Hello, and welcome to the Hexel fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to turn the conference over to Patrick Winterlich, Chief Financial Officer. You may begin.

I'm Sarah. Good morning, everyone. Welcome to HECSEL Corporation's fourth quarter and full year 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 Hexel Corporation in its 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 Chairman, CEO and President, and Kurt Goddard, our Vice-President of Investor Relations. The first of the call is to review our fourth quarter and full-year 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 fourth quarter and full-year results. Excel is a company well-positioned for growth with a very talented team, a world-leading portfolio of products, and a strong operational and safety focus. I am confident in this team's ability to deliver on current commitments to drive advanced composite material innovation for a future with lighter, more sustainable aircraft and capture new growth opportunities. Our 2024 fourth quarter and full year results underscore the robust operational performance HECSEL has demonstrated throughout what was another challenging year for the aerospace industry. 2024 was again a year of disruption for the commercial aviation industry as supply chain and labor challenges persisted for the oems and suppliers while oem production rates are increasing recent history has clearly shown that ramping up aircraft build rates continues to be a challenging process indeed production levels in 2024 were only 68 of 2018 levels on the other hand demand for air travel now exceeds pre-pandemic levels, and aircraft backlogs at both Boeing and Airbus are near record levels. The underlying demand for Hexel advanced composite materials remains very strong. Despite all the disruptions in 2024, we had a solid close to the year and generally met or marginally exceeded all of our final guidance targets. With sales of $1.903 billion, a 6.4% increase over 2023, adjusted EPS of $2.03, to free cash flow of $203 million. XL's fourth quarter sales were $474 million, a 4% increase year-over-year in constant currency. Solid performance in commercial aerospace and defense drove higher sales volumes, partially offset by weaker industrial sales. Adjusted EPS for the quarter was $0.52, a nearly 21% increase over Q4 2023. commercial airspace sales in the fourth quarter of 2024 increased 4.6 percent year over year on a constant currency basis and full year sales increased 11.9 percent 2024 sales growth was consistent with our guidance 787 a350 and a320 neo all increased in 2024 whereas the 737 max decreased as boeing worked through a number of issues the other commercial aerospace category increased 6.7 percent on strength and regional jets. Fourth quarter space and defense sales increased 7.6 percent, and the full year increased 4.6 percent, consistent with our 2024 guidance. For the year, F-35, CH-53K, and classified programs drove the growth. The V-22 was the top five program in 2023, but as the program winds down, V-22 sales did not even reach the top 10 in 2024 for Hexhoff, declining as we expected. The industrial market remains a challenge. In the fourth quarter, industrial sales decreased 14.8% on weakness in all the sub markets except for recreation. For the year, industrial sales decreased 21.1%. Given the soft industrial performance during 2024, we announced that we will be divesting our Neumark Austria site, which is focused on wind and industrial applications for glass fiber. Going forward, we will still pursue industrial business opportunities, but will focus more on niche value-add applications, which use our existing aerospace production plant and Connected to the Neumark divestiture, we have taken one-time non-cash charges in this quarter's results, which Patrick will describe in more detail shortly. As we continue to review our operations and optimize our footprint, we also recently signed a deal to divest our hartford connecticut 3d printing business industry adoption of 3d printing has been slower than we anticipated and there are better operators for this business we expect the deal will close in q1 2025. we also announced that we have formally initiated a project to review our welkinrat belgium plant which supplies engineered core this review is expected to be concluded sometime in the first half of 2025. HECC will provide more details on all of our finances in a few minutes. Looking out over the next decade, we see three broad phases that will define HECCEL's growth. The near-term focus is to drive growth by executing and delivering on existing programs and our current contracts and supporting our customers as they increase production rates. HECCEL has the capacity to support the OEM announced peak rates even as some of these peak rates exceed pre-pandemic levels. We expect to generate strong key free task flow during this period as we grow into our existing capacity and capital expenditure remains at a lower level. I am confident in our team's ability to execute on this ramp up. Since I joined Hexcel, I visited about three quarters of the company's site meeting with hundreds of Hexcel colleagues. The Hexcel workforce is continuing to drive efficiency and quality positioning our factories for the future and continually prioritizing work for safety with the capital in place and a strong team recruited and trained we are ready to meet whatever production schedules our oem customers adopt across all the programs we support in the medium term we see opportunities to drive both organic and inorganic growth for example our space and defense business is well positioned to grow given hexel's unique position as the only vertically integrated U.S. domestic corporations providing advanced lightweight composite materials. Composite technology is critical in current and future military programs, and we look forward to engaging defense primes more directly, as well as pursuing R&T funding opportunities with U.S. government research labs to support HEXL's value proposition. We have additional organic growth potential across regional and business jets, the emerging eVTOL market, and with new aircraft that that will soon enter production, such as the Boeing 777X and the Falcon 10X from Dassault. As we consider future capital allocation from our growing cash generation, we will be stepping up our disciplined evaluation of potential M&A opportunities that leverage our advanced material science expertise and meet our return thresholds. Our core expertise revolves around carbon fiber and resin systems, honeycomb, and then the engineering of honeycomb into highly advanced shape and difficult to engineer specialty aircraft parts. These advanced materials, along with other adjacent material science technologies, are the type of inorganic growth that we will be evaluating. Longer term growth for HEXL will come from the launch of next generation commercial and defense aircraft, as well as the development of new propulsion systems. The decisions on identifying what material systems these platforms will utilize are taking place right now and will continue over the next several years with the airframe and engine OEM, even though entry into service will likely be after 2030. Our current innovation efforts are focused on developing materials for these future platforms. Just as important, our innovation is focused on how we can continue to refine the production process for carbon fiber composites to support the high-rate production requirements of next-generation aircraft, including the next single aisle. These production techniques will include improvements in layup rates, cure time, and non-destructive inspections. We are also driving what we call our future factory initiatives, which will be a constant throughout these three phases of growth near term the focus of future factory is on continuing to drive efficiencies with our operational excellence initiative longer term it will involve more creative approaches to revolutionize production and lower manufacturing costs by rethinking production processes and machinery leveraging ai and selectively adding further automation to repetitive tasks looking forward we issued 2025 guidance in our earnings release issued last night. We are forecasting 2025 sales between 1.95 billion and 2.05 billion dollars. Adjusted earnings per share between 2.05 dollars and 2.25 cents and free cash flows greater than 220 million dollars. When we provide guidance our objective is to provide realistic estimates that align with our understanding of the market. Remember that we provide shift that information for all of our top programs, which enables anyone interested to undertake their own sensitivity analysis of our guidance based on their own assumption of OEM build rate. Because of the continued start-stop-start production environment, uncertainty remains in relation to the outlook for our 2025 performance. Sales growth may be impacted by potential delays to the recovery in production rates. As we enter 2025, our operations headcount is marginally elevated since production was softer in Q4 than expected. However, we expect to grow into that headcount during the first half of the year in 2025. Our R&T spend will also be elevated in 2025 as we work on developing and qualifying new materials for next-generation aircraft and propulsion programs. These cost headwinds will dampen margins to some extent until we achieve further sales recovery to drive the considerable operating leverage opportunity that is in front of us. Since I started in this role in May, I continue to be impressed by the team here at Hexcel. As compelling as our technology is, it is our people who truly make a difference for Hexcel and for our customers. Although the industry faces another challenging year in 2025, Hexcel is positioned for growth and cash generation as we leverage our exceptional team, our intellectual property, and our operational capabilities. 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, HEXL benefits from a strong dollar. We continue to hedge foreign exchange exposure over a ten-quarters time horizon. The year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact sales. The commercial aerospace market represented approximately 59% of total four-quarter sales of $473.8 million. Fourth quarter commercial aerospace sales of $278.3 million increased 4.6% compared to the fourth quarter of 2023. Various industry issues, including OEM supply chain challenges and labour strikes for customers, muted Hexel sales growth. The Boeing 787 and Airbus A320neo grew modestly year-over-year, while Boeing 737 MAX sales were down, with fourth-quarter sales being primarily for the Leaks 1B and Nacelle. The sales for other commercial aerospace in the fourth quarter increased 9.5% year-over-year, led by regional jets. To share some further perspective on our commercial aerospace business for the full year, wide-body sales comprise just under 40% of 2024 commercial aerospace sales. Narrowbody sales with just over 30% and legacy commercial aircraft with 10%. And finally other commercial aerospace including business and regional aircraft with 20%. Business jet comprise the largest sub-market within this category. While business jet sales are higher than pre-pandemic levels, 2024 business jet sales were flat compared to 20. Space and Defence represented approximately 34% of fourth quarter sales and totaled $163.3 million, increasing 7.6% from the same period in 2023. In the In the fourth quarter of 2024, Broke was led by the F-35 and C-8-53 case. For fiscal year 2024, approximately 35% of space and defence sales were outside of the U.S. This included customers in a number of Western European countries, as well as sales to customers in other Western-aligned markets, including Brazil, India, South Korea and Turkey. Industrial complies only 7% for 4th quarter 2024 sales and totaled $32.2 million, decreasing 14.8% compared to the 4th quarter of 2023. We experienced softness across all the sub-markets except for recreation. For the full year industrial sales were down 21.1%, declining more than forecasted. Higher financing costs and growing competition from Chinese automators negatively impacted the performance automotive category of industrial, to a much greater degree than we have expected, particularly for Western European auto companies. Wind continued its multi-year decline, decreasing 37% year-over-year, whereas we were forecasting flash-ish off an already low base. Other sub-markets also decreased. Gross margin of 25% in the fourth quarter of 2024 favorably compared to the prior year period gross margin of 22.5%, as higher sales drove operating leverage combined with strong operational execution. As a percentage of sales, selling, general, and administrative expenses and R&T expenses were 13% in the fourth quarter of 2024, compared to 11.8% in the comparable prior year period. Higher R&T expenses to support innovation for future programs, partially. Other operating expenses in the fourth quarter of 2024 consisted of non-cash impairment and restructuring charges, primarily related to the pending divestment of the Neumark Austria Class Fiber Pre-Preg Industrial Operations has previously disclosed. Adjusted operating income in the fourth quarter was $57.1 million, or 12.1% of sales, compared to $49.1 million, or 10.7% of sales, in the comparable prior year period. The year-over-year impact of exchange rates in the fourth quarter to operating income was favorable by approximately 60 basis points. Now turning to our two segments. The composite material segment represented 79% of total four-quarter sales and adjusting for non-recurring charges generated an adjusted operating margin of 15.3%. This compares to an adjusted operating margin of 14.7% in the prior year period. The engineered product segment, which is comprised of our structures and engineered core businesses, represented 21% of total sales and generated an adjusted operating margin of 10.7%. This compares to an adjusted operating margin of 9.6% in the prior year period. Next, cash provided by operating activities in 2024 was $289.9 million, compared to $257.1 million in 2023. Working capital was a cash use of $0.8 million in 2024, compared to a use of $27.4 million in 2023. Capital expenditures on an accrual basis were $81.1 million in 2024, compared to $121.6 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. dollars. Free cash flow in 2024 was 202.9 million dollars which compares to 148.9 million dollars in 2023. Increased volume, robust working capital management and tightly managed capital expenditures supported the higher level of cash generation. Adjusted EBITDA total 382.3 million dollars in in 2024, compared to $362.4 million in 2023. We operate long-lived assets, which explains why our depreciation expense has been well above our capital expenditures for a number of years. We did not repurchase any stocks during the fourth quarter. In total, for fiscal year 2024, we used $252.2 million to repurchase stocks. The remaining authorisation under the share repurchase program as of December 31st, 2024, with $234.9 million dollars. The Board of Directors declared a 17 cent quarterly dividend yesterday, which is an increase of 2 cents or 13 percent from the prior level. The dividend is payable to stockholders of record as of February 7th, with a payment date of February 14th. Expanding on Tom's comments regarding our 2025 sales and adjusted ETF guidance, we are forecasting 5% sales growth at the midpoint and 6% adjusted ETF growth at the midpoint. Excel has the operational capacity to support much higher demand from our customers, though considering the various current industry supply chain issues and rate ramp challenges faced by our customers we are forecasting somewhat muted sales growth. Note also that our guidance excludes approximately 40 million dollars of annual sales from the Neumark Austria facility which we are planning to divest. In terms of our market we expect 2025 commercial aerospace sales to increase high single digits. As a result of the planned sale of industrial focused we will change our reporting by market. Beginning with the first quarter of 2025 we will report results for commercial aerospace and a second market titled Defence, Space and Other. This market will include the remaining industrial business which will consist primarily of performance orientated automotive sales. In 2025 we are expecting this Defence, Space and Other market to be slattish as low single digit defensive space growth is expected to be offset by continued softness in industrial Tom pointed out some pressure on our margins including growing into our existing headcounts and higher R&T costs as we continue to develop and innovate materials for the next generation of aircraft additionally we are focused on productivity and driving operational efficiency to offset recent inflationary pressures including labour inflation. Top-line growth and higher capacity utilisation will ultimately be critical to driving improved overhead leverage and stronger margin performance. As Tom referenced last quarter, we are upgrading our ERP system. As this new ERP system will be cloud-based, accounting rules require it to be expensed rather than capitalized, placing some further short-term pressure on margins. Rounding out the guidance discussion, we expect a tax rate of 21%. Interest expense will likely increase as during the year we expect to refinance our 4.7% note which is due in August 2025 and rates were expected to be higher for the new bonds. We forecast capital expenditures to remain subdued as we grow back into existing capacity. So for 2025 and likely for the next two or three years accrued capital expenditures are forecast to be below 100 million dollars. This level of capital expenditure should support a conversion a conversion ratio of 100% or higher for a period of time. With that, let me turn the call back to Tom.

Thanks, Patrick. As Hexcel enters 2025, I am confident in our long-term growth and the value we will provide to our customers and shareholders. Hexcel's lightweight material technology is vital for the design and production of modern aircraft that are lighter and structurally stronger, have greater range, consume less fuel, and emit less carbon dioxide. I am proud to be part of this exceptional team. With that, we're ready to take some questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Good morning, Tom and Patrick and Kurt. Hey, maybe Tom or Patrick, as you think about the commercial aerospace guide for this year up high single digit to 10%, can you talk about maybe some of the moving pieces there and maybe explicitly where you are today on some of the higher volume or higher revenue programs like the A350 and to what extent we should expect sort of acceleration on that program in 25 or what's embedded in the guide?

Right. Well, Ken, let me take that and just walk through some of the different programs and give you a sense of what we use as the underlying assumptions for production rates for our 2025. So starting with Boeing, on the 737, we were pulling at mid-30s in terms of aircraft per month for really Q1 last year. And in Q2, it dropped into the kind of 30 range. and then in q4 we were still pulling a 23 in that range for the 25 outlook we built in low 30s as an average atm aircraft per month for the full year and the reason for that is bowling has said publicly they want to get back up to 38. they've got some aircraft that they're going to deliver that are out of inventory so the production rates may be lower we are taking into count there could be some some de-stocking with all the inventory that's in the system but we feel like a low 30s number as an average is a good number for us if it's higher we certainly have the capacity in place we've got the people in place and we can meet the demand um but that's that's what we built we took a fairly conservative number in terms of building our plan for 2025 on the 37 on the h7 we were pulling at about seven aircraft per month for the whole year including Q4 and so we expect 2025 to be at about that same level delivering you know somewhere in the mid 80s um in terms of total number of units and if again if it goes higher we can we can support higher rates but that's that's where we are uh for 2025 is kind of in the six to seven range in in mid 80s uh with the ability to flex and on the triple seven we're expecting three to four aircraft per month for 25. Shifting to Airbus on the 320, we were pulling at mid-50s for most of last year and right about 50 in Q4. So it did drop a little bit in Q4. Airbus delivered, as you know, 602 units last year, which was an increase. And for 2025, we're really expecting probably low 60s in terms of aircraft per month uh so kind of low 700 units in terms of total delivery on the 350 we're obviously we have a very big ship set value kind of four and a half to five million dollars per ship set we were pulling at six and a half to seven for q1 to q3 q4 was a little bit less but if we look at the outlook for 25 again we're thinking six to seven and mid 80s in terms of total units that range. And then on the 220 where we also have content in the 200 to 500,000 range, we were pulling at kind of nine for most of the year. It dropped a little bit in Q4 and the outlook for 2025 is we expect to be pulling at about 10 to 11. So that's how we built our plan was with those underlying assumptions. A bit conservative but we have the ability to flex if the rates are higher because we have a capital in place, We have people in place that are trained. And so, as I mentioned in my remarks, and Patrick reiterated, we are fully prepared to deliver whatever our customers require from us across all of our programs.

Thanks, Tom. I appreciate all the cover. I'll pass it back there. All right.

The next question comes from Matt Akers with Wells Fargo. Your line is open.

Hey, good morning, guys. Thanks for the question. Can you give us any help with kind of modeling the quarters for 2025, just how we should think about maybe a slower start to the year, ramp up in the second half, if there's any way to kind of think about that split?

So, Matt, I would take it as normal. We're on an upward ramp, frustratingly slow, as we all know. But we're moving upwards. We're climbing. And so, as Tom said, on the wide bodies, we're kind of moving from six to seven in 2024, kind of pushing towards seven and hopefully above it. and we should see that trend as we move through 2025. The 320, as Tom said, sort of in the 50s in 2024 and hopefully pushing through 60 to the mid-60s in 2025 and growing as the year goes. The hardest call is the MAX coming out of the strike. Boeing are in the 20s probably right now and it's really going to be down to how well they can grow that. As Tom said, we're fully ready to support and hopefully they push through the 30s and into the high 30s in the back end of the year. So our expectation, yes, is for some growth as the year progresses. And then obviously that would position ourselves for strength as we go into 2026 and hopefully more of the supply chain and the OEMs.

Okay, thanks. And then I guess within the industrial sales, I think you said it's down in 2025, what's the biggest driver there?

Well, obviously, pulling out Austria, which is not included in our guidance, is worth roughly $40 million. And then we're also seeing a bit of a decline. It's not massive, but a bit of a decline in automotive, which is the largest subsegment within industrial year over year. Thank you.

The next question is from Sheila Kayelou with Jeffries. Your line is open.

Thank you so much, and good morning. um maybe i just wanted to ask about profitability if we could talk about it for a minute um two-part question first the guidance implies 20 increments to high 12 adjusted EBITDA margins um you know tom i don't know if you're comfortable talking about this but how do we think about the return to high teens margins over the medium term and just given some of the rate changes in 25 and 26 you just mentioned how do we think about uh you know what you're capacized in terms of hiring?

Right. Well, if you go back to 2018, 2019, that's where HEXL was, was in the high teens in terms of margin. And it was because we were utilizing a lot of the capacity, we were getting great operating leverage. After the pandemic, when we saw the decline in production, we've lost a little bit of that operating leverage, and we're still recovering. So last year, the production was only about 68% of what it was in 2018. So we're still in the middle of the recovery. And as we start to get more production and more revenue, that will drive a lot of operating leverage and will help us get our margins back up to those high teens. Now, at the same time, over the last two or four years, we've seen a massive amount of inflation in labor, in utilities, in material, and we have to offset that. So, I mean, we always have to run fast to stand still in this industry, but I think these inflationary pressures over the last few years have been particularly daunting. Now, we've got a lot of work to do to drive our productivity programs. That future factory that I talked about to drive productivity and efficiency will help us offset the inflationary pressures to get back to the high team in terms of margin. So we've still got a couple of years, though, before we're going to fully get back to those production rates. But in that time, we'll be driving productivity initiatives so that we can offset the inflationary pressures and get back to higher markets.

Great. Thank you. The next question comes from Pete Skabitsky with Alembic Global Advisors. Your line is open.

Yeah, good morning, guys. Just wanted to clarify a little bit more of the revenue guide. So Austria is out of guidance, but you haven't sold it yet. So will you actually report that revenue in the first quarter, even though it's not in guidance?

And then maybe you can talk about I'm sorry maybe you talk about the impact of um of the Hartford sale as well because it sounds like that is a done deal yeah so we will report any sales that we achieve out of Austria because you're quite right the sale is not closed yet we will call out what those sales are so those would be I guess small increments to the guidance that we have provided and that's the best way to manage that I think through the year we expect it to go at some point clearly the timing is uncertain In relation to Hartford, really de minimis level of sales, it was really a development program. We had a very small, low single digit, millions of sales, but negligible in the total company. So more of a research development sort of program that we're, as we said, there are better operators of that business, and we've agreed a good deal on that.

Okay. That's helpful. Thank you. If I could just have one follow-up. Are you guys expecting net pricing improvements in 25? And then is there any way to quantify, you know, I don't know how big it is, but you're talking about margin headwind from this ERP implementation. I was wondering if you could quantify that.

Yeah, so we are always looking for opportunities for price when our contracts come due. And we have several long-term contracts, which is great, but we also have a fair number of contracts that are coming due on a regular basis, maybe 20% a year. And so, we did get some good price increases last year to reflect a lot of the inflationary pressures, and we expect that that will continue into 2025 as well. Now, your second question was regarding what?

The ERP implementation, if you can quantify that.

You know, it's in the kind of $5 to $7 million range. It's normal cost for implementing an ERP. It's just it's hitting this year, as Patrick said, as an expense, and that's creating some headwinds. But on the flip side, it should drive a lot of productivity because at the same time we're implementing the ERP, we're also implementing an MES system, a manufacturing efficiency system, which will drive a lot of productivity in the plant. So it'll pay back. It's just it's a bit of a headwind this year.

Got it.

The next question comes from the line of Michael Charamoli with Truth Securities. Your line is open. Michael, perhaps your line is on mute. Okay, we'll move on. Perfect. The next question comes from John McNulty with BMO Capital Markets. Your line is open.

Yeah, good morning. Thanks for taking my question. So when you look at the inflation that you saw in SG&A in 2024, which I guess is high single digits, call it 8%, how much of that was putting people in the seats versus wage inflation? And I guess, how are you thinking about how that line inflation grows in 2025. It sounds like you've got all the feet you need in the seats, but not necessarily. It's harder to figure out how to think about the wage inflation side of things going forward.

Yeah. Hi, John. I mean, SG&A is a combination of things, and it isn't just people. So the ERP system and implementation, some of those charges, as we talked about, run through there i think we call that previously obviously with the nick tom succession we had some specific one-time costs this year those ran through sgna um as well as yes i mean we're gradually adding some heads and then you've got the the merit that the labor cost increases coming through the inflation if you like so it's a combination of things that are really driving that year on year put that infrastructure in place to support the growth that we expect ahead so we're managing it tightly we're controlling it on an ongoing basis we have from time to time certain one-time costs like the ceo which clearly was unique in 2024 um the erp was in 2024 and that will recur to some extent in 2025 as well as the underlying um general inflation if you like merit cost increases that we normally see.

Got it. Okay. And then it sounds like you've got a bit of a ramp in R&T coming up. I guess, can you help us to think about how big that could be? I guess it was, you were up about 5 million bucks a year over year in 24, but it sounds like it may be a little bit more meaningful going forward. Can you help us to think about that and what that's going towards?

Maybe one way to look at it is it's about 3% of revenue right now, which is a little bit up from where it's been historically, but that's a number that we think is a good number that will allow us to make sure we're driving innovation on not only our fibers and our resin systems and our production techniques, but to really make sure that we're developing the material systems for the next generation. So maybe the easiest way to think about it is we're going to be in the 3% range for R&T in order to fund the level of development that's required for the next generation.

Got it. Thanks very much for the caller.

The next question comes from Myles Walton with Wolf Research. Your line is open.

Thanks. First, maybe a follow-up question to Pete's question on the implied growth within commercial aerospace for 25. In that 10%, is the volume growth maybe something closer to 5% to 7% and the rest is gross pricing?

The majority is volume mild, which is then topped up by some pricing, yeah.

Tom, on the capital deployment strategy you have and as it evolves, there's no stock repurchase in the quarter. I'm curious if that signals to us how you're thinking about the availability of this inorganic growth you put into the press release for the first time. And if I could just clarify, as it relates to what's in scope and not in scope on your M&A strategy, is it fair to think that structures and composite manufacture of structures is not within your scope?

That's correct. We're really not looking at structures. We're really focused on advanced material science. In terms of capital deployment, let me just go backwards in terms of your question. You asked about Q4. Really, I mean, Q4 wasn't signaling anything other than we had done $250 million or so of share repurchases during 2024. And so that was obviously higher than our cash flow for the year. So we didn't do any further in Q4, but we do have $235 million still left on our authorization, and we do intend to do some this year as we go through the year. We put M&A in as a topic just because as we think of capital allocation, we're going to, of course, fund all of our productivity initiatives and our R&T and our innovation initiatives, and at the same time, the organic growth initiatives, like we talked about with Space and Defense or on commercial and regional jets and EVs all. At the same time, we do want to start to look at things that would leverage our material science expertise inorganically, things that are aligned strategically to the direction that we want to go, and that also meet our return thresholds. And if something comes up, we will look at it very, very closely. Absent that, absent an inorganic opportunity, we will continue with our share repurchases. And you saw that we did increase our dividend again this year from $0.15 to $0.17. So, that's how we think of the capital allocation strategy overall. But, again, just to reiterate, we're not interested in structures. We're more interested in advanced material science for things that we consider for inorganic growth. Okay. Thank you.

The next question is from Gavin Parsons with UBS. Your line is open.

Thanks. Good morning, Gavin. I really appreciate all the build rate color. That's really helpful. You mentioned having some buffer for max destock in there. Is there any consideration for that in some of the other programs, or maybe is that already in those build rates?

Well, max is the one where we think it's the most relevant, just because build rates have been all over. Bowling is going up. There's still a lot of inventory in the system. So that was the one we really probably were more conscious about. The other is, you know, our rates have been more or less ticking along with the rates of the OEM. So it wasn't much of a factor, but max is still a bit of a special situation.

That's helpful. And that sounds like maybe due to some of those metrics you talked about, margins are a little more second half weighted. But when do you expect to get back to maybe a more normal incremental margin drop through on revenue growth? Right.

Well, I mean, I would say that the situation really requires the operating leverage that will come through from revenue. So when production rates get back to where they were in the 2018 level and our revenues are up at that level, that's when we can start to see some more normalized margins. And as I said, you know, that's probably 26, perhaps even into 27. It gives us time to work on our productivity initiatives, our future factory initiatives to drive productivity to offset some of the inflation levels.

The next question comes from the line of Michael Charmoli with True Securities. Your line is open.

Hey, good morning, guys. Can you hear me now? Apologies for before. Yes, we can. Hey, Michael. Great. Good. Hey, Patrick, just on exchange rates. I mean, it seems like, you know, the Trump administration powers that be might want a weaker dollar. just given where we are now, does it make sense to change the hedging philosophy to extend that to a more longer term to kind of lock in these current rates where we're basically at parity with the euro?

Yeah, I mean, it's an interesting question, Mike. I think it's a little bit premature for us to do anything in terms of changing our policy right now. We will obviously be vigilant we always are i mean we have a 10 quarter horizon hedging policy which is is quite a long horizon already and and that's quite a substantial amount of hedging in terms of the total dollars involved um so to extend out further would be a lot um but for i understand your point uh a strong dollar is good for hex sales that's the way our cost base in europe rolls up um so Good question. We will stay vigilant. No plans imminently to change anything else. Got it.

Got it. And just if I may, Tom, I think you said you might engage defense primes more directly. What would be different in the strategy there going forward versus what you've historically done?

Thanks. right well i think historically um we've sometimes operated through intermediaries or partners as opposed to dealing directly with the defense prime obviously as we go forward we want to be uh tighter with the defense crimes and understanding what their requirements are and how our material systems could impact them so that's something that we are are seeking to do is we've always had good relationships with the defense prime what we'd like to do is strengthen those and move further upstream and get more involved in their innovation and development, particularly as it relates to material systems, so that we can feed, if you will, a hectile material throughout the program. So that's what we meant by that.

Got it. Helpful. Thanks, guys. Appreciate it.

The next question is from Scott Duschel with Deutsche Bank. Your line is open.

Hey, good morning. Tom, just to clarify, has Boeing restarted issuing purchase orders for products where they had previously halted purchase orders during the strike?

The answer, yes, we're shipping again from all of our plants that supply Boeing. As I said, even in Q4 on the 737, we're still pulling in the low 20s, so it wasn't mainly engine focused, engine focused, you're right.

For products that go on airframes, is that broadly restarted, though? Yes, at the low level, yes. Okay, thank you. And then, Tom, it looks like your 8 through 50 build rate assumptions are a bit higher than what Airbus itself is signaling to the street and what consensus is expecting there. Just curious if you could talk a bit about why you're comfortable getting to ship to and guide to this healthier rate.

Well, you know, of course, we will be guided by what Airbus finally puts out. It's just these are the assumptions that we put in for the year. As I said, you know, between 6 and 7, pushing up to 7 as the year goes on. And, you know, that's generally in line with what Airbus has been indicating. They will, of course, clarify when they present in February. But the one thing they've reiterated is they're still on track for 12 aircraft per month by 2028. So it's just a question of what's the ramp curve. And we've tried to be conservative and realistic, but we will obviously adjust to what Airbus indicates when they present.

And Scott, you always have to remember, we're about four to six months ahead of Airbus's assembly. So we're always going to be a little bit higher in terms of the amount of material we ship relative to the planes that they sell. Understood. Thank you.

The next question comes from David Strauss with Barclays. Your line is open.

Thanks. A follow-up question on currency. um you know it did you called out that it was a 40 bip tailwind to margins in 2024 what kind of tailwind is it further tailwind is it in 2025 and 2026 based on uh you know where your hedge rates are well i can't answer that until i know what the actual rates are so um i mean we're well positioned and hedged coming into the year but obviously the hedge and the benefit we have will depend on the actual rate because we're not 100% hedged.

So I've got to bring in the actual FX rate, combine them with where we're hedged, and then that will be the comparison to 2024. So we're in a good position, I will say that much. We've obviously locked in some of those stronger rates, but until we have the actual rates each quarter, we can't predict a hedge. All I will say is we're well positioned.

So can you maybe give us what was your average rate in 2024 on the euro?

No, we'll come back to you. I don't want to make up a number. I don't want to make up a number, David.

And Patrick, I think in terms of your cash progression through the year, typically Q1 is a usage of cash.

Should we expect the same thing this year?

Yes. I mean, the profile of cash usage will be more or less the same. We had a fantastic fourth quarter the way we closed out the year. I mean, compliments to the team, great income, and really good work in capital management. That tends to reverse in the first quarter, and then after the first quarter, we're then trying to drive ourselves back to a positive situation.

Thanks very much.

The next question comes from Richard Safran of Seaport Research Partners. Your line is open.

Tom, Patrick, Kirk, good morning. I dropped off for a bit, so if you answered this, I'll move on. You're coming off some fairly high level of growth in 2024 for business and regional jets. I thought you might talk a little bit more about business and regional jets and growth trends in 2025. And I'm assuming that you're going to see more of a contribution from DeSoe in 2025. Is that correct?

Yes. We have great packages on the DeSoe 1000 NX in particular. And so as that program gets into low rate production and then full rate production, it will be a good generator of revenue for us.

Okay. And then just a second question. So, you know, you guys have been pretty clear in the release and in your commentary about the ongoing challenges in the OEM supply chain. So as an industry observer and speaking generally, I wanna know if you could comment on how you think about progress being made to eliminate supply chain issues. And if you have an expectation that we're gonna exit 2025 with most, if not all of the supply chain issues behind us.

It's been evolutionary and certainly it's taken longer than everybody expected for the recovery. Part of it is that production rates have remained low and that's put pressure on the supply chain in terms of cash conversion. Obviously, inflation was a bigger problem in the 22, 23 time period. Labor shortages have kind of persisted, but I think those are getting under control. People have now hired the people. They've trained them. So the answer is I do expect that 25 is going to be better than 24. Not completely fully stable. The recovery is not going to completely happen in 25. And so in 26, you'll get even more stability. So yes, it's improving. um inflation has has has tapered a bit but we still are at a higher level of cost um the labor shortages have mitigated people are in place and they're getting trained and some of the attrition is going down so we're certainly seeing that so i expect we'll definitely be in a better place by the end of 25. i'm sorry thanks very much yeah if i can just jump in on the call there to answer So, David's question, it was $1.08, $1.08 to the euro, was our average rate.

So, David's still on the line. There you go.

The next question comes from Scott Mikas of Melius Research. Your line is open.

Tom, I think most would agree that without changes in scope clauses, regional jets are probably going to be less relevant going forward. So, Embraer may need to launch a clean sheet aircraft to challenge Boeing and Airbus. So I'm just wondering, have you had any preliminary discussions with Embraer about a potential clean sheet and narrow body aircraft that could enter service in the 2030s?

Right. Well, we have a very good relationship with Embraer. I don't want to get into, you know, confidential discussions that we would have with them on new programs, but we've always had a good relationship with Embraer, and we're going to continue that. Certainly, I have read about the thoughts that they could introduce the new narrow body. There's certainly plenty of demand for that sort of thing. And so we'll continue the discussions with Cambria, but I don't have anything more to say about the specific discussions.

And then given potential concerns about tariffs, could that impact your ability or cost to acquire some of the precursor chemicals that you need? And are you actively accelerating purchase orders to suppliers to preempt any tariffs?

No. I mean, so on this point, we've obviously been watching this very closely XL buys about 95 percent of its material direct material and sourcing activity from the US Europe and Japan and and by the way only 1.2 percent or so from Canada Mexico and China so we have very limited exposure to the countries that have been targeted for higher for higher tariffs and with regard to acrylic nitrile which is the basis for our PAM. All of the acrylic nitride we use in the U.S. comes from U.S. sources. All the acrylic nitride we use in Europe comes from European sources. So there is no cross-border trade in that major raw material for us.

Okay. And then one quick question for Patrick. I think you have a union negotiation coming up in September.

Just wondering, is that factored into the guidance and part of the conservatism on the incremental margin? um we haven't put anything specific out of the ordinary into the plan um we're we obviously are well first on what to do and we're going to prepare well for that negotiation as we do periodically as those come around um we don't have anything specific and um we believe we're going to find a mutually agreement a mutual agreement and successful outcome okay thanks for taking the questions.

The next question comes from Jack Ayres of TD Cowan. Your line is open.

Hey, guys. Good morning. Yeah, really appreciate all the color here from both of you guys. Just more high level, and I know you're not giving long-term guidance, Tom. I think you guys kind of backed away from that last quarter but just at like a very high level you know hexel did 350 in earnings in in 2019 guiding to you know almost four dollars in earnings for for 2020 before covid um with with much higher build rates to you know all our points here i just wanted to like back up and see like is there anything changing like structurally like maybe wind um is is you know, structurally down, but like any moving pieces to that 350 and earnings, you know, as we get out there and production rates go higher, just so we can kind of get a think like, like a sense for normalized earnings power. Thanks so much. Right.

Well, I think the key is operating leverage and it has to do with build rates that drive revenue. And it allows us to essentially absorb more of the cost in terms of production. so so again as we get back to those 2018-2019 levels of production that will create the operating leverage that will drive the margin and the earnings and that'll be the biggest driver i mean we'll continue to drive all of our efficiency initiatives our future factory initiatives but the biggest thing is going to be the recovery and the production rate in 2024 production was only 68 percent of what it was in 2018. as that recovers back up to 100 percent that's when we will get back to our full margin and earnings just to clarify i think the

68 is the industry production levels that tom's alluding to hex cell is closest to about 80 as compared to um 2019 levels and and and just on the structural chain i mean fundamentally we're still a carbon fiber resin honeycomb engineer core business and so fundamentally it hasn't shifted and taking out the glass pre-preg wind business, if anything, will be a very marginal, small benefit to us.

Okay, thanks. Appreciate it, guys.

We have time for one last question. It will come from Ron Epstein of Bank of America. Your line is open.

Hey, good morning, Greg. Just a quick one. With the expansion of the 787 facility down in South Carolina, what kind of opportunity does that bring along for you guys?

Well, the 787 is a good program for us. Our shift set value is between $1 and $2 million on it. The expansion, as I understand it, will allow them to go from kind of a historic rate of seven aircraft per month to size 12. And that obviously would be great for the industry. It would be great for HEXL. because it's a good shift of value. So I think that was very encouraging to see that they're making that investment and that they are going to be increasing the capacity because the 787 is a very popular aircraft and it's a very good program for HEXL and for many others in the industry.

Great. Thank you.

Thanks, Ron.

Thank you. This concludes today's conference call. We thank you for joining. You may now disconnect your lines.