Hello, and welcome to the Hexcel Second quarter earnings call. I would now like to turn the conference over to Kurt Goddard, Vice President, Investor Relations. Please go ahead.

Hello everyone. Welcome to Hexcel Corporation second quarter 2025 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our Chairman and CEO and President; and Patrick Winterlich, our Executive Vice President and Chief Financial Officer. The purpose of the call is to review our second quarter 2025 results detailed in our news release issued yesterday. Now let me turn the call over to Tom.

Thanks, Kurt. Hello, everyone, and thank you for joining us today as we discuss our 2025 second quarter results. The fundamentals for the commercial aerospace industry and for Hexcel's outlook continue to be very positive. Hexcel has a strong market position with a uniquely extensive range of advanced lightweight composite materials, meeting the requirements for the record levels of new commercial aircraft on order with Airbus and Boeing, as well as supporting military applications and growing global defense spending. Starting with Boeing, there is positive momentum for their key programs, with Boeing stating that they are now at a production rate of 38 aircraft per month for the 737 MAX aircraft. Solid progress also continues on the 787 build rate as Boeing moves towards producing 7 aircraft per month in 2025, following the apparent resolution of supply chain issues. For Airbus, the outlook for the A320 ramp is also becoming more encouraging in terms of the growing availability of engines in the second half of 2025 to enable Airbus to increase the build rate and then push monthly build rates through the 60s in 2026. Airbus continues to project that they will achieve a production rate of 75 aircraft per month on the A320neo program by 2027. The A350, Hexcel's largest program, is currently one of our major challenges, as Airbus looks to stabilize the program's build rates and move monthly rates towards 7 by the end of 2025. In addition to A350 production challenges due to supply chain disruption, we have seen some destocking impact in Europe in the second quarter based on high levels of inventory for A350s for certain parts, including the wings. As previously communicated, we expect this destocking to continue through the third quarter. Airbus has indicated that the destocking should end as we go into Q4, and they are still targeting to achieve a build rate of 12 aircraft per month on the A350 program by 2028. Remember that the shipset for Hexcel in the A350 is between $4.5 million and $5 million per shipset. Each monthly step-up in the A350 build rate brings significant revenue and operating leverage benefits for Hexcel. The medium to longer-term outlook is very positive for Hexcel, including the expected multi-decade production life for both the A350 and the 787. The material demand requirement from these two programs will drive strong ongoing capacity utilization for Hexcel, which will underpin strong cash generation for years to come. As we have communicated, we expect to generate over $1 billion of cash cumulatively over the next four years. Demand within other commercial aerospace is also solid, and second quarter revenue saw growth both year-over-year and sequentially. As a reminder, the modern large cabin business jets now have extensive composite content, with shipset values between $200,000 and $500,000 per shipset. The second quarter of 2025 saw strong defense sales with broad strength across a number of domestic and international programs. Military and defense budgets around the globe continue to strengthen. Notably, NATO members in Europe have indicated that they will increase defense spending to 5% of GDP, which ultimately translates to higher and sustained build rate for most platforms. Development of new platforms is also encouraging, such as sixth-generation fighters and autonomous drones. Hexcel participated in the Paris Air Show last month, which provided a confident outlook for the aerospace industry and where we reinforced existing relationships, announced new relationships, and highlighted recent advances with our innovative technology for lightweight material. Some items of note include Embraer and Hexcel celebrated 50 years of Hexcel supplying lightweight composite solutions by signing a preferred supplier agreement for composites. Hexcel has been a long-standing provider to Embraer on a range of advanced lightweight composite materials, including prepregs, engineered core, and advanced structures. Various Embraer aircraft platforms use these lightweight composite materials, such as the C390 military transport, the KC-390 tanker, the E2-Jet family of narrowbody regional aircraft, and the Phenom 300 business jet. We also signed a long-term agreement with Kongsberg, the Norwegian defense and aerospace systems provider. The agreement covers the supply of Hexcel's lightweight engineered honeycomb and prepreg products for strategic production programs over five years. This is just one example of Hexcel's strong European presence in relation to the increase in defense spending in Europe. Additionally, we announced the collaboration with FLYING WHALES and Hexcel on an exciting project to develop an advanced solution for modern airship structures. The project will utilize a broad range of Hexcel's products, especially Hexcel's lightweight carbon fiber, which has been selected for the pultruded tube that composes the skeleton of the FLYING WHALES airship. Each airship is forecast to have a shipset of more than $1 million. Looking at our financial results for Q2 2025, we generated sales of $490 million and adjusted diluted EPS of $0.50 per share. As we highlighted in our last earnings call, aircraft production rates in 2025 will not meet the initial expectations due to supply chain disruptions. Commercial aerospace sales in the second quarter of 2025 were $293 million, down 8.9% on a constant currency basis compared to the same period in 2024. Lower sales year-over-year were primarily due to the A350 and the Boeing 787. However, this was partially offset by a 5.1% increase in sales within other commercial aerospace from international demand. To share some additional color, commercial aerospace sales were up on a sequential basis. The Boeing 787, the 737 MAX, and the Airbus A320neo all increased sequentially, as did other commercial aerospace. The A350 sales were lower as anticipated due to channel destock. In Defense, Space, and other sectors, sales totaled $197 million, up 7.6% in constant currency compared to the same period in 2024. Growth was driven by the CH-53K, two international fighter programs, and a strong quarter for space, including launchers, rocket motors, and satellites. Conversely, the V-22 Osprey continues to weaken as expected, as that program comes to the end of its production life. However, the overall continued growth in defense underscores the capabilities and value Hexcel lightweight materials bring to the military market. With lower-than-expected sales volume in our commercial business, we see 2025 as a year where we need to remain focused on the fundamentals of our operations and controlling costs as we navigate reductions in near-term production for commercial aerospace programs, notably the A350, before the production rates continue to increase in the second half of 2025. Our gross margin of 22.8% for Q2, down from 25.3% in 2024, was negatively impacted by lower operating leverage from the lower sales combined with actions that we are taking to reduce inventory levels. Margins were also impacted by this lower overhead absorption. Additionally, we are now beginning to feel the impact of tariffs. However, as production rates increase in the back half of 2025 and into 2026, the increased volume will drive operating leverage and expanded margins. While production rate increases for original equipment and commercial aerospace have experienced delays in 2025, the commercial aerospace industry outlook and confidence levels appear to be getting stronger. Given this backdrop, we continue to remain extremely vigilant on the internal elements of our business that we can control, such as on-time delivery. We were pleased to receive a supplier award for Best Performer from Airbus this quarter, recognizing Hexcel for our outstanding delivery and quality. We continue to push pricing and recover cost inflation impacts from contracts when they renew. About 15% of our contracts by number come up for renewal each year, and historically the average life of our contracts has been about seven years. We have worked hard over the last few years on all our contract renewals to get pricing to offset recent material, energy, and labor cost pressures, and we will continue to do so. We are also introducing more escalation and pass-through clauses for our sales contracts whenever we can. We will continue to seek price increases to offset the inflation we have encountered over the last several years as our contracts come to the end of their terms. As we have mentioned in recent quarterly calls, we are managing headcount very tightly and will only add people when demonstrated production rates clearly justify it. Specifically, as we stated in our first quarter earnings call, we expect that our headcount at the end of 2025 will be no higher than the headcount we ended with in 2024. This will be more than 400 heads short below our original plan for 2025. As of June 30, our headcount was below fiscal year-end 2024 levels and decreased sequentially from the end of the first quarter. Our strong focus on operational excellence and general cost control remains as robust as ever as we continually work to drive efficiency and productivity. We also continue to move forward on our future factory efforts which will see significant cost-per-unit improvements over the next several years, in part through the adoption of more automation, digitization, robotics technology, and the incorporation of artificial intelligence at our production site. In relation to continued efforts to optimize our production efficiency and overall facility footprint, we have now completed the legal process required in Belgium and have announced the closure of our engineered product facility in that country. Production stopped at the end of June, and the majority of our employees have departed, leaving a small residual team to decommission the site and prepare it for sale. We took a restructuring charge of $24 million in the second quarter relating to severance and associated costs for the Belgium site. This Belgium site was operating as part of Hexcel for decades, but over time, the cost structure became untenable. While we are incurring near-term costs to close the site, there will be a longer-term reduction in structural costs within the Engineered Products segment of our business from this action. Please also note the production and sales from this plant have been transferred to other existing Hexcel sites, largely to our facility in Morocco, but also to our plant in Pottsville, Pennsylvania. Therefore, there is no impact to our top line. The previously announced divestiture of our Australian glass fiber prepreg and recreation business is continuing, and we plan to provide an update later this year. We also recently divested our additive manufacturing business in Hartford, Connecticut, as part of our overall streamlining of noncore activities, so we can focus on the upcoming production rate increases in commercial and military aerospace. Hexcel is well-positioned on all fronts to meet the opportunities that lie ahead. We have an unrivaled product portfolio of advanced lightweight composite materials. We have world-leading technology and intellectual property positions. We have world-class production facilities across the U.S. and Europe, and we have the right team to drive growth. As build rates increase, we are well-positioned to drive EBITDA and free cash flow while delivering strong returns to our shareholders. Hexcel will see an additional $500 million in annual revenue without winning another contract program. On top of this organic growth, we also believe there is a place for targeted and disciplined M&A. We continue to be vigilant for appropriately priced assets that will provide synergistic benefits to Hexcel and complement what we do today in the sphere of advanced material science technology. To date, we have not found any actionable assets at the right prices, but we continue to look and evaluate potential opportunities. In the meantime, we have continued our periodic repurchase of Hexcel stock, and indeed, we bought back another $50 million of shares in the second quarter. This now brings our repurchases to $100 million for the year and $350 million, or almost 6% of our outstanding stock, over the last 18 months. With that, let me turn it over to Patrick to provide more details on the numbers.

Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter time horizon. The year-over-year sales comparisons I will provide are in constant currency, which thereby remove the foreign exchange impact on sales. The commercial aerospace market reported approximately 60% of total second quarter sales in 2025 of $489.9 million. Second quarter commercial aerospace sales of $293 million decreased 8.9% compared to the second quarter of 2024. We experienced lower sales year-over-year with each of the four major commercial aerospace programs including the Airbus A350 and A320, and the Boeing 787 and 737 MAX. As the overall aerospace supply chain continues to experience challenges ramping as quickly as the market demand falls. A350 sales declined year-over-year and sequentially as expected on channel destocking, as Airbus faced supplier challenges causing delays in the rate ramp. As Tom mentioned, 787, A320neo and 737 MAX all increased sequentially. Sales for other commercial aerospace in the second quarter increased 5.1% year-over-year, led by international demand. Defense, Space, and Other represented approximately 40% of second quarter sales and totaled $196.8 million, increasing 7.6% from the same period in 2024. For rotorcraft, the CH-53K and Blackhawk programs were year-over-year, partially offset by the sunsetting V-22 and a softer quarter for Apache. The space market grew strongly year-over-year, including both from the traditional defense prime and private-based companies. Growth was across multiple space applications, including launches, rocket motors, and satellites. Gross margin of 22.8% in the second quarter of 2025 decreased from 25.3% in the second quarter of 2024 as lower sales and inventory reduction actions negatively impacted operating leverage. Specifically, this softer gross margin reflects the impact of our underutilized carbon fiber assets and the initial impact of increased tariffs, which started in the second quarter. We expect upcoming production rate increases, especially in commercial aircraft, to create operating leverage and drive increased margins as we go through the year. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 11.7% in the second quarter of 2025 compared to 10.9% in the comparable prior year period. Upgrades to financial and manufacturing IT systems, combined with some additional professional fees contributed to higher operating percentages. The closure of the engineered product facility in Belgium drove other operating expense of $24.2 million in the second quarter of 2025. These costs consist primarily of severance expenses, with the majority of cash outflows expected to occur in the second half of 2025. Let me reiterate what Tom said. There will be minimal impact to sales with the closing of this facility as production is transferred to other Hexcel sites. Longer term, this plant closure will help us reduce our engineered product cost structure as Belgium was a high-cost market for the product being manufactured. Adjusted operating income in the second quarter was $54.2 million, or 11.1% of sales compared to $72 million, or 14.4% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the second quarter to operating income was favorable by approximately 10 basis points. Now turning to our two segments. The Composite Materials segment represented 80% of total second quarter sales and generated an adjusted operating margin of 14.1%. This compares to an adjusted operating margin of 17.2% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and excluding the impact of the Belgium plant closure generated an adjusted operating margin of 10.9%. This compares to an adjusted operating margin of 14.3% in the prior year period. Net cash used by operating activities in the first six months of 2025 was $5.2 million compared to net cash provided of $37.2 million in the first six months of 2024. Working capital was a cash use of $124.5 million in the first six months of 2025 compared to a cash use of $118.3 million in the first six months of 2024. Capital expenditures on an accrual basis were $31.8 million in the first six months of 2025 compared to $41.1 million in the comparable prior year period. Free cash flow in the first six months of 2025 was negative $46.6 million, which compares to negative $14.4 million in the first six months of 2024. We typically use cash in the first half of the year, and this year was no different. Adjusted EBITDA totaled $172.5 million in the first six months of 2025 compared to $204 million in 2024. We used $50.5 million to repurchase stock during the second quarter, the remaining authorization under the share repurchase program as of June 30, 2025, was approximately $134 million. The Board of Directors declared a $0.17 quarterly dividend yesterday. The dividend is payable to stockholders of record as of August 8, with a payment date of August 15. We are reaffirming our 2025 guidance with the caveat that we are still reviewing the recent change to tax laws. Our initial assessment is that our cash taxes will be lower in 2025 than our book taxes due to the deductibility of past R&D costs with what is in essence a onetime catch-up. I would also like to clarify that our guidance of an effective tax rate of 21% is the underlying ETR we are currently assuming for the third and fourth quarters of 2025. Therefore, given some discrete adjustments in the first six months of 2025, we expect the average adjusted ETR for the full year of 2025 to be lower than 21%. And as I have just indicated, we will update our forward ETR guidance if needed, once we have fully digested the impact of recent tax law changes. We continue to forecast the tariff impact of $3 million to $4 million per quarter. However, the tariff situation remains uncertain with more potential changes to come. Our regional sourcing helps to insulate us from the impact of tariffs, and we will continue to work on mitigations and pass-throughs, so that takes time. Lastly, I would like to share a reminder of the typical third quarter sales seasonality that arises from European summer vacations. With that, let me turn the call back to Tom.

Thanks, Patrick. Despite the challenging first half of the year and the near-term softer-than-expected demand for the A350, the fundamental outlook for Hexcel remains robust. The backlog for new aircraft is at an all-time high, and every new commercial and military aircraft program brings more demand for advanced lightweight composite materials than the older generation it replaces. And as defense budgets around the world continue to get stronger, this provides an additional tailwind for Hexcel. Given this landscape, we are extremely confident that with Hexcel's unrivaled portfolio of technology and lightweight product offerings, coupled with the production footprint we already have in place requiring minimal capacity increases over the next several years, there is a great opportunity for Hexcel to generate strong incremental margins, drive growing EBITDA, and generate significant free cash flow for many years to come. To repeat, we expect that we will generate over $1 billion of cash flow in the next four years. Hexcel has the technology, the lightweight product portfolio, customer relationships, the qualification, and the team to deliver as commercial production rates fully recover and defense spending increases. We appreciate your engagement with us today. With that, we're ready to take your questions.

Your first question comes from Ken Herbert of RBC Capital Markets.

Tom, maybe or Patrick, just to start off, can you outline specifically what the assumption is on either build rates or delivery rates or sort of the growth in the second half for the A350 program?

Yes, Ken, sure. So as we've said, that's a program that has changed. Airbus announced back in November that they were bringing down their schedule. Then in February, they announced again another reduction in the schedule. We had built our plan around 84, and we dropped that to 68 at our last call. What we're seeing now is something in the low 60s for the full year. But we do see is that we think the destocking should end in the third quarter. Airbus has said that they're going to get to 7 aircraft per month in the September timeframe. So we're expecting a pretty strong fourth quarter, probably 21 units in the fourth quarter of demand pull from us. That's how we see the year shaping out. It's lower than we originally thought, but we do see with Airbus planning to increase rates to 7 in September, that Q4 should be pretty strong as we get past the destocking.

Great. That's very helpful. And is there any reason to think that we shouldn't see continued growth within the defense space and other portfolio in the back half of the year? I think the run rate has been very nice to start the year.

It has been. It's been probably a little bit higher than we expected, and I think it should continue. I mean, defense spending around the world on all programs is going up. So we're very encouraged with the Q2 results and extremely optimistic about the rest of the year.

The next question comes from David Strauss of Barclays.

Following up on Ken's question, Tom, regarding the destocking of the A350 that you've observed in the first and second quarters, what was the effective shipping rate in the first half of the year?

For the A350?

Yes.

The rates have varied a bit because we tend to be ahead of others by 6 to 8 months due to the specific materials we provide. In the first quarter, rates were generally in the low 6s, and then in the second quarter, they were around the high 5s. However, it's important to remember that these rates can differ from what is actually shipped, which can also fluctuate based on factors like shortages in laboratories. Overall, we observed low 6s in Q1 and high 5s in Q2.

And the thing is we've got a disparity between what we're shipping in the U.S. and what we're shipping in Europe. So the destocking is likely Europe. We were shipping at a lower rate in Europe, whereas we're getting pulled still at a relatively high rate in the U.S. as the supply chain catches up.

Okay. Got it. So just to clarify, so those aren't the stated Airbus rates, those are the rates you're actually shipping at.

Yes. What Tom was talking about is what we're shipping at, and we're shipping more in the U.S. than we are in Europe.

Yes. And let me clarify, and this is the destocking aspect because what the stated Airbus rates are could be one level, but what they're pulling from us at because their destocking is another level. Our results kind of reflect the lower number, which is the destocking. Our results won't reflect what Airbus is reporting as their ship rates because they are destocking.

Yes, perfect. That's what I was getting at. And then, Patrick, on currency. So you're still seeing a bit of a tailwind given your hedging. When would you expect the currency comparison to flip negative here given the weakening in the dollar that we've seen?

We have continued to benefit, and it really does reflect the merits of the currency hedging that we do. So it was a tailwind again. I think we will actually continue to see a net tailwind this year. If rates stay where they are, we're going to see that flip or start to flip. I think next year in '26, David.

The next question comes from Gautam Khanna with TD Cowen.

Yes. I was wondering to follow up on the prior two questions. Can you give us any framework for thinking how the recoupling to underlying rates on the A350 progresses in 2026? Do you think you'll be at that 7-ish rate that you implied for Q4 for much of 2026 irrespective of where Airbus is? I'm just curious like there's a destock and then as a recoupling. Just wondering the pace of recoupling, if you will.

Right. So our sense is that we'll get through the destocking in Q3 and start to get closer in terms of that coupling that you mentioned in Q4 and through next year. So Airbus looks like they're going to enter 2026 at 7 on the A350, probably raise it to 8 sometime during the course of the year. We'd expect that we'll be closely and more coupled with them throughout 2026.

Got you. Okay. And then just on the other major programs, like say, the 787. Could you update us on where you are and how you see that progressing into 2026?

Great. Well, to be honest, the first half of the year was probably a little soft for us on 787 just in terms of what they were pulling. But Boeing is getting up to rate 7, and they have plans to continue all the way up to rate 10 and beyond. So again, we're expecting the back half of the year to be stronger on the 787. Boeing has been reporting very strong production rates on that. Our pull was probably a little softer in Q1 and Q2, but the production rates on that program look very strong and are expected to grow.

And last one. I think you mentioned something on the pricing side in the prepared remarks. Is there any reset that you can point to with respect to a time? Is it like in 2026, you start to see kind of a reset on pricing? Or anything you can speak to on how pricing might change and when?

Our average contract length is around seven years, and we renew about 15% to 20% of contracts annually. When it's time to renew, we always take the opportunity to adjust the terms and negotiate pricing to account for inflation, ensuring we achieve a fair return on our investments. This is an ongoing process with 15% to 20% of contracts coming up each year. However, some of our larger Airbus contracts, particularly for the A350, are locked in until 2030, making them part of a longer-term arrangement. The original A350 contract dates back to 2008, representing a longstanding agreement. In general, our contracts tend to average around seven years with a significant portion available each year for renewal.

The next question comes from Myles Walton with Wolfe Research.

Tom, you mentioned the award from Airbus for the best supplier for schedule and quality. I'm just curious how do you use that to your advantage? And what conditions on the ground would have to exist such that on your Airbus contracts in particular, because they're so onerous and so long dated, where you would say, we're your best supplier, we're not getting value for what we're delivering and we need to renegotiate.

Well, look, I think that key right now for commercial aerospace, Boeing and Airbus, is to get the production rates back up. And to do that, they need the supply chain delivering and performing. We're very proud on Airbus, as I mentioned, we received an award for best performing. This was in the materials category for our quality and delivery. That's very important to support Airbus as they're increasing the rates across all their programs. We're going to continue to do that. At the same time, we always work with our customers, including Airbus, to drive productivity. Even though our contracts in the case of Airbus aren't due until 2030, we're constantly working on productivity initiatives where we can jointly share the benefit. So the contracts do go through 2030, but that doesn't mean we're not working on productivity to drive mutual benefit in the meantime.

Okay. And just to circle the square on the A350 deliveries. So 2021 in the fourth quarter, you're shipping probably something like 10% in the third quarter. Is there any risk internally for that kind of 50% up slope that you anticipate? Or is that something that's not really a test to the system for you?

Not an issue. We've got plenty of capacity in place, and we've got a trained workforce. Because the volumes have been a little bit lower than we expected, we're essentially overstaffed. We could have probably taken out 50 or 100 people, but we didn't because we know the rates are going up in the back half. We didn't want to have to rehire and retrain them. Absolutely, we've got enough capacity and staffing to meet the demand as they come up in Q4 '25, but also into '26.

Okay. And one last one, Patrick, the $24 million in restructuring, how much of that is cash that you have to spend in the second half?

Yes. A large majority, 85%, to 90% will end up as cash. The majority of that cash, I would expect to move in the third quarter, Myles.

The next question comes from Michael Ciarmoli with Truist Securities.

Just a further clarification on the A350. Does the full year guidance contemplate low 60s? Or do you think you end up at 68? And then just from a seasonality perspective, does Q3 look a lot weaker kind of across the board than normal?

Q3 does look weaker. We've got the destocking. As Patrick mentioned, you've got the seasonal holidays that always take place in Europe. So Q3 does look softer. Yes, the full year we think is kind of low to mid overall. But as I said, we're expecting a fairly strong Q4. Airbus is planning a rate break to 7 in September, and the destocking should really be behind us by that point. So Q4 should be strong, and that leads into 2026.

Okay. And then just for clarification, the tariff headwind. I mean, it sounds like you're trying to offset. You've got some regional sourcing, but you kind of indicated you're starting to feel it. How should we think about just the earnings guidance? Do we think the low end comes into play? Or is that range doable if you kind of get the full brunt of tariffs?

Right. Well, the tariffs, they're changing frequently. We're trying to keep up and figure out what they are. As we said, the direct impact on us is about $3 million or $4 million a quarter. There are three quarters. We said we're at the low end of the range in this quarter. Considering things in the outlook right now, maybe it's $10 million, but we don't know. So we didn't include it in the guidance just because it could be smaller or larger, we just don't know based on where the negotiations end up. So we've left it out. You could extrapolate and say it could be up to $10 million. Our EPS target is to be $1.95 or $195. There could be some pressure that brings us towards the lower end of the range if the full tariff impact hits. We just don't know, and we didn't want to build it into the guidance and then have to change it based on what we've learned. We'll know more in the next few months. It seems like some of the deals are coming through, providing more clarity. But putting it in right now just seemed a bit premature, especially since it's only $3 million or $4 million a quarter, and we're at the low end of the range.

The next question comes from Richard Safran with Seaport Research Partners.

I just have one two-part question for you guys on defense this morning. First, Tom, you touched on this a couple of times for 2025 this morning. But could you discuss a bit more about how the administration is spending on defense and the increases you've been mentioning in European defense spending impact your longer-term outlook. Given the increase in U.S. and Europe, I just would have to think infinitely better than when you started the year? And second, would you be willing to provide some comment on your view of the long-term growth and margin potential for your defense business?

Well, there's no doubt that defense spending has increased. The recent budget has a higher amount, and then there are the supplemental funds as well. I think that's definitely driving the current performance and the outlook for the rest of the year. There's no doubt about that. We're seeing strength across the board in some of our big programs like the CH-53K, where we do the whole material system, or the F-35, where we provide all the carbon fiber for the material system. Some of the space and missiles have also been strong. We expect that to continue, if not accelerate because the underlying defense spending and the demand is so great. We're also seeing that in Europe. We have a big work share on the Rafale program, which is the fighter jet from Dassault, and that was up a lot, and the demand for that is significantly increasing. Many countries are turning to that aircraft as they go forward. So we expect that to continue throughout the year. I don't know if it will be the same level of increase that we saw in Q2, but we certainly expect to see strength. In the long term, defense is about 30% to 35% of our total revenue, and we still see that as a potential big opportunity for growth organically and potentially inorganically as we go forward. I see this long-term trend of increased defense spending, both in the U.S. and Europe, as benefiting our defense growth in the future. We see that as our top core organic growth opportunity in defense, both in the U.S. and Europe. But it's not just Europe; we also have some good defense contracts in Turkey and India, and we expect those to continue to grow as well.

The next question comes from Scott Deuschle with Deutsche Bank.

Patrick, to get the midpoint of the EPS guide, I have to assume something like a 45% incremental operating margin in the back half. I guess does that math sound directionally right? And if it is, can you walk through what's going to drive that type of operating leverage?

Yes. we clearly need to step up in the second half. We've got the seasonality sales effect in Q3, but with cost and management, we will drive a solid Q3 as we can. As Tom said, at least a couple of times this morning, we're leaning into a strong fourth quarter as we exit the year as the build rates go up as the widebodies kind of move towards 7 that we expect to move towards 60%, and hopefully, we're sort of getting aligned on the 38 on the MAX. That should drive pretty strong leverage as we exit the year and deliver what we see as a positive fourth quarter. So yes, I agree roughly with your numbers. As Tom said, sort of the $195 million or less the tariff impact is really where we're expecting to finish the year.

Okay. And then, Patrick, can you give the latest split in cost of goods sold between energy, raw materials, direct labor overhead, and the like? And then has energy become a meaningfully larger share of that cost breakdown? Or has that been fairly stable as a percentage of your overall cost of goods sold?

Yes. we've never shared the details of that, but materials continues to be the largest part of our COGS followed by people cost, labor cost. I mean, energy is still single-digit. I'll say that much. I think we've indicated that before, it set up with the European impact of the Ukraine war a few years ago now, and it's still at that level. So it hasn't certainly changed materially in the last year or two, but it's in that sort of mid-single-digit level.

The next question comes from Scott Mikus of Melius Research.

Tom, to dig in a little bit on the pricing protections and the LTA negotiations. Historically, some suppliers have had to pass back productivity to Boeing and Airbus as part of their LTAs. You mentioned at some of your Airbus contracts, you're sharing the productivity benefits with them. So as you renegotiate these LTAs and they come due or you bid for new programs, are you making sure that you get to keep the productivity that you drive in your own four walls?

Well, it's a little bit of both. I would say as we get into renegotiations, we're trying to learn from the past. We're building in volume adjustments because certainly, that was a big issue from the pandemic. We're looking to ensure that there's appropriate escalation protection for things like inflation, labor, material, or logistics, and tariffs as we have learned. Those are some of the ways we're looking at it. The thing on productivity is that this is a tough industry, and you always need to be running fast to stand still. Our customers expect ongoing productivity. So while if we can get buying protection and we can get escalation protection, we certainly have to be willing to work jointly with them to get productivity that we share. That's been a hallmark of our contracts with all of our big customers in the past, and I expect that will be in the future as well.

If you have to remember, Scott, most of the time with all our qualified products and processes to make changes, we need the cooperation of our customers. If we can do it in-house and it's purely in-house, then yes, we would keep it. The vast majority of the time to speed up our lines, change our parameters, we need those signed off and approved by the customer. We do tend to work with them. To Tom's point, ultimately, it's a competitive advantage. If we can give them some benefit as well as clearly keep as much as we can for ourselves. So we normally do have to elaborate.

Okay. And then thinking about build rates, we saw GE raise its commercial OE sales growth and reaffirm the LEAP delivery guidance. Boeing's production rates have been surprising to the upside. You mentioned the A350 destocking to be over by the fourth quarter. Could we see a possibility in early 2026 where you start to see a restocking benefit actually on the 737 and 787 while destocking on the A350 is entirely behind you?

When you say restocking, I mean, just the build rates going up.

Well, I mean customers, some of the sub-suppliers that you ship to maybe have burned down excess inventory and need to build higher levels of buffer inventory to support future higher production rates?

Yes. I mean it remains to be seen. I think the goal for everybody is to synchronize and get everybody on the same production rates going forward. We're not quite there yet, but we're getting closer. I don't think so; I think the goal for everybody in the supply chain is to get synchronized so that we're all at the same rates, not different parts of the chain building at different rates.

Yes. And restocking is a very gradual process, Scott. There might be a little bit of it, but it's not like destocking, which is tough and abrupt and significant. Restocking is very gradual over a period of time as the network, as the supply chain builds up for higher rates.

But I would say, just to your point, we are starting to see this inflection point with the rates going up in a sustained way across all the main programs of Boeing and Airbus, and that's very positive. We're still in the kind of final throes here of the destocking on the A350, but it looks very strong for Q4, as we've said, and into 2026. It's not just the A350; the A320, the 787, and the 737. It's been a long recovery period, but we're finally getting to the point where it's going up.

The next question comes from Sheila Kahyaoglu with Jefferies.

Tom, Patrick, sorry, I'm going to ask you to do some math on this because all this capacity and headcount had me thinking. When we look at your headcount per aircraft, it's actually flat versus 2019 levels. Obviously, headcount is down because revenues are down. The actual number of aircraft people produce are the same. So it implies that you're actually getting a net price decline of 6% while other companies in the sector are probably up multiples of that. I guess, how do we think about when that fixes itself to get the margins back up, not only based on volume, but this contract renewal process, Tom, if that extends?

Yes. Well, I think there's two things going on. One is just operating leverage because if you go back to 2019, we peaked in terms of our revenue and our production. We shipped 112 A350s, and our revenue was $2.35 billion. We had all the capacity in place to support that level of production. Where we are now is a much different place. Obviously, last year, Airbus delivered 57 A350s. We are utilizing only a portion of the capacity, probably two-thirds to three-quarters. We're not getting the operating leverage that we should have, both in terms of headcount and overall. That's what's impacting our margin. As revenues and build rates recover to where they were in 2019, you'll see us get the operating leverage, and that will improve revenue per headcount. It will also improve margins. As we've said, because we've experienced some inflation in labor and in material and utilities, even when we get back to previous levels of revenue, we're still going to have some headwinds, about 100 basis points of headwind on margin. That's what we're working to offset with our future factory initiative. Ultimately, as we get to the renewal period for our contracts, we'll use price to help offset some of that as well. But that's how I would lay it out.

That makes sense. And then, I guess, maybe if I could ask, as the destocking alleviates itself from the Q2 levels, what program has the most operating leverage? And then how do we think about the Belgian factory payback?

The destocking is primarily related to the A350 for us, which is our largest program. We invested heavily from 2010 to 2019 to increase production to 13 aircraft per month, but since the pandemic, production rates have been significantly lower. This has created the largest challenge regarding our operating leverage. The A350 has been the main factor driving destocking. To illustrate, last year we reported delivering about 72 shipsets in 2024, while Airbus only delivered 57. This disparity is what is currently causing the destocking.

The next question comes from Gavin Parsons of UBS.

Tom, pretty healthy pace of buybacks, but I thought in the prepared remarks, you maybe sounded a little more front-footed on M&A. I just wanted to know how you think about that trade-off and how you're contemplating size of maybe bolt-ons for something more significant.

As I said, we're looking at it. We think it could be a good complement to the organic growth that we're going to experience both from the recovery in build rates and the growth in defense spending. We're going to be very disciplined. We'll look for things that are strategic, that advance our focus on advanced material science, have a heavy emphasis on aerospace and defense, and meet our return thresholds, which are quite high. But we can't find something that fits that criteria. We have been doing share buybacks, and we'll continue that. That's how we think about it; it could be a good complement if the right opportunity surfaces, but we're going to be very disciplined. In the absence of that, we'll continue to fund our productivity, our innovation, and our organic growth, and then continue to do share buybacks on a selective basis.

Okay. And then it seems like Kinston is the main bottleneck on the A350. I wondered if you could share some insights on the improvement timeline, given your familiarity with that facility and if you think that's contingent upon the transaction closing?

I think Airbus has pointed to that in the past, but they could probably provide more insight on it. One thing they said is that once the deal closes and they take full control of that operation, they'll be able to drive more productivity. I think that's probably the case.

The next question comes from Ron Epstein of Bank of America.

This is Alex Preston on for Ron today. I was wondering about the direct impact of tariffs and if you're observing any indirect effects, particularly in relation to strong demand in the U.S. and how you're approaching that in the early stages.

As we've said in the past, that's our bigger concern; it's not the direct impact of tariffs on us. But if there's any indirect impact that could impact build rates for Airbus or Boeing. At this point, it doesn't look like that will be the case, but we need to wait and see. Obviously, there is no deal yet with the European Union. We'll have to wait and see what that is, and then what the treatment is of aerospace trade that goes back and forth. One thing I'll say is, over the years, aerospace has been a great industry for the U.S. It's probably the biggest net importer in industrial industries with over $120 billion of net exports. It's relied on zero tariffs, and that served the industry well. We'll see where we end up. At this point, as I said, the direct impact of tariffs is relatively minimal, $3 million or $4 million a quarter. The indirect could be bigger, but we don't know what that could be yet.

The next question comes from Kristine Liwag of Morgan Stanley.

Maybe I'll kick off with a currency question. I mean, can you remind us your mismatch with your European business, how much of the European footprint is actually sold in dollars? Also, if you could remind us regarding your hedging policy, how much are you hedged for this year and next year? If we see the dollar weaken for longer, how we should expect that to result in your margins?

Yes. So we enter a year roughly 75% hedged. If I look at 2025 for the back half of '25, we will be hedged more than that at this point with just those two quarters remaining. We're probably 80%, 85% hedged. It's not 90% now through the end of 2025. We're building up our hedge profile for 2026. By the end of this year, I would expect to enter 2026 around 75% hedged. The vast majority of our sales in Europe are in dollars. With the decline of the wind energy business, that was actually a source of euros, which has now gone away. Our need to sell dollars to cover our European cost base in euros and pounds has grown a little bit, not massively, but it's grown a bit. Our hedging policy remains disciplined over 10 quarters, and we layer it in each quarter as we move forward. Putting a magnitude on things, yes, if the dollar stays weaker, that will be a marginal headwind certainly to where we are today, but I'm not going to speculate on the size of that at this juncture.

Great. I’d like to follow up on the contract negotiations. Tom, it seems from your tone that you might be a bit more cautious or perhaps balanced regarding these negotiations as contracts expire. When we speak with other industry participants and suppliers, they appear to be much more hopeful about significant price increases for these contracts since the OEMs really want to ramp up. I want to understand during your contract negotiations, are there factors you need to consider? Why aren't you able to secure higher prices when it appears that many of your peers are achieving that? Ultimately, the OEMs can’t really change their material inputs at this stage, and you seem to have a strategic advantage. Why can’t you obtain higher prices?

As you go into any contract negotiation, your goal is always to maximize the value of the contract. But of course, you have to negotiate that with the other party. There are trade-offs to be made. Our goal is always to ensure that we get a fair price that reflects the value we provide and the huge investments we've made. This also takes into account the cost increases we've seen over the last years in labor, material, utilities, and logistics. The goal is always to maximize price, and you take into some account other considerations. This is a long-cycle business, and there are only a few players in it. The programs come up only once every few decades. We're also trying to get on the next program. The next program, of course, is going to be the narrow body, and that's going to be a huge program. That's another trade-off that you factor in but, Kristy, our goal, and I assure you, is always to maximize price in contract negotiations subject to where our counterparties will let us go.

That is all the time we have for questions. This concludes today's conference call. We thank you for joining. You may now disconnect.