Hexcel - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 missed Street: revenue $456.5M vs $474.7M consensus* and adjusted EPS $0.37 vs $0.42 consensus*, on softer commercial aerospace volumes (notably 787 and MAX), an Engineered Products vendor quality issue, and a Decatur power outage impacting gross margin (22.4% vs 25.0% LY).
• Guidance cut: FY25 sales to $1.88–$1.95B (from $1.95–$2.05B), adjusted EPS to $1.85–$2.05 (from $2.05–$2.25), FCF to ~$190M (from >$220M), and capex < $90M (from < $100M); tax rate unchanged at 21%.
• Why the guide-down: Airbus A350 shipset demand reduced from 84 to ~68 for 2025; A320 assumptions lowered by ~30 units; 787 softer start; tariffs excluded with direct impact estimated at ~$3–4M per quarter if implemented.
• Capital and cash: $50.4M buybacks in Q1; $0.17 dividend declared; $300M 2035 notes issued and 2025 notes refinanced; Q1 FCF -$54.6M as usual seasonal cash use.
• Potential stock catalysts: depth of A350 destock and 2Q–3Q volume trajectory, tariff policy clarity and pass-through dynamics, and defense/space offsets to commercial softness.

What Went Well and What Went Wrong

• What Went Well

  • Defense & Space growth despite macro: D,S&O market up 2.0% y/y (2.7% cc) with strength in CH-53K, Black Hawk, classified and space programs.
  • Cost discipline and capital allocation: Capex trimmed for FY25; $50M buybacks in Q1; successful $300M refinancing “significantly oversubscribed” at attractive spreads.
  • Management execution focus and recognition: Embraer “Best Supplier of the Year” award; “deliver, innovate, grow” priorities reiterated; capacity already installed for higher OEM rates.
  • Quote: “Our gross margin… was negatively impacted by lower operating leverage… and a power outage in January… the plant is once again operating efficiently.”

• What Went Wrong

  • Commercial Aerospace softness: segment sales down 6.4% y/y (6.3% cc), driven by lower 787 and MAX; A350 nominally lower; gross margin fell 260 bps to 22.4%.
  • Non-recurring and mix headwinds: vendor quality issue in Engineered Products; unfavorable mix; Decatur power outage cost $2–3M.
  • Guide cut concentrated in A350: planned shipsets to Airbus reduced by ~16 units (84 → ~68), driving ~$76M revenue impact at $4.5–5.0M shipset midpoint.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Hexcel First Quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Patrick Winterlich, Chief Executive Officer. You may begin.

Patrick Winterlich (CFO)

Hi, Krista. Thank you. Hello, everyone. Welcome to Hexcel Corporation's First Quarter 2025 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes different 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 express permission.

Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our Chairman, CEO, and President, and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our First Quarter 2025 results detailed in our news release issued yesterday. Now, let me turn the call over to Tom.

Thomas C. Gentile (Chairman, CEO and President)

Thanks, Patrick. Hello, everyone, and thank you for joining us today as we discuss our 2025 First Quarter results. Hexcel's value proposition is strong. We have a broad and unrivaled product range of lightweight, innovative aerospace composites protected by robust intellectual property, as well as considerable know-how gained from decades of experience. That positions Hexcel extremely well to meet the expanding demand for advanced lightweight composites in aerospace and defense as the industry continues its recovery from the COVID-19 pandemic and returns to higher production rates across all commercial and military programs. We are well-positioned with sole-source Life of Program contracts across a large number of commercial aircraft programs. Hexcel will benefit as Airbus and Boeing increase production in the coming years to address their significant backlog.

Taking the ship set values by program that we disclosed and the peak build rates announced by Airbus and Boeing for key platforms, there is roughly $500,000,000 of incremental annual sales from existing contracts ahead of Hexcel when compared to our 2024 sales. For example, the A350 is Hexcel's largest program with a ship set value between $4,500,000 and $5,000,000. Airbus delivered 57 A350 aircraft in 2024 and recently reiterated that they still expect to achieve 12 aircraft per month for the A350 by 2028, which would result in approximately 132 deliveries. This is business we already have contracted as production rates ramp in the future for the A350 and other Airbus and Boeing commercial programs. Defense and business jets and space and other existing and new markets are all additive.

In terms of defense, we see significant opportunities as both the U.S. and European governments look to increase spending. We are U.S. domiciled and vertically integrated to support U.S. defense production with existing positions on most current military programs that use lightweight composite materials. We also have deep relationships with European defense contractors and a strong vertically integrated manufacturing presence in Europe to support our overseas defense customers. Our ability to generate cash, combined with our conservative financial policy, underscores Hexcel's solid balance sheet. As sales grow over time and our capital expenditures remain subdued as we have already invested in the plant and equipment necessary to support higher production rates, the multi-year cash generation profile of Hexcel is compelling.

Based on the value we perceive in Hexcel's common stock and our confidence in the future cash generation potential of the business, we utilized $50 million to repurchase shares of common stock in the first quarter. We have additional authorization to purchase a further $185 million. We also addressed a pending debt maturity by refinancing a $300 million fixed-rate note that was maturing later this year at attractive interest rate spreads. As a reminder, we are changing how we report sales by market and will now report two markets: commercial aerospace and defense space and others, which is the market that now includes our industrial business. This industrial business will consist primarily of performance-oriented automotive sales once we conclude the divestiture of our wind and recreation-focused facility in Austria, which we expect to be later in Q2.

Looking at our financial results for the first quarter of 2025, we generated sales of $457 million and adjusted diluted EPS of $0.37. 2025 is turning out to be another year in which production rate increases for commercial aircraft will not meet initial expectations due to ongoing supply chain disruptions. Commercial aerospace sales in the first quarter of 2025 were $280.1 million, down 6.3% on a constant currency basis from the same period in 2024. Lower sales year-over-year were primarily due to the Boeing 787 and the 737 MAX. However, this was partially offset by a 7.1% increase in other commercial aerospace from international demand. To share some additional color, commercial aerospace sales were up nominally on a sequential basis. Airbus A350, A320, and A220 all increased sequentially, as did other commercial aerospace.

Boeing 737 MAX sales were unchanged sequentially, consistent with our expectations, whereas the Boeing 787 sales were significantly lower. In defense space and other, sales were $176.4 million, up 2.7% in constant currency from the same period in 2024. In defense and space, we realized sales growth of 3.3% in constant currency compared to Q1 of 2024, driven by the, excuse me, by the CH-53K, the Black Hawk, classified programs, a number of space programs, and an international fighter program. This continued growth underscores the capabilities and value Hexcel brings to the defense market, particularly our vertically integrated capabilities for both U.S. and European defense programs. Within industrial, we had growth year-over-year in automotive offset by further deterioration in wind and recreation remained soft.

With lower than expected sales volume in our commercial business, we now see 2025 as a year where we need to remain focused on the fundamentals of our business and controlling costs as we navigate reductions in near-term demand for commercial aerospace programs, including the A350. Our gross margin of 22.4% for the first quarter, down from 25% in the same period last year, was negatively impacted by lower operating leverage from the lower sales volume. Additionally, we experienced a power outage in January at our Decatur, Alabama, facility, which disrupted our manufacture of PAN, the precursor element for our carbon fiber production line. This resulted in additional expense to restart production at the facility, which is now complete and the plant is once again operating efficiently.

With respect to hiring, we are carefully managing any additional increase in headcount to ensure we do not get ahead of the revised production levels of our customers while maintaining our ability to support future rate ramps. Our current headcount is about 300 heads or 5% lower than where our annual plan forecasted for the end of March. For 2025 overall, we expect to run significantly below our previous plan for year-end headcount. The Hexcel team is actively managing cost reduction and cash by driving material usage efficiencies, minimizing discretionary spend, revisiting planned capital expenditures, and optimizing our sales, inventory, and operations planning to right-size working capital. Before I move into guidance, I want to address the issue of tariffs. The situation remains fluid as U.S. policy continues to evolve. We have a cross-functional team analyzing the potential impact and our strategy to manage tariffs.

As a reminder of what I shared earlier this year, resins and acrylonitrile are two of our top purchases, and we source these regionally to support local production, both in the U.S. and in Europe. To illustrate further, over 85% of our 2024 spend was in the U.S. and five European countries where we have the vast majority of our assets, employees, and production. I share these figures to provide some perspective on the potential direct tariff impacts on Hexcel. Further, our total combined purchases from Canada, Mexico, and China were only just above 1% of our total 2024 spend, so we source very little from those three countries that have been specifically targeted for tariffs. There was no impact from tariffs in the first quarter results as the new U.S. tariffs were not announced until April.

Due to the fluid situation and uncertainty with tariffs, our guidance does not include any tariff impact or potential impact from tariffs enacted after March 31st, 2025. Based on current information, we expect the direct impact from tariffs will be about $3 million-$4 million per quarter. We do not know what the indirect impact that tariffs could have on other parts of the aerospace supply chain and OEM production rates, however. Additionally, we continue to streamline our footprint to minimize our costs and position the business for future stronger margins. In Q1, we completed the divestiture of our 3D printing facility in Hartford, Connecticut, and we continue to work on the divestiture of our Neumarkt, Austria site, which primarily supplies the wind and recreation market. In addition, we are continuing the evaluation of our Belgium facility, which makes Engineered Core.

We announced our 2025 guidance this past January. Subsequently, Airbus significantly revised their demand forecast, which substantially lowered A350 production in 2025. We built our plan in 2025 with an assumption of 84 A350 material ship sets. We now expect this to be around 68 material ship sets in 2025. This lower A350 production is the primary driver for revising our 2025 guidance downward as we have significant ship set values on the A350 of between $4.5 million and $5 million per ship set. Patrick will go into more detail on the revised guidance in his remarks. Despite these near-term headwinds that we have in 2025, Hexcel is well-positioned to generate significant future cash flows as the commercial OEMs ramp up production, and we are aligned and focused to grow in other markets such as defense and space, where we continue to see opportunities to expand.

Before turning it over to Patrick, I would like to thank again our customer, Embraer, for the recognition of the hard work the Hexcel team does every day in producing high-quality parts that are delivered on time. We are honored and humbled to receive the Best Supplier of the Year award from Embraer for their materials category. I was at the Embraer headquarters last week in Sao Paulo to accept this prestigious honor. I'd also like to thank and congratulate our customer, Gulfstream, for obtaining certification of their G800 large cabin business jet. It is quite an amazing aircraft and utilizes our lightweight composite material extensively. Now let me turn it over to Patrick to provide some more details on the numbers. Patrick?

Patrick Winterlich (CFO)

Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter time horizon. The year-over-year comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. The commercial aerospace market represented approximately 61% of total first quarter 2025 sales for $456.5 million. First quarter commercial aerospace sales of $280.1 million decreased 6.3% to the first quarter of 2024. The overall aerospace supply chain continues to recover in fits and starts, leading to delayed rate ramps across our commercial aerospace customers. Boeing 787 sales declined meaningfully year-over-year. MAX sales remained low as excess inventory is consumed, consistent with our expectations as we lag Boeing ramp rates. Airbus A350 sales declined modestly year-over-year, or less than the equivalent of one half of one ship set.

Sales for other commercial aerospace in the first quarter increased 7.1% year-over-year, led by strength from a few of our international customers. The newly designated market of defense, space, and other represented approximately 39% of first quarter sales and totaled $176.4 million, increasing 2.7% from the same period in 2024. Within this market, defense and space grew 3.3% with growth both domestically and internationally. For rotorcraft, the CH-53K and Black Hawk programs grew year-over-year, partially offset by declining V-22 sales. A few space programs drove additional growth, as did an international fighter program. Industrial increased in automotive, tempered by lower wind and recreation sales. Much of our industrial business is with European customers, as illustrated by sales being down year-over-year from a weakening dollar, whereas on a constant currency basis, sales were nominally up.

Gross margin of 22.4% in the first quarter of 2025 period rated year-over-year from the negative impact of lower operating leverage, a vendor quality issue in our engineered product segment, as well as a generally unfavorable sales mix. In addition, a rare power outage at our Decatur, Alabama, facility cost us between $2 million and $3 million. Tom said in his remarks that Decatur plant operations were restored quickly. Gross margins in the comparable prior year period were 25%. As a percentage of sales, selling, general, and administrative expenses and R&D expenses were 12.5% in the first quarter of 2025, compared to 13.6% in the comparable prior year period, with the year-over-year reduction primarily reflecting lower employee costs, including lower stock-based compensation charges.

Adjusted operating income in the first quarter was $45.3 million, or 9.9% of sales, compared to $54.1 million, or 11.5% of sales, in the comparable prior year period. The year-over-year impact of exchange rates in the first quarter to operating income was favorable by approximately 60 basis points. Now turning to our two segments, the composite material segment represented 80% of total first quarter sales, and adjusting for non-recurring charges generated an adjusted operating margin of 14.2%. This compares to an adjusted operating margin of 16% in the prior year period. The engineered product segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 6.8%. This compares to an adjusted operating margin of 14.3% in the prior year period. As previously mentioned, a vendor quality issue and poor sales mix impacted the engineered core segment this quarter.

Net cash used by operating activities in the first quarter of 2025 was $28.5 million, compared to a use of $7 million in the first quarter of 2024. Working capital was a cash use of $97.7 million in the first quarter of 2025, compared to a cash use of $84.5 million in the first quarter of 2024. Capital expenditures on an accrual basis were $17.1 million in the first quarter of 2025, compared to $18.6 million in the comparable prior year period. Free cash flow in the first quarter of 2025 was negative $54.6 million, which compares to a negative $35.7 million in the first quarter of 2024. We typically see cash use in the first quarter of the year, and this year was no different. Adjusted EBITDA totaled $84.8 million in the first quarter of 2025, compared to $98.2 million in 2024.

During the first quarter, we refinanced a $300 million fixed-rate note that was maturing later this year. The transaction was significantly oversubscribed, and we achieved good interest rate spread, demonstrating Hexcel's strong credit profile. We are pleased to have removed this refinancing as a potential risk. Our net debt maturity is not until 2027. We used $50.4 million to repurchase stock during the first quarter. The remaining authorization under the share repurchase program as of March 31st, 2025, was $184.5 million. The board of directors declared a 17% quarterly dividend yesterday. The dividend is payable to stockholders of record as of May 2nd, with a payment date of May 9th. Expanding on Tom's comments regarding the year and our guidance revision, 2025 is going to be another transition year for the commercial aerospace industry and for our commercial aerospace business.

In recognition of this, we are pivoting and managing the business for the realities of today. We are focusing on strong control of operating costs and tightly managing HEX. For the 2025 sales guidance, we reduced the midpoint by $85 million. Most of this sales reduction is attributable to Airbus cutting their 2025 demand for A350 materials. For 2025, we expect A350 sales to be lower than 2024, with the decrease to be particularly noticeable in the second and third quarters of 2025. There was also a reduction in the A320 build rate for 2025 compared to our original assumptions. There are a few other areas of softness, including the Boeing 787 and automotive. Much of our automotive business is with European-based high-performance automotive manufacturers that import their automobiles into the U.S., where any additional tariffs are likely to have a significant impact.

By market, 2025 commercial aerospace sales are now expected to be unchanged or flat compared to 2024, as are 2025 sales to defense, space, and others. Lower sales negatively impact cost absorption, resulting in margin deterioration and a downward revision to adjusted EPS guidance. The midpoint of our EPS guidance is now $0.20 lower. Our operating footprint capacity supports peak announced build rates and some growth beyond. However, we will be very deliberate before adding any headcount above where we ended 2024. Free cash flow guidance is now expected to be around $190 million. Note also that our guidance excludes any further sales from the Neumarkt, Austria, facility, which we are continuing to work towards divesting. Sales for Austria were originally assumed to be approximately $40 million for the year.

Just to repeat, our guidance does not include the impact of any new tariffs announced after March 31st, 2025, due to the fluid and uncertain nature of tariffs globally. With that, let me turn the call back to Tom.

Thomas C. Gentile (Chairman, CEO and President)

Thanks, Patrick. In my annual letter to shareholders, I outlined three key strategies for Hexcel this year: deliver, innovate, and grow that are central to us navigating the current challenges and positioning Hexcel for the future. We are focused on operational excellence, ensuring we meet production schedules, maintaining high quality, and upholding our commitment to the safety of our employees as we deliver on our commitments to our customers. While we do this, we have been streamlining our footprint to position Hexcel for higher margins in the future. We are innovating through our investments in research and technology to develop new materials and processes that will drive the next generation of aerospace and defense products.

We will grow as build rates increase on existing programs to address historically high levels of backlog, and as we pursue opportunities in the medium term in markets including defense and space, regional business jets, and eVTOL aircraft. Longer-term growth will come from the next generation narrowbody aircraft and propulsion that will incorporate increasingly more lightweight composite materials. As the only U.S.-owned maker of lightweight carbon fiber composite used extensively in all of the top commercial and military programs, Hexcel is well-positioned to benefit from the continued recovery from the COVID-19 pandemic and the increase in production rates across all programs. As we move forward, I'm confident in our team's ability to navigate the challenges and seize the opportunities ahead to deliver strong and meaningful cash flows over the coming years and to generate strong shareholder returns. We appreciate your continued engagement with us today.

Operator, we're now ready to take questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, again, press star one. We do ask that you limit yourself to one question and one follow-up. Thank you. Your first question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Sheila Karin Kahyaoglu (Analyst)

Good morning, Tom, Patrick. Thank you so much. Popular topic today. On tariffs, Tom, you talked about it a little bit, and Patrick, you noted $4 million per quarter. How do we think about your overall tariff impact and what your base assumption would be if you were to include it into guidance on that $4 million and how you think about profitability in Q1, 9.9% margins? They expand 200 basis points or 250 basis points depending on whether you include tariffs on flattish sales in the next three quarters. What drives that margin improvement?

Thomas C. Gentile (Chairman, CEO and President)

Let me just start with the tariffs. As we said, as we've gone through and analyzed our total spend and just matched it to the tariffs currently in effect for each country, we came out with that impact of $3 million-$4 million per quarter. As I mentioned in my prepared remarks, most of what we buy in the U.S. is U.S. sourced, and most of what we buy in Europe for production is sourced in Europe. There is not a lot of cross-border flow. As I also mentioned, the amount that we buy from China, Canada, and Mexico is only a little bit over 1%. The direct impact is fairly minimal. It is, as I said, $3 million-$4 million. While that is a big number, that is a number that we can offset over the course of the year with our productivity improvement.

We did not include it in our guidance because there is a lot of uncertainty as to what the final tariffs will be by country. Also, and probably more importantly, is what the indirect impact of tariffs is going to be on the rest of the aerospace supply chain and on production rates at the OEM. That is something that we just cannot determine at this point. We did not want to try to guess, so we have left that out of our guidance. The margin that you mentioned for first quarter was depressed primarily because the revenue was lower than we expected, and we did not get the kind of operating leverage that we expected. As you know, we peaked in production back in 2019. We have all the capital and equipment in place to support much higher levels of production, and we are only about 80% recovered back to those levels.

We're not getting the operating leverage. We didn't get it in Q1, and that's why we saw the depressed operating margin.

Sheila Karin Kahyaoglu (Analyst)

Got it. Thank you very much.

Operator (participant)

Your next question comes from the line of Michael Ciarmoli with Truist. Please go ahead.

Michael Frank Ciarmoli (Analyst)

Hey, good afternoon, guys. Thanks for taking the question. Just to follow up on what Sheila was asking on the tariffs, lots of uncertainty. Do you have any levers to pull in terms of pricing as a potential offset versus or in addition to productivity?

Thomas C. Gentile (Chairman, CEO and President)

What I would say, Mike, is that we have in our contracts and our Incoterms, most of them, for example, out of Europe, are ex-works. The buyer is responsible for the tariffs. They would get passed on to the buyer in that case. In addition, we have a lot of contracts which are essentially pass-through. For some of our bigger items, like acrylonitrile or some of our paper for our core, contracts are set up so that we can pass-through costs, including tariffs. That creates a little bit of a natural hedge for us. Most of our aerospace contracts are fixed for the period of time that they're in effect. That does not offer the contract opportunity for raising price. As I said, most of our Incoterms out of Europe are ex-works.

The tariff is the responsibility of the buyer. We can, for some of our bigger commodities, pass through the price, including tariffs, to the customer.

Michael Frank Ciarmoli (Analyst)

Okay. Perfect. And then maybe on the flip side, is there an opportunity to potentially gain some domestic share if these tariffs are making composites from other global suppliers more expensive? I mean, is that kind of in the realm of your thought process right now?

Thomas C. Gentile (Chairman, CEO and President)

It's a possibility, but of course, it depends on what the impact of the tariff is on those foreign sources. At this point, I would say it's still uncertain.

Michael Frank Ciarmoli (Analyst)

Okay. Okay. Got it. I'll jump back in the queue. Thanks, guys.

Thomas C. Gentile (Chairman, CEO and President)

Thanks, Mike.

Operator (participant)

Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead.

Louis Raffetto (Analyst)

Hey, good morning. You have Louis Raffetto on for Myles.

Thomas C. Gentile (Chairman, CEO and President)

Hi, Matt. Hi.

Louis Raffetto (Analyst)

You called out the lower production rates on the A350 as the driver, main driver of the revised guidance. I'm just curious, is this the rates flattening, or are you actually seeing any destocking there?

Thomas C. Gentile (Chairman, CEO and President)

What we're seeing is, in terms of what we're going to deliver, is a reduction of about 16 units. In January, when we had our call for the fourth quarter, I mentioned that we built our plan around an assumption that we would deliver 84 ship sets of material to Airbus in 2025. What we're seeing right now is a demand for about 68 units. If you just take a look at the midpoint of our ship set amount, which is $4.5 million-$5 million, 16 times the $4.75 million is $76 million. Our revenue guidance dropped from midpoints by $85 million-$76 million of that is due just simply to the reduction that we've seen in the A350 production rate. As Patrick said, we've also seen a reduction in the A320 of about 30 units.

If you look at the midpoint of what we said, our ship set value is $350,000. Thirty units is about $10 million. Just the A350 and the A320 reductions and what we're seeing as demand accounts for the $85 million drop in our revenue guidance.

Louis Raffetto (Analyst)

I appreciate that, Keller, Tom. Maybe just to follow up on the corporate expense. Usually, it's a lot higher in one Q. I know you mentioned lower stock comp. I don't know if anything slipped out of the quarter, or should we expect some sort of flattening? Any reason corporate expense will be up year-over-year in the back half now?

Patrick Winterlich (CFO)

No. I mean, essentially, we had one or two credits come through, and there is a stock comp difference between Nick and Tom because of Tom's tenure with the company. That will make a difference where Tom's costs are now going to be spread out. It was two or three things, but the largest thing was really around the difference between Tom and Nick. I mean, the other thing, kind of also picking up on something Sheila said, Q1 is normally our softest margin quarter because we're taking those stock comp charges, which we did again this year. They were just a little bit lower, and that's what you're seeing in the lower corporate charges in 2025.

Louis Raffetto (Analyst)

Thank you, Patrick.

Operator (participant)

Your next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

John McNulty (Managing Director - Chemicals Analyst)

Yeah, thanks for taking my question. Tom, historically, Hexcel has always been very conservative when it comes to kind of its staffing and whether it pares back for temporary changes in orders or production levels from the customers. It seems like you guys are taking a much more aggressive approach. Now, admittedly, the A350 has got a pretty significant cutback. I guess, is this a change in terms of how you think Hexcel should be managed as you go forward and where you're a little bit more nimble? If not, how do you get comfortable that you can ramp up quickly enough when things start to get better?

Thomas C. Gentile (Chairman, CEO and President)

I think we are taking a stronger line in terms of aligning our headcount with what we see current production at and how we see it evolving. That is true. We're being a little bit more, I'd say, practical and realistic in terms of where we are. That said, we remain very well-positioned to support our customers in terms of whatever production rates they determine that they can achieve. We have higher levels of inventory. You can see that on our balance sheet. That gives us a bit of cushion. We also have all the capital in place, so that's not an issue. We're not going to reduce headcount per se, but we're just not going to increase it. We've made a few reductions in Europe of contract labor. In one of our plants in the U.S., we made a small furlough.

For the most part, we're just not increasing, and we're allowing attrition to take place. We're running 300 heads below where the plan was, and we'll stay that way until we see evidence that production rates will increase. With that high level of inventory, we have more than enough cushion to be able to respond to our customers. One thing I want to make very clear, we're not trying to second-guess our customers on their rates and their schedule. We are absolutely prepared to meet all of our customers and the production rates that they put out there. We're just managing our own cost base so that we are not getting ahead of them on that.

John McNulty (Managing Director - Chemicals Analyst)

Got it. Fair enough. No, makes sense. I mean, maybe just as a follow-up on the CapEx reduction, I mean, it looks like you're taking CapEx down by 10% or maybe even more than that. I guess, can you give us a little bit of color as to where that trimming is taking place?

Thomas C. Gentile (Chairman, CEO and President)

It's in a whole variety of areas across dozens of projects. The fact is, if you look at Hexcel between, say, 2008 when we won the A350 program up to 2018, we made massive investments to tool up for the A350 industrialization. Those investments are all behind us, and we're still not using all that capacity. We do not have that sort of capital expenditure. We had $100 million in the plan. Given that this year is soft, we've obviously sharpened the pencil, and we've prioritized the projects. We pushed some things out, and we were able to take $10 million out of the CapEx budget for the year. It was just through blocking and tackling on a wide variety of projects, nothing major or significant.

We also don't have any big capital expenditures in front of us for capacity because all of those were made in the past.

John McNulty (Managing Director - Chemicals Analyst)

Got it. Thanks very much for the call.

Thomas C. Gentile (Chairman, CEO and President)

Thanks.

Operator (participant)

Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Kasen Kieler (Equity Research Associate)

Yeah. Hi. This is actually Kasen Kieler on for Matt this morning. I guess back to the guidance, you talked about the reduction in ship sets on the Airbus side, but could you speak to what you're seeing on the Boeing side and what you're assuming in terms of production rates there?

Thomas C. Gentile (Chairman, CEO and President)

Right. On the Boeing side, for 737, we said that we were planning and building our plan around an assumption that they would be in the low 30s. That is about where we still are. We have not seen a change in that. Boeing is doing very well on their production. They are getting up in rate. They still have that cap of 38 aircraft per month. That will be something really to watch during the course of the year: are they able to get approval from the FAA to go above that? Even if they get above it in the back half of the year, we still think the overall average for the course of the year will be in the low 30s. That has not changed.

On the 787, we built our plan around an assumption of about 84 units of delivery, so roughly seven a month. What Boeing has said is that they are delaying the increase in their rate by three to six months. That could impact 5 units-10 units over the course of the year. Our ship set value is $1 million-$2 million. At $1.5 million, that could be another $7.5 million-$15 million. Those are the assumptions that we have used in terms of constructing our plan.

Kasen Kieler (Equity Research Associate)

Okay. Understood. I guess on the F47 and NGAD and the FAA XX, do you guys have any opportunity to supply those programs in the future?

Thomas C. Gentile (Chairman, CEO and President)

Yes. We do have opportunity. It's still obviously very early. They've just been awarded, and so there have been no decisions made. As you know, we are a supplier for the F35 material. We provide the carbon fiber for that. As Boeing and whoever wins the Navy and NGAD program decide on their material system, we will certainly have discussions with them to advocate that our material system for lightweight composite material would be very suitable for those applications. As I mentioned before, and I think this is important in this context, we are the only U.S.-owned maker of aerospace-grade carbon fiber composite. With everything going on in the geopolitical environment today, having a source that is owned and controlled in the U.S. certainly has its advantages.

Kasen Kieler (Equity Research Associate)

Great. Thanks.

Operator (participant)

Your next question comes from the line of Ken Herbert with RBC Capital Markets. Please go ahead.

Kenneth George Herbert (Analyst)

Yeah. Hi, good morning. Tom and Patrick and Kurt.

Kurt Goddard (VP of Investor Relations)

Good morning, Ken.

Kenneth George Herbert (Analyst)

Maybe you wanted just to drill again deeper on the A350. If you are looking at obviously a step down in about 16 units this year, what's your confidence level in terms of inventory at Airbus or other customer sites that that couldn't face incremental headwind if the ramp at Airbus goes a little slower than expected? I guess, how much inventory do you see in the channel at your customer on this program, and how much of that does the revised guide imply is worked off this year?

Thomas C. Gentile (Chairman, CEO and President)

I think, and what we're seeing is that there is some inventory there, and there's some destocking going on, which is why we built our plan where it is. Our plan and where we built it takes into account some level of destocking that will occur. We're confident. The thing is, as Airbus just reiterated in their recent annual meeting report, they are still planning to get up to 12 aircraft per month in 2028. Of course, that means the ramp is going to be steeper now in these few years to that point. They're confident that they're going to do it, and we are certainly prepared to do it. That creates enormous opportunity for us. I would just say this. I said, on the basis of that, we're going from last year they delivered 57 aircraft.

They're going to get up to 12 aircraft per month in 2028, which is about 132 units. That creates a lot of potential for Hexcel. When you look at that in terms of our cash flow generation capability, we see and expect that we could deliver $1 billion in cash flow over the four-year period between 2025 and 2028, principally on the back of that A350 ramp. That is why we're really so optimistic about Hexcel's position. We're on that program. It's going to ramp up. It has been slow, frustratingly slow to ramp up, but they haven't changed their outlook for 2028. That gives us, as I said, $1 billion of cash flow over the next four years. We see that as very compelling.

Kenneth George Herbert (Analyst)

Yeah. Thanks for that, Tom. As you look obviously at that 2028 ramp, Airbus obviously hasn't been at those levels before on the A350. Is there incremental capacity you have to put in to support 12 a month, assuming Airbus is eventually able to get there?

Thomas C. Gentile (Chairman, CEO and President)

No. No. We're absolutely capacitized for that. In fact, a little bit more. That's where we capacitized in 2019. If you look at it, if you go back to 2019, in fact, the A350 deliveries were about 111, which translates into 10 a month. The system has generated very high levels of production. Everybody does have the capacity. It's really just a question of getting the supply chain stabilized and achieving it. For Hexcel, we are absolutely capacitized to achieve those levels and even a little bit higher.

Patrick Winterlich (CFO)

Remember, Ken, that we're completing a fiber line that we announced pre-pandemic, and that will be online in the next two to three years, which will also give us additional capacity for other sort of military growth opportunities, business jet growth opportunities. As Tom said, we will be comfortable on the capacity footprint for some years to come.

Kenneth George Herbert (Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Gautam Khanna with TD Cowen. Please go ahead.

Gautam J. Khanna (Analyst)

Yeah. Thanks. Good morning, guys. Was wondering, on the A350, given you ship well in advance of final assembly, what are you expecting by the end of this year you'll be shipping at for 2026? What do you think they're going to get to in terms of what they're going to buy at, what rate per month later in the year? I know you've said the impact's biggest in Q2 and Q3 on the negative side, but presumably it picks back up in Q4 in anticipation of higher rates in 2026.

Thomas C. Gentile (Chairman, CEO and President)

The numbers are going to be higher for next year, but I certainly don't want to try to provide any guidance for 2026 at this point. We'll just say right now it'll be higher, and we will be prepared to support it.

Gautam J. Khanna (Analyst)

Okay. I know you have a number of different ship twos on the A350, 40 suppliers or so. Are they all coming down in rate? Are they all kind of, or are you still seeing excess processing or overbuying?

Thomas C. Gentile (Chairman, CEO and President)

Now, it's a little bit variable. You can imagine 40 different supply or plants are at different levels of production. There are some plants that are actually behind, and we see quite a bit of a higher rate at those. Others maybe where they built ahead a little bit, and so we're seeing a lower rate. It really is quite variable across the—it's about 35 locations that we deliver to for the A350, but it's highly variable. The average is what we are building our plan around, which is 68.

Gautam J. Khanna (Analyst)

Gotcha. Thank you very much.

Thomas C. Gentile (Chairman, CEO and President)

You're welcome.

Operator (participant)

Your next question comes from the line of Scott Mikus with Melius Research. Please go ahead.

Scott Mikus (Analyst)

Hey, Tom, Patrick. Quick question. You've been a very good partner to Boeing and Airbus over the years. You've also had to absorb a big inflation headwind over the past several years in addition to just the chaotic aero ramp. Have you approached Boeing and Airbus about repricing some of these LTAs, particularly on the A350?

Thomas C. Gentile (Chairman, CEO and President)

Right. We are under contract, as you know, on all of our programs with our long-term agreements. On the Boeing side, they tend to be a little shorter. When we see those expirations, we have been negotiating with Boeing on price to reflect the current market conditions, including inflation. We have been able to reach mutually satisfactory outcomes on that. On the A350, which is our biggest program, that goes out to 2030 with Airbus. The pricing is locked in. There are some variables due to volume. What we do there is we put in place joint productivity programs where they have to invest engineering resources. We put our own engineering resources in, and then we split the savings. That is how we are able to drive productivity and improvements in those long-term contracts with Airbus.

As you said, it's very important to maintain strong relationships with our biggest customers. We want to support them. They're in a tough competitive situation. At the same time, we are in discussions with them about long-term programs. We want to make sure that we secure positions on the long-range programs as well. A combination of all those things, we do get price when contracts expire. For the longer-term contracts like the A350, we work on joint productivity improvement programs where we can both benefit through our investment.

Scott Mikus (Analyst)

Okay. Europe is trying to essentially rebuild its own indigenous defense industrial base. If you can't sell that Austrian facility at a reasonable price, could you repurpose it to support growth on some of these European defense programs like the Rafale?

Thomas C. Gentile (Chairman, CEO and President)

Not really. The facility in Austria is really aligned better to industrial production. It's a prepreg. So it really was very good for the wind market and the recreation market when those were bigger. It's not really tailored to aerospace-grade carbon fiber and the production of carbon fiber. No, it wouldn't help on the capacity. We have sufficient capacity in Europe to support defense growth, and we would invest in more if the market would justify it. That's an exciting opportunity for us. Because we are indigenous in Europe with production facilities and labor in Europe, we think we're well-positioned to support any increase that the European defense firms decide to take.

Scott Mikus (Analyst)

All right. Thank you.

Operator (participant)

Your next question comes from the line of Gavin Parsons with UBS. Please go ahead.

Gavin Eric Parsons (Analyst)

Hey, guys. Good afternoon. On the cost out, the headcount attrition sounds like that's more just kind of aligning with the new revenue guide for the year, maybe not driving incremental efficiency on a per-head basis. Just want to ask about initiatives to actually improve per-head efficiency and other opportunity to take cost out of non-labor areas.

Thomas C. Gentile (Chairman, CEO and President)

Right. We are investing quite a bit in what we call our Future Factory initiative and continuous improvement. We have got dozens of Lean projects across the plants to drive efficiency and take cost out to improve unit cost. That is really the mechanisms. Basic blocking and tackling at the plant at very defined levels to take cost out to improve the short-term productivity. Longer term, we are looking at digitization and automation and new ways of structuring our production flow that will take even additional cost out and reduce the capital that is required for production. In the short term, it is just dozens of continuous improvement projects with Lean and Six Sigma manufacturing that will take cost out and create efficiency. There is just no shortcut to it. You just have to grind away at it.

Gavin Eric Parsons (Analyst)

Got it. Just a clarification on the tariff impact. The $3 million-$4 million per quarter would be inclusive of reciprocals?

Kurt Goddard (VP of Investor Relations)

No. No. That would be the, as Tom called out, that would really just be the direct impact that we can sort of sensibly estimate today. I mean, when you get into indirect impact and reciprocal tariffs, then you're in another realm of assumption. The $3 million-$4 million is our kind of ring-fencing, giving a magnitude around sort of the direct impact that we can see today.

Thomas C. Gentile (Chairman, CEO and President)

I think that highlights how fluid the situation is. We do not know what the tariffs are going to be by individual country. We do not know if there will be reciprocals. What we have done is analyzed what we know, the tariff by country, what the direct impact is, and that is the $3 million-$4 million. Other things are speculative and will remain to be seen as the situation continues to evolve.

Kurt Goddard (VP of Investor Relations)

I mean, even the $3 million-$4 million has some speculation in it because we don't know where the tariffs are going to settle, but it's a sensible ballpark.

Gavin Eric Parsons (Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of David Strauss with Barclays. Please go ahead.

David Egon Strauss (Analyst)

Thanks. Good afternoon. We've obviously seen a pretty big weakening in the U.S. dollar, and I know that's a negative. I know you're hedged out, but Patrick, maybe give some color around how that could potentially impact as you look to hedge going forward.

Kurt Goddard (VP of Investor Relations)

Our hedging profile will continue as we've done for many years, and that's protecting us to a significant degree today. I think in this quarter, you saw what FX was actually a headwind for us, given our tailwind, I should say, given our hedges that were in place. Now, obviously, if the dollar stays weak for any sort of extended period of time, ultimately, our new hedges will reflect that weaker dollar position. In 12 months' time, our average FX rate will be weaker. Yeah. We will manage it appropriately as we've done for many years. Certainly through 2025, given our previous hedging profile, we're in a good position.

David Egon Strauss (Analyst)

Okay. It looks like your updated guidance reflects 11.5%-12% margins for the full year. Is that right? How?

Kurt Goddard (VP of Investor Relations)

That's the right ballpark. Yeah. Yeah. I would say about 15.

David Egon Strauss (Analyst)

Okay. How should we expect that to kind of ram from here? Do we have the typical seasonal Q3 slowdown or lower margins?

Kurt Goddard (VP of Investor Relations)

As we said, Q1 is often the weakest quarter of the year because of the stock comp charges. That was mitigated this quarter by some slightly lower corporate expenses going through. We also highlighted that Q2 and Q3 are going to be the most significantly impacted by the reduced A350 sales, and so the volume leverage. Therefore, yes, I would expect the margin ultimately to get stronger as the year goes on. We know we have the European vacations, which can impact Q3 anyway. Yes, we would expect a strong sort of improvement in margins as we come to the end of the year, and we see higher volumes going into 2026.

David Egon Strauss (Analyst)

All right. Thanks very much.

Operator (participant)

Our final question comes from Scott Deuschle with Deutsche Bank. Please go ahead.

Scott Deuschle (Analyst)

Patrick, sorry if I missed this, but did you lower your guidance assumptions on 787 at all to reflect the softer start there in the first quarter?

Kurt Goddard (VP of Investor Relations)

We do have slightly—I mean, we called out the A350 and the A320. Those are really the driver of the $85 million. What I would say is we have some puts and takes. Within the puts and takes, the 787 is down, whereas some of our defense business is up to offset it. It is down a bit, but not massively, and it is more than offset. Really, as Tom called out, the A350 and the A320 explain the revenue guidance adjustment.

Right. The adjustment on 787 is really just due to the delay of three to six months that Boeing signaled on the production rate.

Scott Deuschle (Analyst)

Okay. Is there current level of purchase order activity supporting that ramp back up on 787?

Kurt Goddard (VP of Investor Relations)

We saw a softer Q1. Now, we'll obviously see what we do for the remainder of the year, but we're expecting them to kind of somewhere in the 70s for the full year, reflecting that push out that Tom posted.

Scott Deuschle (Analyst)

Okay. Thank you.

Operator (participant)

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.