Hexcel Corp /De/ Q4 FY2025 Earnings Call

Hello, everyone, and welcome to Hexcel's earnings call for the fourth quarter and the full year of 2025. Please be advised that this call is being recorded. I will now turn the call over to Kurt Goddard, Vice President of Investor Relations. Please proceed.

Thanks, Ellie. Hello, everyone. Welcome to Hexcel Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. Before beginning, let me cover the formalities. I would like 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, CEO and President; and Mike Lenz, Interim Chief Financial Officer. The purpose of the call is to review our fourth quarter and full year 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 for Hexcel's Fourth Quarter and Full Year 2025 Earnings Call. With positive signs emerging for a sustained ramp-up in commercial aircraft production rates, we are confident in Hexcel's ability to meet this increasing demand. Longer term, it is a promising outlook for the entire industry. IATA recently released data highlighting the current backlog for commercial aircraft has exceeded 17,000. The same report also noted that to date, there has been a delivery shortfall of at least 5,300 aircraft, underscoring the current imbalance between supply and demand for commercial aircraft. The fact that even with this historically high backlog, airlines are still ordering new aircraft underscores how much demand there is for these new aircraft that incorporate more lightweight material, are more fuel-efficient, and require less maintenance than the older aircraft they will replace. This situation is positive for manufacturers like Hexcel as production rates are likely to remain at elevated levels for an extended period. As a vertically integrated manufacturer of advanced lightweight carbon fiber composite with a broad product portfolio, we are well-positioned to support the needs of our commercial and defense customers. Also, we continue to focus on developing advanced material solutions for next-generation aircraft as lightweight composite materials increasingly replace metals and aircraft structures to make them lighter, stronger, and more fuel-efficient. Combined with our commitment to operational excellence, we see Hexcel is well positioned to benefit as commercial aircraft production rates continue to recover and funding for defense platforms increases globally. 2025 was a challenging year for us as destocking by the OEMs, schedule delays, and lingering supply chain constraints to the OEMs impacted our plan. Despite these challenges, Hexcel closed the year on a positive note as we continue to see an upturn in commercial orders that we first highlighted in our previous earnings call. This positive trend is setting us up for a stronger 2026. Across all our major programs, the A350, the 320, 787, and the 737, we see positive catalysts that a sustained recovery and ramp-up in commercial aircraft build rates is beginning to take hold. On the A350, the closing of the Spirit AeroSystems transaction moves major A350 production in-house for Airbus, eliminating a previous bottleneck. On the A320, engines have been a problem. Safran is expanding LEAP engine production capacity with the new final assembly line in Morocco. LEAP production continues to increase with record unit shipments in the fourth quarter 2025, and full year 2025 unit shipments exceeded the pre-pandemic 2019 prior peak. The GTF from Pratt & Whitney engine shipments have also been increasing and are forecast to increase further in 2026. Additionally, Airbus added two new A320 final assembly lines, one in the U.S. and in China. On the 787, Boeing broke ground to expand its Charleston, South Carolina site to double 787 output. Boeing reported that they are transitioning production to eight aircraft per month. They also mentioned in their earnings call on Tuesday that the 787 inventory is now more normalized with the supply chain. On the 737, Boeing reported that they are producing at a rate of 42 aircraft per month after the FAA lifted the production cap. Along with reduced supply chain disruption, these catalysts give us growing confidence that the long-rated recovery in commercial aircraft production is coming into focus as impediments to the OEM reaching their peak build rates are receding and the destocking we experienced in 2025 appears to be largely behind us. Aircraft production peaked in 2018 at 1,734 aircraft. In 2025, production was still just 1,503 aircraft or about 87% of the pre-pandemic level. In 2026, we should finally fully recover to pre-pandemic production levels as an industry, although wide-body production will probably not recover fully for a couple more years. With the historic backlog held by Airbus and Boeing and our sole-source positions and long-term contracts on our commercial programs, Hexcel is in a strong position to benefit from the increase in commercial aircraft production. As we have previously highlighted, when Airbus and Boeing achieve publicly disclosed peak build rates, we expect to generate $500 million in incremental sales annually from those sole-source contracts. Additionally, growth from Defense and Space, as well as business and regional jets, will add over $200 million in additional sales. As our sales volumes increase, it drives greater operating leverage and margin expansion for our business. It was based on our confidence in this production ramp and our ability to execute on it that we initiated the $350 million accelerated share repurchase program last October. Shifting to opportunities in Defense and Space. We expect strong long-term demand in this market as defense budgets in the U.S. and allied nations globally continue to increase due to an uncertain geopolitical environment and the development of new platforms. We continue to engage the U.S. defense primes directly as well as government stakeholders, highlighting Hexcel's unique value proposition. We are well positioned to serve defense customers with Hexcel's innovative lightweight advanced materials that provide defense and space customers with greater payload, greater range, and low observability that those platforms require. Additionally, our vertically integrated operations in the U.S. and across Europe provide those governments with secure and sovereign access to advanced carbon fiber that is critical for defense platforms. Our strong positions in both commercial and defense markets underscore Hexcel's ability to capture growth going forward. With this foundation in place, let me now turn to our financial performance for the fourth quarter and full year 2025, which reflects the actions we have taken to navigate near-term challenges and position for long-term success. Our 2025 full year results were impacted by Airbus revising the A350 production schedule combined with channel destocking on the A350 and other programs. In 2025, Hexcel achieved full year sales of $1.894 billion, adjusted EPS of $1.76, and free cash flow of $157 million. In the fourth quarter, Hexcel generated $492 million in sales, up 3.7% from 2024, highlighting the positive trend in commercial orders as we enter 2026. Commercial aerospace sales in the fourth quarter were $299.5 million, an increase of 7.6% compared to 2024. This increase was due to strong growth in the A320, along with increases in 787 and 737 volumes, as well as increased regional jet sales. The overall sales volume increase in the commercial segment was partially offset by lower sales volume in the A350 due to lingering destocking in the quarter. In our defense, space and other segment, sales were $191.8 million in the fourth quarter, down 1.9% compared to the same period in 2024. Taking a closer look at this market, we experienced increased sales for defense and space due to strength in military rotorcraft programs and launches, but sales overall were lower due to the divestment of our Austrian-based industrial business that we announced at the end of the third quarter in 2025. Overall, our full year 2025 results were impacted by Airbus initiated schedule changes on the A350 program, destocking by the OEMs and charges related to the disposition of non-core businesses in Austria and Connecticut. In addition, we closed the facility in Belgium as we rationalized our footprint to streamline operations. Commercial order activity continued to trend higher throughout the quarter, which we expected and first highlighted in our third quarter earnings call. Also, we believe the majority of destocking by the OEMs is now generally behind us. However, this remains a watch item for all of us, and we will continue to monitor it throughout 2026. While our results reflected the headwinds we faced in 2025, they also underscore the importance of the operational discipline we maintained throughout the year. Let me share with you a few of the actions we took to strengthen our operational excellence foundation for the future. As we dealt with the impact from schedule changes and destocking throughout 2025, we kept a strong focus on cost control and operational discipline. This included the business rationalization I mentioned earlier as we exited industrial markets like wind energy and winter recreation market, and we continue to streamline operations in 2026. We just announced a proposal to refocus our Leicester U.K. site to perform work solely related to commercial aerospace development. Along with our cost control initiatives, we continue to invest in productivity enhancements in our factories through automation, AI-driven workflows, and digitization, while maintaining high levels of safety and quality. Also, we remain focused on managing headcount closely. We finished 2025 about 330 positions fewer compared to our year-end headcount for 2024, and well below our original plan for 2025. This delta reflects an intentional use of attrition to lower headcount during 2025, which was slow, along with the headcount reductions that resulted from our site rationalization activity. Going into 2026, we are starting to evaluate some selective hiring earlier in the year to support increased A350 production, followed by some general hiring that will likely begin around midyear. In the third quarter of 2025, we launched the $350 million accelerated share repurchase program, which underscores our confidence in Hexcel's long-term growth. This decision reflects our strategy to invest in Hexcel as we see tremendous opportunity to benefit from increasing commercial aircraft build rates and growth organically in defense and space over the coming years. Also, as we noted in the third quarter earnings call, I want to be very clear that we remain committed to disciplined financial management and our targeted leverage range of 1.5 to 2x net debt-to-EBITDA. We intend to repay the $350 million we borrowed from our revolver for the ASR as soon as possible in 2026 to return Hexcel to that target leverage range. We also announced a 6% increase in the quarterly dividend to $0.18 per share, reflecting our positive outlook in Hexcel's long-term growth and strong cash generation profile. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. Along with strengthening our financial foundation in 2025, we also focused on leadership across the organization. We welcomed several new members to the Hexcel leadership team, bringing fresh perspectives and deep industry expertise to help drive our strategic priorities. This includes Mike Lenz, who joined us as our interim CFO while we conduct a search for the next permanent CFO. You'll hear from Mike shortly. We have made great progress on the CFO search, and we are focused on identifying the right person for Hexcel. Also, we added new functional and business program leaders across defense, safety, R&D, quality, and operations, all areas that are critical to delivering on customer commitments and maintaining the highest standards of excellence. Before I turn it over to Mike, let me briefly highlight our outlook for 2026. I want to emphasize that 2025 was a year of disciplined execution as we managed through the schedule changes and the impact from destocking. We closed the year with encouraging trends, including an uptick in commercial orders and the margin rate for the fourth quarter, carrying over a trend that began the previous quarter. We believe the commercial recovery is gaining traction as OEMs take steps toward higher production rates across all our key programs. At the same time, defense and space markets remain robust with budgets increasing and the demand for advanced composite solutions across rotorcraft, fixed wing, and space applications. As OEMs hit their publicly disclosed peak commercial build rates before the end of the decade, this will, as I said, generate $500 million in incremental sales from existing contracts with Airbus and Boeing, and we expect to generate in excess of $1 billion in free cash flow cumulatively over the next four years from 2026 to 2029. In 2026, we expect sales in the range of $2.0 billion to $2.1 billion, adjusted EPS between $2.10 and $2.30, and free cash flow greater than $195 million. Increased operating leverage from higher sales volume, along with disciplined execution and focus on controlling costs will be the primary driver of these results. We believe that our guidance reflects prudent assumptions regarding commercial aircraft rate ramps. Now Mike will provide additional details of our financial results.

Thank you, Tom. We closed the year with a strong fourth quarter and a return to year-over-year growth. The higher sales supported adjusted operating margin expansion, illustrating the operating leverage opportunity ahead. The commercial aerospace OE recovery continues to become more apparent, both in our business and in the broader supply chain. Total fourth quarter 2025 sales of $491 million increased 1.6% in constant currency. Growth in the commercial aerospace market was partially offset by lower defense, space and other sales following the divestment of the Austrian industrial business on September 30, 2025. By market, commercial aerospace fourth quarter 2025 sales were $300 million, representing approximately 61% of total fourth quarter sales. Fourth quarter commercial aerospace sales increased 5.8% compared to the fourth quarter of 2024. Sales increased for the A320, 787, and 737, whereas sales decreased for the A350 as a result of some lingering destocking. Sales for other commercial aerospace in the fourth quarter increased 16.1% year-over-year, led by regional jets. Defense, space and other represented approximately 39% of fourth quarter sales and totaled $192 million, decreasing 4.3% on a constant currency basis from the same period in 2024. Sales were basically unchanged year-over-year on an organic basis. Demand was strong for a European fighter program and European helicopter programs as well as launchers and satellites, offset by lower automotive sales and the absence of the divested Austrian industrial business. Gross margin of 24.6% in the fourth quarter decreased from 25% in the fourth quarter of '24, principally due to sales mix. As a percentage of sales, operating expenses, including selling, general and administrative expenses and R&D expenses, were 11.4% in the fourth quarter of 2025 compared to 13% in the comparable prior year period. We continue to focus on cost control, and there is leverage within our operating cost structure so that expenses should grow slower than the rate of sales growth. Adjusted operating income in the fourth quarter was $65 million or 13.3% of sales compared to $57 million or 12.1% of sales in the comparable prior year period. In terms of foreign exchange, Hexcel benefits when the dollar is strong. We generally sell in dollars for commercial aerospace, yet we have a significant European presence and European cost base. We hedge our operating profit over a 10-quarter time horizon, so foreign exchange gains and losses are layered into the financial results over time. Foreign exchange has become a headwind as the impact of the weaker dollar is now being felt. Fourth quarter 2025 operating margin was negatively impacted by approximately 110 basis points from foreign exchange. In contrast, fourth quarter 2024 had a favorable impact of approximately 60 basis points. Now turning to our two segments. The Composite Materials segment represented 80% of total fourth quarter sales and generated an adjusted operating margin of 20.5%. This compares to an adjusted operating margin of 15.3% in the prior year period. The Engineered Products segment, which is comprised of our structured and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 11.1%, which compares to an adjusted operating margin of 10.7% in the prior year period. For the full year 2025, we met our updated sales and adjusted EPS guidance. The lower tax rate was supportive, contributing roughly $0.02 to adjusted EPS. The lower effective tax rate in 2025 primarily reflects the tax benefits associated with restructuring charges for the closure of the Belgium facility, which contributed roughly a 4% rate reduction. To share some further perspective on our commercial aerospace business for the full year, latest generation wide-body sales comprised about one-third of total commercial aerospace sales in 2025. Narrow-body sales were also about one-third of sales and legacy commercial aircraft were about 10%. Other commercial aerospace, including business jets and regional aircraft, accounted for the remainder at somewhat less than 25%. Shifting to full year 2025 defense, space and other sales, approximately one-third of defense and space 2025 sales were outside of the U.S. Our international defense and space sales are predominantly from customers located in NATO-aligned countries and also include customers in India, Brazil, and South Korea. Net cash provided by operating activities in 2025 was $231 million compared to net cash provided of $290 million in 2024. Working capital was a use of cash of $1.5 million in 2025 compared to a cash use of nearly $1 million in 2024. Capital expenditures on an accrual basis were $77 million in 2025 compared to $81 million in the comparable prior year period. Free cash flow in 2025 was $157 million, which compares to $203 million in 2024. There are always a number of moving parts with working capital at year-end, and free cash flow came in below our guidance. Strong sales in December led to an end of the quarter increase in accounts receivable greater than we forecasted, combined with lower-than-projected payables at year-end, along with some retirement plan flows. Adjusted EBITDA totaled $346 million in 2025 compared to $382 million in 2024. Following our revolver borrowing to finance the ASR, our leverage is temporarily elevated. Leverage, defined as net debt to last 12 months adjusted EBITDA was just under 2.7x at year-end 2025. And as Tom said, we remain firmly committed to a disciplined financial policy to return leverage to the targeted range of 1.5 to 2.0x as soon as possible during 2026. The Board of Directors declared an $0.18 quarterly dividend yesterday, and this reflects a $0.01 or 6% increase compared to the prior dividend. The dividend is payable to stockholders of record as of February 9 with a payment date of February 17. I will conclude by sharing some additional details regarding our 2026 guidance. In terms of comparing 2026 sales guidance to our actual 2025 sales, recall that the divested industrial facility in Austria generated just under $30 million of sales in 2025. So those sales are not recurring in 2026. Further, the Leicester U.K. facility that Tom referenced earlier generated around $15 million in sales in 2025. So if the facility is closed in the first half of 2026, that will only be a partial year of sales this year. Foreign exchange will be a headwind in 2026 compared to 2025 due to the weaker dollar. We are not guiding to an expected FX impact due to the uncertainty of future rates. But as a reference, our average euro-dollar rate in 2025 was 1.13. FX had an approximately 10 basis point unfavorable year-over-year operating impact to operating margin in 2025. In 2024, the average euro-dollar rate was 1.08 and FX was a benefit of approximately 40 basis points year-over-year. Cash conversion should exceed 100% for a period of time as capital expenditures remain subdued. Inventory days on hand should continue to trend lower during 2026 as we grow into our inventory levels. And while even though inventory may grow modestly on a dollar basis, sales are expected to grow faster, leading to a reduction in days on hand. And then three comments regarding seasonality. Operating expenses are typically elevated in the first quarter of the year on stock-based compensation. Third quarter sales are seasonally soft due to summer holidays, particularly impacting European sales, and the business typically uses cash in the first quarter of the year with the strongest cash generation typically in the second half of the year. Repayment of the revolver will be a priority during the year and consistent with Tom's comment regarding our focus on deleveraging in 2026. As a result, interest expense should decrease as the year progresses as cash is generated and used to pay the revolver. Depending on the timing of cash receipts and market rates, interest expense for 2026 is expected to be in the range of $50 million to $55 million. And lastly, we are projecting an effective tax rate of 20% for our EPS range. And with that, let me turn the call back to Tom.

Thanks, Mike. Before we move to Q&A, I want to take a moment to express our deep appreciation for Jeff Campbell's leadership on Hexcel's Board of Directors. Jeff recently announced that after almost 23 years of service on the Hexcel Board, the last seven as our Lead Director, he will not stand for reelection at our next annual meeting. Jeff has been an invaluable contributor to our governance and strategy for more than two decades. We are grateful for his commitment and the impact he has made on Hexcel. Looking ahead, Hexcel enters 2026 with strong momentum. Positive order trends we saw late in 2025, combined with the catalysts enabling increased commercial aircraft production and the opportunities we have in defense and space, position us well for the future. We are excited about the path ahead and confident in Hexcel's ability to deliver value for our customers and shareholders. With that, Ellie, we are ready to take questions.

I'd now like to call Ken Herbert for our first question from RBC Capital Markets.

Maybe, Tom, just to start with sort of the midpoint of the up 8% on revenues in the '26 guide, can you provide any more detail on how we should think about commercial aerospace within that growth? And specifically, what the underlying assumptions are associated with the A350?

The 8% growth consists of our commercial sector along with defense, space, and other areas. However, the defense and space portion will experience some dilution, as we won't receive $30 million from the Austrian business and around $8 million from the Leicester U.K. business. Hence, we arrive at the 8%. For commercial aerospace alone, I anticipate a growth rate in the low to mid-double digits for next year, indicating an upward trend. Our forecasts are closely aligned with the original equipment manufacturers' build rates for Boeing and Airbus, particularly regarding the A350, which has a shipset value between $4.5 million and $5 million—this will be a significant contributor. We project delivering around 80 units to Airbus in 2026, an increase from 57 in 2025, signifying considerable growth. Our demand forecast is derived from engaging with all 35 locations that receive material, leading us to believe the 80 units reflect both bottom-up insights and top-down analysis. Additionally, as a material provider, we tend to be four to six months ahead of the OEMs in our forecasts. Therefore, our predictions are a blend of expectations for 2026 and 2027. For the A320, our shipset values range from $200,000 to $500,000, mostly skewing towards the upper end, and we are estimating deliveries in the low to mid-700s, again remembering we're ahead of Airbus's timelines. For the MAX, we are aiming for mid-400s, which we are monitoring diligently, especially given the destocking situation experienced in 2025. We expect something similar for the 787, aligning with Boeing's guidance of 90 to 100 units. These assumptions outline our expectations for the major programs. Although we are slightly ahead of the OEMs due to our role as a material provider, we have approached our assumptions conservatively due to supply chain challenges. That said, there are four key catalysts across these major programs that bolster our confidence in achieving ramped-up build rates, which we expect will reach peak production in the coming years.

That's great. I appreciate all the detail, Tom. Just one quick follow-up on the A350. You called out in prior quarters that you were seeing purchase order activity and customer activity that supported these rates and your expectations in '26. Can you just comment, did that continue through the end of the fourth quarter? And what have you seen so far this year, specifically on that program in terms of just customer purchasing activity or pull?

The purchase orders are very strong this year compared to last year. We have good visibility on the firm purchase orders extending through May, providing us with confidence. Our approach involves engaging with all 35 internal Airbus plants and external third-party plants to gauge their orders. This thorough analysis reassures us about the 80 number we provided. In fact, we're so confident that we have recently brought a carbon fiber line online earlier than anticipated to prepare for an increase in demand, even beyond our expectations. This illustrates how we've developed our plan and the level of confidence we have in our assumptions.

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

I apologize if I missed this, but could you clarify the out-of-period benefits or one-time items in the fourth quarter composite segment? Last year, we observed relatively high decremental margins, but the implied incrementals seem to be in the mid-30s. What are the prospects for upside, and why shouldn't we consider that there could be some, given the leverage returning?

Let me start with the incremental margin, and then I'll pass it to Mike. You are correct that we are observing incremental margins in the mid-30s based on our current plan. The potential for improvement really hinges on commercial build rates. If we experience higher production rates for the A350, A320, 737, and 787, we will see an increase in those incremental margins. A key aspect of Hexcel is our focus on operating leverage. As production rates rise, we will achieve operating leverage. As I noted, production is currently at 80% recovery, and overall at 87%, with wide-body production lagging. As production returns to pre-pandemic levels, we expect significant operating leverage, which will enhance our margins and incremental margins moving forward. Now I'll let Mike address the question.

Yes. So the adjusted operating margin in the fourth quarter for composite materials, that was 20.5% was the margin. We can follow up. We can be more specifics about what numbers plugged there to get to that margin. But that is the adjusted one. The table, as you know, that's a GAAP number.

The next question comes from the line of Gavin Parsons of UBS.

I'd love to just go back to the incremental conversation. Could we have a little bit more color around maybe fixed versus variable costs, just kind of aligning your hiring expenses, your utilization to your revenue? Just how do we think about some of the pieces underlying incrementals?

We're overseeing costs in the corporate sector, and you may have noticed that G&A expenses were lower than last year. We have implemented measures like tightening our budget on professional fees, headcount, travel, and similar expenses. Regarding factory costs, while some labor is variable, we have imposed a hiring freeze. Due to decreased demand, we’ve also allowed attrition to occur, resulting in a reduction of our workforce. By the end of the year, we had a headcount that was 330 below where we finished in 2024, significantly lower than our initial projections for 2025. We plan to maintain this reduced headcount into 2026, and will begin hiring only as demand increases. We're starting to see signs of recovery with the A350 project, which is why we initiated the new carbon fiber line sooner than expected. However, we will hold off on any additional hiring until midyear as we manage our fixed and variable costs into 2026.

And then on A350, will you go up at the same rate as Airbus? Will you be leading them on that typical four- to six-month time frame? How do we think about the time frame?

We're, as I said, a little bit ahead of them, but we're more in lockstep. There was a lot of destocking last year. But as we get into fourth quarter and we got into December, in particular, we saw that kind of normalizing and shipping to them at close to their delivery rates. So we expect that to continue throughout 2026, and we'll go up with them. We'll be a little bit ahead, as I said. So our rates are generally a little bit ahead of them. But, as I said, we're protecting more on the upside, and that's why we started up that extra carbon fiber line because the initial bottoms-up forecast is probably a little bit higher than our underlying assumptions, and we want to be ready. We just don't want to miss. As you know, there have been a lot of companies called out for being behind on production rates for Boeing and Airbus. We don't want to be one of those. We haven't been. We've always been a very good supplier in terms of on-time delivery and quality, and we intend to remain that way.

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

Maybe just fleshing out a little bit more about how to think about incremental margins going forward. It looks like based on the revenue outlook that you've laid out, you're kind of calling for somewhere around a 30% incremental margin, which is definitely kind of lower than what we saw in 4Q. And I would imagine just given that you are really feeling some demand pull and you've got kind of the assets and the people in place, I would think it should be maybe a little bit north of that. So I guess how should we be thinking about what's embedded in the guide at this point?

If you take the midpoint and add it back, it would be in the low 30s. We believe it could actually be a bit better, which is why I mentioned mid-30s. This is due to the operating leverage we expect. We've been under-capacity for the last six years, particularly since the pandemic began, which has limited our ability to spread out the fixed costs and depreciation from the assets we've invested in to increase our rates. As we begin to absorb this depreciation due to rising volume, we will see operating leverage that will improve margins at a faster rate than revenue growth, leading to positive incremental margins. Therefore, I would say the mid-guide is likely in the low 30s, but I feel confident in stating mid-30s for incremental margins for 2026.

Got it. Okay. Fair enough. And then just as a follow-up or a quick question, so you just got finished with a big ASR. So I understand you've already put a lot of capital behind the stock. I guess as we look to 2026, it sounds like debt reduction is kind of the first priority, just getting leverage back to where you want it to be, which seems like that should be pretty quick. Should we expect further cash going into buybacks as we look into 2026? How should we be thinking about that?

Well, I'd just go back to last year. When we did the ASR, we did a $600 million share purchase reauthorization. And so we had $134 million on a previous authorization. We added $600 million. We took out $350 million. So we still have $384 million left. We want to get back down to our target leverage ratio. But after that, we will certainly look at continued share repurchase. But the first goal is to get down, and we expect to be down to less than two by the end of the year.

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

I just wanted to ask kind of on the incremental margins as well. Just does the guidance range kind of contemplate any higher cost to demothball additional carbon fiber lines if Boeing and Airbus actually exceed the A350 and 787 production rate targets that you have baked into the guide? And then some of the other puts and takes, I mean, can you quantify the year-over-year tailwind to operating income from closing the Austrian and Leicester facilities? And is there an additional tailwind from the ERP implementation that you did in 2025 that won't repeat in '26?

Let me discuss the mothball costs. We've included all the necessary costs in our plan as we bring new capacity online, so we don't anticipate any additional expenses. Removing those lines is not a significant issue; it's mostly about hiring staff. All those costs are factored into our plan and outlook. Regarding your second question about the operating income related to closing various assets, that is also included. For the ERP, there are some costs in 2025 and additional ones in 2026 as we implement it, but they are accounted for in our figures. We are approximately halfway through the overall implementation, expecting to complete most of it in 2026, with a bit extending into 2027, but it's not significant concerning our overall numbers. Therefore, we are not emphasizing it; it's included in our SG&A.

It's fairly stable when considering the ERP, but we are launching a larger number in 2026 compared to 2025. As Tom mentioned, we are working to complete that, likely in early 2027.

Yes. But the overall focus is we are going to continue very strong disciplined management of all of our costs so that we can continue to drive margins, which will obviously contribute to the incremental.

Okay. Just to clarify, were the Austrian and Leicester facilities, were they EBIT negative in 2025?

It was not significant as it was close to breakeven, possibly even slightly negative, but not material. As mentioned, we closed those operations, which were essentially non-core, and this was part of our effort to streamline the portfolio to enhance focus and productivity moving forward. The closures of the Belgium facility and the sale of the Hartford facility played a role in this strategy. The goal is to reduce costs and improve productivity. We may not see the complete impact this year, but we will experience some of it, with the full effects expected next year.

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

Tom, I may have missed it. Did you provide a breakdown of the revenue guidance by end market, specifically regarding what we should expect this year between commercial aerospace and space and defense? Additionally, do you have any updates on the price-cost equation? I understand that some key material inputs, particularly acrylic nitrile, might be decreasing in price. I know you have a hedging strategy in place, but do you have any general updates on that and how it might affect margins as we discuss the incremental margin?

For 2026, I indicated that commercial growth will be in the low to mid-double digits, while defense growth will be in the low to mid-single digits. The combined categories of defense, space, and others are expected to be flat to slightly negative due to the impact of $30 million from the Austrian facility and about $8 million or $9 million from the Leicester facility. However, defense alone is anticipated to grow in the low to mid-single digits, and commercial will experience low to mid-double-digit growth. Regarding the price cost dynamics, acrylonitrile, our primary raw material for carbon fiber production, is derived from petroleum byproducts, and we hedge propylene to manage volatility. Currently, prices are down, but our hedging ensures stability, so we don’t foresee significant variations in costs. We frequently discuss margins, and as we ramp up production rates and reach peak production targets for Boeing and Airbus, we project an additional $500 million in annual revenue. Additionally, we expect several hundred million dollars more from defense along with growth in regional jets and business jets. This strategy sets us on a trajectory to return to 18% margins before the decade concludes, supported by effective pricing strategies and operational improvements tied to achieving peak production rates across various programs.

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

Mike, I just wanted to follow up on the margins in composite materials. I understand that the press release was 20.5%, but that number is enormously greater than what you've ever done in the last several years and even back pre-COVID, you'd have to have 10% higher volumes. So was there anything in there that was non-normal? I understand it might not be non-GAAP one-timer, but anything non-normal in that margin?

No, there was nothing specifically unique in terms of any one-timers there. Again, we had a pretty very solid cost control here at the end of the quarter. And so that certainly contributed to that.

I think another factor that played a role was compensation. Our incentive compensation did not meet the target because 2025 was a relatively light year for the reasons we discussed. Unfortunately for the management team, this led to lower payouts on compensation, which impacted the margin, especially in the fourth quarter when those costs were incurred.

Yes. The biggest true-up is in the fourth quarter because you true it up for the full year in Q4.

Got it. So it's a reversal of accruals through the course of the year. What was the size of that reversal?

I don't think we have disclosed that yet, so I'd prefer not to discuss it at this time. However, it was quite significant since we did not meet our target for the year. Additionally, unlike last year when I succeeded Nick, we had duplicate expenses at the CEO level in the latter half of the year, which did not occur this year. That was another factor. As Mike mentioned, we also maintained strict cost control over SG&A, travel, professional fees, headcount, and other usual measures, and we continue to focus on these areas.

Okay. And then the longer-term question, Airbus, one of their head of commercial, then Head of Commercial, talked about the new plane likely not having a composite fuselage, but obviously having a composite wing. Can you just landscape us if you mapped an A320 to a new plane without a composite fuselage, the composite wing, what the shipset scaling would look like?

Right. First of all, I believe the effectiveness of using a composite fuselage is still under evaluation because it offers lighter weight, better fuel efficiency, and reduced maintenance. OEMs will likely consider these factors. Currently, the A320 and the MAX utilize about 15% carbon fiber composite. We estimate the shipset value ranges from $200,000 to $500,000, with the A320 approaching the higher end at around $500,000. If a wing is added to the next narrow-body aircraft, the carbon fiber content could increase from 15% to 30%, effectively doubling the shipset cost to between $500,000 and $1 million, assuming a production rate of 75 aircraft per month, leading to significant carbon fiber use. Furthermore, fuselages may increase carbon fiber content from 30% to 50%, which would raise the shipset cost to between $1.5 million and $2 million at the same production rate. This provides some insight into the potential shifts. The wing will definitely be made of carbon fiber due to its benefits, such as improved lift-drag ratio, enhanced range, and reduced fuel consumption. The discussion about the fuselage continues, and we advocate for its use, highlighting strong arguments for cost reduction, time efficiency, and lower capital investment. Various pilot projects are underway, and we will keep making our case. If a composite fuselage is adopted, it could reach up to 50% and result in about $2 million per shipset for narrow-body aircraft.

Your next question comes from the line of Scott Deuschle of Deutsche Bank.

Just one question. Tom, this business, Seemann Composites, was recently purchased by another public company. But it seems like something that would have been a good strategic fit for Hexcel given that they make advanced composites for the aerospace and defense market.

I'm sorry, what's the...

I was curious if you had the chance to look at Seemann Composites, which was bought by Karman, a space company. If so, I'm wondering why Hexcel did not make the purchase.

Right. Unfortunately, I'm not familiar with Seemann. Do they make composite structures or do they make composite materials?

I believe it's composite materials for the marine market. But yes, it's all good. I'll pass it along.

Your next question comes from the line of Sheila Kahyaoglu of Jefferies.

Tom, maybe just to start off, just looking at your revenue assumptions, at least some of the shipset content you've helped frame on the commercial aero side, it seems like you're a little higher on Airbus deliveries than folks expect and a little lower on Boeing. So maybe what's driving some of those assumptions...

I'll start with Boeing. Regarding the MAX, we observed significant destocking last year. Although they're increasing to 42 aircraft per month, our data suggests they're still pulling slightly fewer than that from us. Therefore, we are likely taking a more conservative approach with Boeing and the 737. For the 787, we’re aligned closely with their output expectations, estimating between 90 to 100. The primary concern is still the destocking associated with the 737, and we will continue to monitor that. In terms of Airbus, our projections are slightly above consensus but below Airbus's estimates. Additionally, we’re still under what our demand management tool indicates. We have good visibility and clarity regarding Airbus, which informs our estimates. We believe that the target for the A350 is conservative based on our comprehensive analysis. We'll keep an eye on it over the year to ensure we're tracking the reality of the situation.

That makes sense. And then if I could ask one on margins. How do you think about just risks to profitability going forward and how we should be thinking about the FX headwind?

Well, FX is going to be a headwind. The dollar is lower. And Mike, maybe you can comment a little bit on this.

Yes. No, sure, Sheila. Thanks. As we talked about previously, the weakening of the dollar to the euro early last year shifted the effect of foreign exchange on earnings from a tailwind for the first half of the year to a headwind in Q3 and into Q4. And we certainly projected a higher headwind in Q4 versus Q3. But the 110 basis points that I called out in Q4 included the settlement of certain short-term non-USD balances that influenced the year-over-year FX comparison to a greater degree than historically. So I don't anticipate that to be an ongoing trend. So I would not project the Q4 impact as the run rate into 2026. So I hope that helps.

But we did build in headwind into '26 into the plan that's already baked in for a headwind on foreign exchange. So that's already baked in. We have a hedging program, so it will be a little bit more muted than it might have otherwise been, but there is some headwind into '26, and we incorporated that already into the outlook.

Your next question comes from the line of Ron Epstein of Bank of America.

Tom, maybe just revisiting some of the stuff that we've already spoken about. But when we think about maybe a next-generation aircraft, you alluded to potentially lower fabrication costs, that kind of thing. Are you guys doing work on out of autoclave? I mean can you just give us a sense on maybe some of the new tech that you all are looking at?

Right. So we are working with the OEMs, both of them, on production techniques to improve all of those characteristics that I talked about. Let me give you an example. Yes, we are working on out of autoclave, but it starts with layup. There's automated fiber placement that has replaced hand layup. But the question is how many kilograms an hour can you layup? If it's 20 kilograms an hour, we think we have techniques that could take it up to 80 kilograms an hour, maybe even double that to 160 kilograms an hour and making the tape wider and thicker and faster. We're looking at not only prepreg layup, but also dry layup. We're also looking at how can we improve the cure time on carbon fiber. Today, it could be 12 hours. We think we have ways to take that down to 3 hours or even less than 2 hours. We're also looking at ways to improve nondestructive inspection and make that better. And also looking at improved ways to do resin infusion at the point of manufacturing. And then on top of that is looking at ways to improve joining techniques. So all these things improve the time it takes to build the part. It reduces the cost, and it also reduces the amount of capital. Capital being autoclaves or it could be NDI-type equipment, trim and drill, all of those things by all of the techniques that I just mentioned. So those are some of the levers. And yes, we are working very actively with the OEMs on those techniques. That's a big part. The production system is absolutely critical to the next-generation aircraft, not just about the cost of the material; it's also about the whole production.

That makes a lot of sense. If I could ask a quick follow-up question. Missile production is increasing significantly, as you've announced several major agreements with key contractors. Many of the smaller unmanned systems utilize carbon fiber composite materials. Considering the evolving defense landscape and the rise in production, especially for carbon fiber products, how do you view the potential opportunities for your company in this area?

Big opportunity. Lightweight is so critical because range is important and durability is also important. Now some of these drones don't carry people, and they don't come back. They're one way. So it changes some of the requirements. But in general, range and strength are key, and our material addresses both of those issues. So this new defense that you were describing is a big opportunity for us. And one of the things I mentioned in my prepared remarks is we have started to strengthen our defense team so that we can address these markets. These are new markets. They don't exist today. They're growing very fast. We think we can play a big part in it, and that's why we're strengthening the team so that we can do that.

Our last question for today comes from the line of Kristine Liwag of Morgan Stanley.

Tom, considering the production rates from Boeing and Airbus, it looks like we've moved past the low point, and your business seems to have stability and visibility. Now that we're in this improved position, could you share your thoughts on the current portfolio? Over time, regarding your exposure to Original Equipment, are you looking to expand more into the aftermarket? Would you consider increasing your focus on defense or possibly moving towards a more vertically integrated component structure? It would be useful to understand the direction you envision for the business in the coming years.

Right. So certainly, we want to continue to grow, Kristine, and those things are all important. But the #1 priority for us right now, in the immediate future is to focus exclusively on making sure we can ramp up on these production rates. That's going to generate so much operating leverage. And so that's what our focus is. That's a little bit why we did the ASR is because we have great confidence that this is going to go up. We thought we were undervalued at the time, and this is an opportunity for us. And we want to make sure that we're laser-focused on executing it. On the other growth initiative that we are going to push very hard is defense. It's already about 35% of our current business, but we think it can be more. We think it's growing, not only in the U.S. but also in Europe and also in some other markets like Turkey, India, Brazil, and some other markets. And so we think we can play a big part there. And so that's the focus for us and growth in the immediate future is in defense. And then as I said, just to reinforce, the big priority for us over the next couple of years, absolutely laser-focused on executing on the rate ramps for all of our customers to make sure that we can deliver the quality and maintain a safe work.

Thank you. This concludes our question-and-answer session for today, and this concludes the session. Thank you so much for attending. Have a wonderful day. Goodbye.