize in the future. But we're not getting out of industrial. We'll still focus opportunistically where we can use our aerospace-grade carbon fibers on markets, including automotive and pressure vessels, things like that. So it's not an exit of all of industrial. It's just those certain markets that no longer really align with our strategic priorities.

Our next question comes from Michael Ciarmoli from Truth Securities. Please go ahead. Your line is open.

Yes, Tom, I think it was wise to remove that long-term guidance. Regarding production rates, as you mentioned, they aren't being reduced, but we're not seeing any increases either. Could you elaborate on the LEAP? We did hear GE initially forecast a 25% increase at the start of the year, but now they are looking at a 10% decline this year. It seems like they might drop even lower than that in the coming year. Should we be concerned about a destocking situation with the LEAP program? Also, since you indicated that MAX for the quarter is effectively zero, does that include LEAP? Could you provide some additional insights on that?

Well, we really align weak, partly with the MAX, but also, of course, partly with the A320 because it serves both of those markets. In terms of the production rates for the MAX, we just took the conservative outlook for the quarter. We have plenty of inventory that'll be able to support Boeing. And I think once the strike is over, Boeing will be able to basically recalibrate what the MAX production rates will be for next year. But regardless, we expect them, even for the MAX would be higher next year than they were this year. And we'll wait for guidance from Boeing on exactly what those rates will be, and we will be prepared to support.

Is there any difference for the LEAP production rate there? I mean, is there a lot of inventory in the channel there specifically where we might see a destock?

We're not aware of any. If anything, they've been catching up on production. So it doesn't seem like they have excess inventory. And certainly, they have to support the fleet as well. So I don't think destock is going to be a risk at least at this point, we don't see that more than that.

Our next question comes from Matt Akers from Wells Fargo. Please go ahead. Your line is open.

Are there other parts of the portfolio you're still reviewing as maybe areas you could shed? Or is this Austria facility? Do you think that's sort of the extent of it?

We are looking across the whole portfolio. As you know, we have a fairly homogenous product mix. We provide lightweight materials in carbon fiber composites, matrices, reinforcements, and honeycomb core and engineered core. So we don't have a lot of different parts of the portfolio that would be logical to divest. This plant in Austria was a bit of an exception. It was focused more on these industrial markets, and it really didn't leverage Hexcel's carbon fibers. It leveraged industrial-grade fibers and glass fibers. And so increasingly, it just wasn't fitting with our strategic alignment, and that's why we made the decision to divest. But broadly speaking, Hexcel is a fairly homogenous product mix, and we don't have a lot of pieces that we could divest.

And then I guess as a follow-up, Tom, I guess, what would need to happen for you to think there's enough visibility to kind of give mid-term guidance again? Because it feels like we've been in this situation for years now; we think the supply chain is getting better, then kind of the same issues pop up. Is there some way you think we get past that? Or do you think this is just sort of a new normal and the visibility is going to sort of be limited?

I wouldn't say it's a new normal, but certainly for the time being, there's a lot of uncertainty. And so we're going to provide guidance for 2025 in January, and that's about as far out as we can see right now. And by the way, we're going to wait to see what Boeing and Airbus announce as we get throughout the whole course of this year before we make that guidance. 2026 is just too far out right now. And so mid-term guidance, I think for the timing until the supply chain settles, and we get into a period of stability, mid-term guidance would be very difficult for us or any company to provide.

Our next question comes from Ken Herbert from RBC. Please go ahead. Your line is open.

Tom, I wanted to follow up on your initial comments around sort of where you are in terms of the workforce. Are you at staffing levels to support the next move up to 8 a months on the A350? And when do you expect to see that?

The answer is yes, and we are staffed to the schedules that Airbus put in place for A350 and A320 and also what Boeing has put in place. Since those got pushed out, so we are a bit overstaffed right now to the current production rates. But those production rates are going to hit as we get into next year, first quarter and second quarter. It would make no sense to reduce our workforce only to have to rehire it. So we're just going to stay where we are. And we've paused new hiring, but we're maintaining our current position, and we are staffed to meet the production rates that are going to be in effect for next year. The good news is because we're already staffed, those employees are getting training and on-the-job experience, which is going to help them in terms of quality and on-time delivery. And so I think it's going to be a win-win for everybody as a result. It's putting a little bit of pressure on our margins right now, but ultimately, it's going to pay dividends in terms of quality and on-time delivery in the future.

And maybe, Patrick, is it possible to quantify what that margin headwind has been just from a staffing standpoint alone this year?

I don't think we're going to discuss specific margin points. However, our adjusted EBIT level is not where we would like it to be, and that's a pressure we are experiencing. As Tom mentioned, we are likely carrying more labor than necessary at this time, but it will be beneficial for us in the first half of next year as we anticipate growth heading into 2025, even though the expected progress has been delayed. This situation is a challenge, and we prefer not to delve into specific margin points regarding it.

Our next question comes from Scott Mikus from Melius Research. Please go ahead. Your line is open.

Tom, I wanted to ask, so your sales the last 12 months are about 80% of 2019 levels. And you mentioned that you're a little bit overstaffed right now. I'm just wondering, with all the production rate pushouts that we've seen from Boeing and Airbus, why not just hold extra buffer inventory, so you can ship at higher rates rather than growing your headcount in the face of production rates that we've seen shift multiple times?

Right. First of all, Airbus has clearly indicated its position. As we mentioned, Airbus is our largest customer for the A350 and A320, and we want to ensure we can meet their schedules for next year. Although production rates have been delayed and we currently have excess inventory, taking a conservative approach is important. The key issue is production, and headcount plays a crucial role. Hiring and training new employees takes time, as does providing them with necessary on-the-job experience. So, even though we are slightly overstaffed at the moment, I was explaining to Ken that this will benefit us next year when production rates increase, as we will already have trained staff with practical experience in place. You can't rush this process. While our inventory will assist in delivering the physical product, it's essential to have an experienced and trained workforce, which we've established. This will be a significant strategic asset for us moving forward. Every program we see, including the 737 MAX, is projected to have higher production next year compared to this year. Therefore, having our team ready will enable us to effectively deliver for our customers.

And the other thing to remember, Scott, is, as Tom said, we do have some extra fiber, not inventory, notably fiber. But when it comes to our prepregs, when you involve the resins, the resins have to be when we impregnate the products have to go into cold storage into freezes. And so there is a finite amount, a natural finite amount of capacity for that. So part from not wanting to build huge amounts of excess inventory. There's also a natural barrier to holding too much anyway in the supply chain because of the storage issues.

I'd also add, you mentioned it, but we're still only at about 80% of the production levels that we were in 2019. And we have all the capital in place to support higher levels of production. And so right now, we're absorbing a lot of that fixed cost. As the production rates increase and revenues go up, we'll get a lot of operating leverage.

And then, Patrick, in the past, incrementals have normalized typically been in the 30% to 35% range. I know there's a lot of puts and takes. But if you don't have to do much hiring next year, you exit the facility in Austria as well. Should we be thinking about incrementals in 2025 being above the 30% to 35% range that you would normally see in an up cycle?

Yes. I mean we don't guide, as you know, anymore to incremental margins. We're always going to drive them as strongly as we can. We're going to have to assess where the growth is coming from next year. Undoubtedly, the key commercial aerospace programs are going to grow. We're going to have to understand what else is growing. We obviously have some cost increases. And we've got that, we're carrying that sort of labor into the first half of next year, which we absolutely need that labor, but that cost is not going to go overnight. So we will drive incremental margins as strongly as we can as we always do. That's the only message we can send. But we've got a good cost base. We've got a good headcount base going into next year. I think that's the key point.

Our next question comes from David Strauss from Barclays. Please go ahead. Your line is open.

For the 2026 guidance or the medium-term targets you are considering, what assumptions did you have for rates on the 787, A350, and A320 that you are no longer using?

Well, we didn't really lay out the specific rates, and the OEMs have provided publicly what their targets are. But what I would say is as we look over the past 1.5 years, the OEMs have each released at least 3 new schedules in each schedule they pushed out production rates on certain programs, particularly the MAX and even the A320 on the Airbus side. And so it's really on the basis of that. And then all the uncertainty that we have here in the fourth quarter with supply chain and the Boeing strike is. We just didn't feel that those rates that we were looking at in February of 2024 were really valid. And so therefore, the whole guidance was really no longer valid. And that's why we decided to pull it. The outlook is very good. If you look at the production rate increases going forward. We just don't know exactly when they're going to hit. So we'll wait until January, and then we'll provide guidance for 2025. And we think that will be a good indicator for the investment community to see the market. But right now, it's just too hard to see. And certainly, 2026 is just too far out, given the current uncertainty in the supply chain.

I have a few smaller questions. Are you expecting working capital to fully reverse in the fourth quarter, allowing you to generate a significant amount of cash? Will you maintain your focus on buybacks, or are you looking to reduce your debt a bit? Additionally, regarding corporate expenses, is the higher cost related to the CEO the reason it's above the typical level this year? Will that decrease as a percentage of sales next year? In relation to working capital, we will focus on that in the fourth quarter as we always do. Inventory is a key area for us not just in the fourth quarter but moving into 2025 as well, as we aim to improve our days of inventory, which is an important ratio comparing inventory to sales. Regarding buybacks, we will evaluate that periodically. Our overall strategy is to maintain our net debt-to-EBITDA leverage within the range of 1.5 to 2, and we are currently at 1.9%, which we are comfortable with, but we intend to stay under 2. As for corporate expenses, there are a few factors to consider. The CEO transition costs will be present in 2024, but we do not expect those in 2025. Additionally, there is some intercompany profit elimination, which is contributing to the year-over-year difference. This is due to internal profits among segments that we need to eliminate at the corporate level, causing a swing in figures year-over-year.

Our next question comes from Adam Parsons from UBS. Please go ahead. Your line is open.

It's Gavin. Any change to the lead time from OEM build rate increases just given it seems like they'd want you to ramp up well ahead of time and then when they cut you, it's pretty close to the actual date.

Right. Well, we tend to be a little bit ahead of the OEMs about 6 months. And so we are planning our production and our staffing based on that 6 months out. And so when the rates do change, yes, it's difficult for us to respond, especially when we know the rates are going to continue to go up. It's just been pushed out. So it's just the nature of the industry. We are 6 months ahead of a lot of the structures, manufacturers, and the OEMs just because we're providing materials. And so for us, it can be a little bit challenging when the rates change as we get closer to the actual production base.

Okay. So no desire or ability to shorten that ramp-up lead time?

Not really. We need to stay ahead of the OEMs since we're supplying that material. It's a very dynamic time in the industry, and rates are changing more frequently than usual. However, we need to consistently be six months ahead of the OEMs.

Our next question comes from Gautam Khanna from TD Cowen. Please go ahead. Your line is open.

Forgive me if I missed this, but it sounded like you have slowed down a bit on the 737 MAX compared to Q2. However, the 787 is continuing to ramp up sequentially. I'm curious if this trend is consistent across all your intermediary customers, like Hexcel and Boeing, or if you are encountering varied purchasing patterns within your customer base.

Well, for Boeing, obviously, the 737 with the strike, there were a lot of stop shipment orders to our plants. And so that impacted September. And so we did see a sequential slowdown from Q2 and also from the first 2 months of the third quarter. On 787, as I mentioned, it's built in Charleston, South Carolina. It's not impacted by the strike. It kept producing and they kept pulling, and Boeing was very public about that. And so I would say the rates for us, the pull was about 7% in Q2, it was about 7% in Q3. So it stayed about the same. And I think that was consistent. With Airbus in Q3, and we expected this, we did see a sequential slowdown in the A320 and the A350. The A350 was smaller. It was only a couple of percentage points on the A320, it was probably about 5 aircraft per month between Q2 and Q3, but that was fully expected because in Europe, August is a much slower month, and so it's seasonally slower. So not unexpected.

Given that the 787 has been assembled and the final assembly rate is currently well below 7, does this indicate a shallower ramp in the first half of '25? I'm curious about your thoughts on the direction for '25.

We'll wait to see Boeing's final production schedules and then align accordingly. They tend to look at our output based on their projected rates six months ahead. This is why there may be a discrepancy between current delivery rates and those we anticipate. For 2025, we expect the production rates for the 787 to increase, similar to other programs. We want to be ready to meet that demand, and we are prepared for it.

Our next question comes from Pete Skibitski from Alembic Global. Please go ahead. Your line is open.

I wanted to revisit a topic from earlier regarding how we should approach margin rates for 2025, Patrick, without expecting any guidance. Considering that most of your major commercial programs are projected to either improve or remain stable as we enter 2025, with the MAX potentially still at 30 initially, should we anticipate some margin headwind at the beginning of the year that could shift to a tailwind in the latter half, assuming the MAX begins to ramp up? I'm also factoring in labor as part of this overall assessment. What are your thoughts on that?

I think in a broad sense, that, that is probably a correct way to look at it in that we'll get more and more volume leverage as the year goes on, production rate increases. And as I think we've communicated before, volume leverage is really the key driver for Hexcel. We need to get back to the 2019 levels of revenue. We need to utilize our capacity to get the true efficiency across our farms. And that volume leverage, yes. So every 6 months, as hopefully, we start to see build rates increase, that will help our margins, yes.

Regarding V-22, you might anticipate a few more quarters of challenges. It seems that the impact has been significant for you. Therefore, as we enter 2025, you should expect that the underlying average growth for Space and Defense will improve.

Well, we're on over 100 different programs. There's many, many different moving parts in space and defense. I mean, the V-22 is essentially sunsetting next year. We think there's probably a couple of aircraft to build. So it impacted this quarter year-over-year, but I wouldn't overplay it in the broader picture, and we've got to assess the moving parts before we can really talk to Space & Defense in 2025.

Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead. Your line is open.

Maybe just on the 737 because it's such a hot topic, could we go over the rates, Tom, you mentioned, you said you were at 36% in Q2, 30% in Q3. Is it 0 for Q4? And how do we think about potential optionality into 2025, what you're assuming in terms of rates?

Right. Well, as I mentioned, the 30 in Q3 was really a function of September falling off in the back half of the month. And so regarding next year, I think it really depends on when the strike ends, and then Boeing resetting the schedule, and we'll wait to see what that is. They had plans in place for higher levels of production next year. Obviously, with the strike that gets pushed out a little bit. And so the book Boeing's presenting tomorrow, of course, bots tomorrow. We'll know a lot more after that in terms of 2025.

And I know Ken asked some questions about headcount too. Can you give us an idea of how fungible headcount is across programs, whether you move folks to A350 from 357?

Well, actually, for us, it's very fungible because we make a base material carbon fiber composites rather than in prepregs. And so the materials, while they are different materials, labor is fairly fungible across the programs. And so we can leverage it if we need more Airbus material, the labor is very fungible to do that in our plants. It's just the nature of what we do. We're producing carbon fiber prepreg and the resins.

Our next question comes from Noah Poponak from Goldman Sachs. Please go ahead. Your line is open.

I'm still a bit unclear about what’s happening with Boeing and how it is affecting the supply chain during the strike. There was a report suggesting that they were halting the supply chain, but I’ve also heard many suppliers say they were instructed to maintain operations close to pre-strike levels, hoping for a quick resolution. On this call, you mentioned that they've slowed things down a bit, but I've also heard that they’ve issued stop orders. I'm trying to clarify whether Boeing's actions and messages regarding the supply chain during the strike are leaning more towards a complete halt or whether it's more about keeping things moving so we can resume quickly once there’s a resolution.

That characterization is the right one is they issued a stop ship but they encourage suppliers to keep building so that when the strike ended, they could continue to ship again. And that was the case. And so for us, and in fact, you saw our inventory go up, that was part of it. We stopped shipping to Boeing, but we continued to build into some inventory, and that's why we have a little bit higher inventory. That's one of the reasons why we have it. And that enables us to meet the demand once the strike end and once they start producing it.

And the other point, Noah, is that the 737 MAX, as we said many times, is not the biggest program for us. And so those 2 statements, we did have some stock orders during September, but the overall impact in the third quarter was marginal. So those are consistent things and in line with what's considered building inventory. So the bubble charts in the investor deck now kind of illustrates the relative magnitude of the program, the A350, A320, and the 787 all bigger than the MAX with its sort of build rate at the lower end of that $200,000 to $500,000 range.

I see. So it's sort of both at stop ship, but them then counting on everyone to build on their own I guess.

Yes.

And the other thing is that the 737 MAX, as we said many times, is not the biggest program for us. And so those two statements, we did have some stop orders during September, but the overall impact in the third quarter was marginal. So those are consistent things and in line with what's considered building inventory. So the bubble charts in the investor deck now kind of illustrates the relative magnitude of the program, the A350, A320, and the 787 all bigger than the MAX with its sort of build rate at the lower end of that $200,000 to $500,000 range.

Our understanding of the broader ecosystem a little better. But I appreciate that. And then just one other item. The industrial assets that you've discussed disposing of or selling. Is that far down a process and close to completion or that's a process you're just now starting?

I'd say we're probably midway through the process. It's something we initiated months ago, but we felt it was the right time to be public about it because we wanted to be open and transparent with our customers as well as with our employees. And so the process is underway.

And do you have an approximate revenue and EBITDA for that?

It's about a third of our industrial business. And quite honestly, the margin impact is going to be low. That's what I would say.

Our next question comes from Scott Deuschle from Deutsche Bank. Please go ahead. Your line is open.

Patrick, sorry if I missed it, but was there any restocking benefit this quarter from going to 7 per month on the A350 and 787? Or would that potentially be a tailwind later on?

Yes, I wasn't sure if you were referring to 797 or 350 million.

Both.

They remained relatively unchanged. As Tom mentioned, both programs experienced a slight decline in the third quarter compared to the second quarter, but there was a consistent delivery pattern for those programs. The slowdown for the 350 was minor due to European vacations, while the impact on the 320 was more pronounced, as Tom indicated. Therefore, I wouldn't highlight any effects from stocking for either the 787 or 350 programs.

And then, Patrick, it seems like China has become pretty dominant in supplying carbon fiber in a lot of industries outside of aerospace. And it looks like Airbus has brought in Chinese structure suppliers in a fairly meaningful way at this point, I think, with AVIC in particular. I guess my question is, do you see any risk over the longer term that you start to see the Chinese become a more meaningful competitor in the carbon fiber world on the aerospace side, particularly on next-gen aircraft? Great. Well, certainly, on industrial-grade fiber China has increased capacity, and that has had an impact on price for industrial-grade fibers. But aerospace-grade fibers are very different. And there are no Chinese makers today of industrial-grade carbon fiber. And it'd be a pretty big leap for that to happen. So while they can compete certainly on industrial markets. They are competing on aerospace markets today and probably will not do so for the foreseeable.

Our last question will come from Phil Gibbs from KeyBanc Capital Markets. Please go ahead. Your line is open.

Tom, you may have mentioned that the wide-bodies, the key ones, are at about seven per month. When did you start to perceive that increase from the previous rate of around 4% to 5% we experienced near the bottom?

Well, you go back to kind of early '23, and the 787 was in the kind of 3%, 4% range, and then it started stepping up progressively through '23 and got into the 7 range as we got into '24. So that was the time frame. And on the A350, you got to really go back to 2022. It was in the 4 and 5 range, stepped up to the 6% range in '23 and it's kind of moved into the 7 range in '24.

And then on defense, historically, the fourth quarter for defense-related revenues is typically a lot better than the third quarter. I would say, one, is that what you're expecting? And then I know you have a decent outlook for new program growth over the next couple of years, some of that being international. Is that all still holding in your mind as you look ahead?

Yes. I mean defense overall is strong, unfortunately, because of some of the geopolitical pressures that are out there. Q4 has been stronger, and we're going to push hard to make that true again this year. And then as we go forward into next year, yes, the big programs you're on like F-35, 53K, Black Hawk, some of our European programs, we expect to see continued strength in those. And so overall, yes, we're very bullish on Space & Defense.

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.