Operator
Hello, everyone, and welcome to HEXO fourth quarter and full year 2025 earnings call. Please note that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you'd like to ask a question during that time, please press star followed by one on your telephone keypad. Thank you. I'd now like to hand a call over to Kurt Goddard, Vice President of Investor Relations. Please go ahead.
Thanks, Ellie. Hello, everyone. Welcome to Hexel 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 Hexel Corporation and its copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our Chairman, CEO, and President, and 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 rate, 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 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 composites 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 them lighter, stronger, and more fuel efficient. Combined with our commitment to operational excellence, we see Hexcel as well positioned to benefit as commercial aircraft production rates continue to recover and funding for defense platforms increase globally. 2025 was a challenging year for us as de-stocking by the OEMs, schedule delays, and lingering supply chain constraints for the OEMs impacted our plans. Despite these challenges, Hexcel closed the year on a positive note as we continued 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 2020 state. Across all our major programs, the A350, the 320, 787, and the 737, we see positive catalysts that a sustained recovery and ramp-up of commercial aircraft build rate 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 model. On the A320, engines have been a problem. Safran is expanding LEAF engine production capacity with the new final assembly line in Morocco. LEAF production continues to increase with record unit shipments in the fourth quarter of 2025, and full-year 2025 unit shipments exceeded the pre-pandemic 2019 prior piece. The GTF from Pratt-Whitney engine shipments have also been increasing and are forecast to increase further in 2026. And Airbus added two new A320 final assembly lines, one in the U.S. and one in China. On the 787, Boeing broke ground to expand its Charleston, South Carolina site to double 787 output. And Boeing reported that they are transitioning production to eight aircraft per month. They also said in their earnings call on Tuesday that the 787 inventory is more normalized with the supply chain now. And 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 in long-term contracts on our commercial programs, Hexel 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 Hexel'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, Hexel achieved full-year sales of $1.894 billion, adjusted EPS of $1.76, and free cash flow of $157 million. In the fourth quarter, Hexel 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 8-3-20, along with increases in 7-8-7 and 7-3-7 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 8-3-50 due to lingering de-stocking in the quarter. In our defense base 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 in space due to strength of military rotorcraft programs and launchers, 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 OEM, and charges related to the disposition position 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 de-stocking by the OEM 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 underscored 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 markets, and we continue to streamline operations in 2026. We just announced a proposal to refocus our Leicester UK site to perform work solely related 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 of 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 activities. 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 mid-year. 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 in our targeted leverage range of one and a half to two times 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 HEXL 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 in the CFO search, and we are focused on identifying the right person for HECSEL. 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 commitment 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 de-stocking. We closed the year with encouraging trends, including an uptick in commercial orders and the margin rates of the fourth quarter, carrying over a trend that began the previous quarter. We believe that 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 wings, 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 in 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 volumes, along with the 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 30th, 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 administrative expenses and R&T 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, HECL 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 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 material 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 product 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 two cents to adjusted EPS. The lower effective tax rate in 2025 primarily reflects the tax benefits associated with restructuring charges for the closure of the Belgian facility, which contributed roughly a 4% rate reduction. To share some further perspective on our commercial aerospace business for the full year, latest generation widebody sales comprised about one-third of total commercial aerospace sales in 2025. Narrowbody 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 dollars which compares to 233 million 203 million dollars 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 2.7 times at year-end 2025. And as Tom said, we remain firmly committed to a disciplined financial policy to returning leverage to the targeted range of 1.5 to 2.0 times as soon as possible during 2026. The Board of Directors declared an $0.18 quarterly dividend yesterday, and this reflects a one penny or 6% increase compared to the prior dividend. The dividend is payable stockholders of record as of february 9th with a payment date of february 17th we'll 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 dollars of sales in 2025 so those sales are not recurring in 2026. Further, the Leicester UK facility that Tom referenced earlier generated around 15 million 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 But as a reference, our average Eurodollar 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 Eurodollar 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 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 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 Hexel's Board of Directors. Jeff recently announced that after almost 23 years of service on the Hexel Board, the last seven as our lead director, he will not stand for re-election at our next annual 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 Hexel. Looking ahead, Hexel enters 2026 with strong momentum. Positive order trends we saw late in 2025, combined with the catalyst 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.
Operator
We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. Please limit your questions to one question and one follow-up. Thank you. I'd now like to call Ken Herbert for our first question from RBC Capital Markets. Your line is now open.
Yes. Hi. Good morning. Thanks for the question. 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?
Right. And so the 8% is a mix of, of course, our commercial and then the defense-based and other. Defense-based and other is going to be diluted because, as Mike explained, we aren't going to have the $30 million from the Austrian business and also probably about 8 million or so from that Leicester UK business that I mentioned. So that gets us to the 8%. For commercial aerospace by itself, I would describe the growth rate as low to mid double digits for next year. So we are seeing an increase. And the assumptions underlying that, because we right now are very aligned to the original equipment commercial aerospace build rates for the oem following an airbus in particular and primarily the a350 is our biggest program where we have a ship set of 4.5 to 5 million dollars that's a big driver as i said in the past we're assuming about 80 units delivered and produced that we're going to deliver to airbucks in 2026. that's up from the 57 that they delivered in 2025 So it's a big leap, but what we see is we do a bottom-up demand forecast where we contact all 35 of the locations that receive material, and the 80 is a pretty good representation of what we think from the bottoms up as well as the top-down analysis. Now, I also want to remind you that we're a material provider, so we're typically four to six months ahead of the OEM in terms of what our assumptions are because we're looking that far ahead in terms of the material. So it's really, our forecast is kind of a mix between the forecast for 26 and 27 combined. But for the A350, the underlying assumption in our plan is about 80. Now, just to carry on, for the A320, as we've said before, our ship set value is between 200 and 500,000. On the A320, it's more toward the upper end of that range. We're assuming low to mid 700s. And again, remember that we're six months ahead of Airbus. So our number is going to be a little bit higher than what they're communicating or estimating. On the max, we're targeting mid-400s, which we are going to monitor closely. We saw a lot of de-stocking in 2025. They're getting through that, but there's probably still some lingering de-stocking on the 3-7 program, so we'll watch that. But we're expecting mid-400s. And on the 7-8-7, consistent with Boeing, what they said on their call, 90 to 100 is what we're assuming in our plan. So for the four major programs, those are our assumptions. As I said, we're a little bit ahead of the OEMs because we're a material provider, but we've also tried to be conservative in making those assumptions as we build a plan because we know it's been tough with the supply chain. But as I mentioned in my prepared remarks, there are four catalysts across each of those major programs that give us confidence that these build rates can now start to ramp up and that they will hit their peak production rates in the next few 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?
Right. The purchase orders are very strong this year in contrast to last year and so we see we've got good visibility on the purchase orders firm purchase orders all the way out through may so five months and and so that's good but it was this bottoms up demand management profile that i mentioned where we with airbus go out to all 35 internal airbus plants as well as external third party plants and we basically pull them on what their orders are going to be and so that bottoms up uh analysis is also giving us confidence in that 80 number that we gave. In fact, we're confident enough that we've had a number of carbon fiber lines mothballed over the past few years because production's been lower. We actually brought one online earlier than expected, just so that we're prepared for the increase, and even if it goes above that. So that's just to give you a little bit of color on how we built that plan and the confidence we have in the assumption.
Great. Thanks a lot, Tom.
Operator
Your next question comes from the line of Gotam Khanna of TD Cohen. Your line is now open.
Hey, I apologize if I missed this, but I was wondering in the fourth quarter composite segment if you could quantify the out-of-period benefits for the one-timers. And then just, you know, one of the things we noticed last year is we had, you know, pretty high decremental margins, but the implied incrementals look to be kind of like mid-30s. Wondering, you know, what would be the case for upside and why shouldn't we think that there could be, just given you got the leverage coming back?
Okay, let me take the incremental margin first and I'll turn it over to Mike. You're right on the incremental margins. It's mid-30s is what we're seeing based on the current plan. And the upside is really it gets down to commercial build rates. If we see higher production rates on the A350, the A320, the 37, the 787, then we'll see upside to those incremental margins. The key point about Excel is we are all about operating leverage. As the production rates go up, we're going to get operating leverage. I mentioned in my remarks, production is only 80% recovered, 87% recovered overall, and less on wide bodies. As the production gets back to pre-pandemic levels, that generates a lot of operating leverage for us, which will improve margins and our incremental margins if we go forward. Now I'll let Mike answer the question about that.
Yeah, so the adjusted operating margin in the fourth quarter for composite materials, that was 20.5% was the margin. We can follow up if you need more specifics. about what number is plugged there to get to that margin. But that is the adjusted one. The table, as you know, that's a gap number.
Operator
The next question comes from the line of Gavin Parsons.
Of UBS, your line is now open.
Thank you. Morning. 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 You're just kind of aligning your hiring expenses, your utilization to your revenue. Just how do we think about some of the pieces underlying incrementals?
Right. Well, we're managing costs overall in the corporate area. You saw G&A was lower than last year. So we held the line. A lot of belt tightening on things like professional fees and headcount and T&L and things like that. The other thing that we've done is, as we've said, in terms of cost, we fixed costs in the factories, is we, now this, in some of the labor, the direct labor is variable costs, but we've had a hiring freeze on. We also let attrition, because the volume wasn't there, we didn't need all the people, so we did let attrition go down. We had a couple of small staff production. And so we ended the year with 330 headcounts below where we ended 2024, and it was way below our original plan for 2025. And we're keeping that low level of headcount going into 26. We're only going to start to higher as we see evidence that those rates are coming up. We're starting to see it on the A350, which is why we started up that new carbon fiber line a little bit early. But other than that, we're going to wait until mid-year before we start any increased hiring. And that's how we're going to manage some of the fixed and variable costs. as we go 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 timeframe? How do we think about the timeframe?
We're, as I said, a little bit ahead of them, but we're more in lockstep. There was a lot of de-stocking 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 us. 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.
Thanks, Tom. Appreciate it.
Operator
Your next question comes from the line of John McNulty of BMO Capital Markets. Your line is now open.
Yeah, thanks for taking my question. maybe just flushing 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 on 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?
Right. Well, I guess if you took the midpoint and you add it back, it would be in kind of the low 30s. You know, we think it could be a little bit better. That's why I say mid-30s. But, and it's for the reasons that I mentioned, for us, it's about operating leverage. We've been so under capacity the last six years, really, since the pandemic began, that we're not able to basically allocate all of the fixed costs and depreciation from the assets that we put in place to go up in rates. As we start being able to absorb all that depreciation because the volume is going up, it's going to lead to operating leverage, which will drive margins faster than revenue growth. And that will create the positive incremental margin. So I think the mid-guides, I would say, are probably low 30s. But I said I'm comfortable with saying mid-30s on incremental margins to point this.
Got it. Okay, fair enough. And then just as a follow-up or quick question, so you just got finished with a big ASR, so 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 you thinking about that?
Well, I just go back to last year when we did the ASR, we did a 600 million share purchase reauthorization. And so we had 134 on a previous authorization. We added 600. We took out 350. So we still have 384 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.
Got it. Thanks very much for the caller.
Operator
Your next question comes from the line of Scott Mekus of Male Use Research. Your line is now open.
Morning, Tom and Mike. I just wanted to ask kind of on the incremental margins as well. 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?
Okay, let me talk about the mothball costs. We've built in all the costs into the plan required as we bring new capacity online. So we don't expect any incremental. And taking those lines out is not that big of a deal. It's really about just going and hiring the people. So those costs are all incorporated into our plan and our outlook. In terms of the – your second question was on the operating income to close all of the – the different assets okay that's all incorporated yeah um on the erp let me just be clear the erp there was some cost in 25 there's some additional cost in 26 as we implement it it's just incorporated into our numbers um we're probably about halfway through the overall implementation we expect to get most of it done in 26 maybe a little bit in 27 but it's not it's not material in terms of our overall numbers so we're not highlighting it it's just incorporated into our SG&A.
It's roughly flattish if you think about it for the ERP, but we're rolling out a number of a greater number in 26 than we did in 25. So as Tom said, we're pushing to get through that, but likely the early 27.
Yeah, but the overall focus is we are going to continue very strong discipline management of all of our costs so that we can continue to drive margins, which obviously contribute to the income element okay just to clarify were the austrian and leicester facilities were they ebit negative in 2025 it was immaterial um in terms of you know close to break even maybe even a little negative so um but but but but not material and so but as we said we we closed those they were basically non-core operations um and this was all part of streamlining in the portfolio so that we can be more focused and productive as we go forward. And so both of those, plus closing the Belgian facility and selling our Hartford facility, all contribute to that. It's about lowering costs and being more productive. We won't see the full impact of that. We'll see some of it this year. We'll see all of it on a full-year basis next year.
Operator
Your next question comes from the line of Michael Caramoli of Truist Securities. your line is now open.
Hey, morning, guys. Thanks for taking the question. Tom, I've missed it. Did you guys give, in terms of the revenue guidance, did you give a breakdown or a split by the end market in terms of what we should expect this year between commercial aero and space and defense? And then just any update on sort of the price cost equations? I know So, you know, some of the main material inputs, you know, notably acrylic nitrile, some of those, you know, prices could be coming down. I know you've got the hedging strategy, but any general update there as well on how that may impact margins as we're kind of talking about this incremental margin?
Right. Okay. So, on revenue guidance for 2026, what I said is commercial will be low to mid double digits. Defense will be low to mid single digits, defense on its own, defense is based on its own. Because the defense space and other is going to be flat to slightly negative because of the $30 million from the Austria facility plus the 8 or 9 million or so from the Leicester facility. But defense by itself will be, say, low to mid double digits, and commercial will be low to mid double, excuse me, defenses low to mid single digits, and commercial aerospace will be low to mid double digits for 2026. On the price crossed equation, AN, acrylonitrile, is the basic raw material that we use to make the carbon fiber. It's essentially a petroleum byproduct, but we hedge propylene. And so that's, we, so it is, it's a fairly volatile price over the years. It is down right now, but we hedge it so we smooth it out over the years so we don't expect a variation on that because we have a very strong hedging program on that. The other thing I will mention is that you know we talk about margins a lot as production rates go up and as we get to the target peak production rates across all the programs for Boeing and Airbus that's going to generate as I said 500 million dollars of incremental revenue per year. Then on top of that we have a couple hundred million dollars of increase in defense and regional jets and business jets. The combination of all of that gives us a path back to 18 percent margin before the end of the decade. So we are always working on pricing as contracts come up, and so we'll continue to do that. But along with the operating leverage and the productivity initiative, we do have a path back to the 18 percent margins for the end of the decade as the OEMs achieve their peak production rates across all the different programs. Great. Thanks, guys.
Operator
Your next question comes from the line of Miles Walton of Wolf Research. Your line is now open.
Thanks. Good morning. Mike, I just wanted to follow up on the margins in composite materials. I understand that the press release is 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. you know when and so that that's certainly contributed to that well I think another thing that contributed was compensation in other words our incentive compensation didn't pay out at Target because 2025 was a fairly light year for all the reasons that we mentioned but unfortunately that resulted unfortunately for the management team that resulted in lower payout on compensation and that contributed to the margin and particularly in fourth order because that's when those costs.
Yeah, the biggest true-up is in the fourth quarter because you're truing 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 it's – we haven't revealed it. I'd rather not just go into that right now. But it was obviously fairly sizable because the year we just didn't hit the target. The other thing in this year's numbers that wasn't in last year – recall last year I succeeded NIC. We had duplicate expenses at the CEO level for the back half of last year. Obviously, that didn't repeat this year, so that was also a contributor. And then, as Mike said, just a lot of cost control on SG&A, travel, professional fees, headcount, all the normal levers we can continue to focus on.
Okay. And the longer-term question, Airbus, one of their head of commercial, their new 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, but with a composite wing, what the ship set scaling would look like?
Right. Well, first of all, I still think the jury's out on the fuselage because you get lighter weight, better fuel performance, and you also get less maintenance. So that's something I think that the OEMs will continue to take into account. But right now, the A320 and the max are about 15% carbon fiber composite. We said that our shift set value on that is $200,000 to $500,000, and the 320 is close to the upper end of that range, so call it $500,000. If you put a wing on the next narrow body, that'll take the 15% to 30%, So double the 500,000 to a million per ship set at 75 per month, that's a lot of carbon The other thing is the fuselage would probably take the 30% up to 50%. And so that's also a possibility. And so at that point, you would take the 30% to 50%, the million per ship set probably goes to one and a half to 2 million per ship set at 75 aircraft per month. So that just gives you a thought process on it. Now, the wing, for sure, 100% will be carbon fiber because the characteristics of the wing, improve lift-drag ratio, increase range, reduce fuel consumption. So that's not a consideration anymore. There is still a lot of discussion on the fuselage. Of course, we're advocating for it. I think there's a lot of strong arguments for it. It's all about reducing the cost, improving the time, and reducing the capital required to produce it. And all of those things, I think, are in works. There's lots of pilots going on. We'll continue to make the case. But if it is a fuselage, that takes up to 50% and about $2 million per ship that I'm in there about. Perfect. Thanks, Tom. You're welcome.
Operator
Your next question comes from the line of Scott Noichel of Deutsche Beck. Your line is now open.
Hey, good morning. Just one question, Tom. This business, Seaman Composites, was recently purchased by another public company, but it seems like something that would have been a good strategic fit for Excel, given that they make advanced composites for the aerospace and defense market. I'm sorry, which one was? I was just curious if – yeah, it's called SIEMEN Composites. Carmen bought it, a space company. I was just curious if that was an opportunity that you had the – or a business you had an opportunity to look at, and if so, why HEC-SEL was not a buyer.
Right. Unfortunately, I'm not familiar with SIEMEN. Do they make composite structures, or do they make composite materials?
I believe it's composite materials for the marine market, but yeah it's all good i'll pass it along yeah i'm sorry just not familiar with that so it's not in one of our core markets and so we did not look at it and um so i i unfortunately just can't answer it understood thank you your next question comes from the line of sheila kayagolu of jeffries your line is now open good morning guys and thank you for the time um tom And maybe just to start off, just looking at your revenue assumptions, at least some of the ship set 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?
Well, on Boeing, I'll start there. On the MAX, we did see a lot of destocking last year. I know they're getting up to 42 aircraft per month, but our numbers really show them what they were pulling from us, still a little bit lower than that. So yes, we are being probably a little bit more conservative on Boeing and on the 3.7. On the 8.7, I think we're right on top of them, 90 to 100. So it's really the 3.7, and it's more worried about the de-stocking, but we'll see. On Airbus, we're a little higher than consensus, but we're probably a little bit lower than the Airbus estimates. And again, we're a little bit lower than our bottoms-up demand management tool would indicate. So we have a lot of visibility and clarity on Airbus, and so that's why we are putting the peg where we are. We still think that the 80 is conservative on the Airbus A350 based on all of our bottom-up work and all the top-down work and what the master schedule at Airbus does. So we're comfortable with it. We'll watch it throughout the year and monitor it to make sure that we're seeing evidence of it. But that's what all of our bottoms-up analysis is telling us.
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.
Well, yeah, no, sure, Sheila, thanks. You know, we talked about previously, you know, the weakening of the dollar to the euro early last year shifted, you know, 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, you know, we've certainly projected a higher headwind in Q4 versus Q3, but, you know, the 110 basis points that I called out in Q4, that 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 we don't anticipate that to be an ongoing trend, so I would not project the q4 impact of the run rate into 2026 so 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 and it'll be there we have a hedging program so it'll be a little bit more muted than it might have otherwise been but there is some headwind in the 26 and we incorporated that already into the artwork.
Operator
Great. Thank you. Your next question comes from the line of Ron Epstein of Bank of America. Your line is now open.
Yeah. Hey, good morning, guys. Thanks for the question. 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? 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 those characteristics that i talked about let me give you an example um we yes we are working on out of autoclave but it starts with layup um you know there's automated fiber placement has replaced hand layup but it's the question is how many kilograms an hour can you lay up 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 i'm making the tape wider and thicker and faster. We're looking at not only pre-preg layup, but also dry layup. We're also looking at how can we improve the cure time on carbon fiber. Today could be 12 hours. We think we have ways to take that down to three hours or even less than two hours. We're also looking at ways to improve non-destructive inspection and make that better. And also looking at improved ways to do resin infusion at the point of manufacture 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 oem on those techniques. That's a big part. The production system is absolutely critical to the next generation aircraft. It's not just about the cost of the material. It's also about the whole production system.
Yeah, that makes a ton of sense. And if I may, just a second question real quick. Missile production, you know, going up a lot. I mean, you're just kind of, a lot of announcements about that. Some big agreements with the big contractors. And a lot of the unmanned systems, you know, these smaller systems are carbon fiber composite systems. When you look at the changing defense environment, you know, with the volume of everything kind of going up, particularly a lot of things that are made out of carbon fiber, how do you think about the potential opportunity there for you?
Big opportunity. You know, lightweight is so critical because range is important and durability is also important. Now, some of these drones are, they don't carry people and they don't come back for 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 this team so that we can do that.
Got it. Great. Thank you very much.
Operator
Our last question for today comes from the line of Christine Lewug of Morgan Stanley. Your line is now open.
Hey, good morning, everyone. Tom, you know, looking at the production rates from Boeing and Airbus, it's clear that it seems like we're beyond a trough and you've got stability and visibility in your business. Now that, you know, we're in this better place, I was wondering, can you discuss how you're thinking about the portfolio today? Over time, when you look at your exposure to OE, do you want to expand more into aftermarket? Do you want to expand more into defense or potentially go into more vertically integrated component structure? It would be helpful to think about where the direction you see the business going in the next few years.
So certainly we want to continue to grow, Christine, and those things are all important. But the number one 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 or India, Brazil, some other markets. And so we think we can play a big part there. And so that's the focus for us in growth and 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 focus on executing on the rate ramps for all of our customers to make sure that we can deliver the quality and maintain a safe organization. thank you very much 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
