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Thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Sir, please go ahead.

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

Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's Third Quarter 2025 Earnings Call. Our confidence in the growth outlook in the aerospace and defense markets and Hexcel's unique position within the industry remains strong. With Hexcel's broad portfolio of advanced innovative lightweight materials, we are well positioned to meet the needs of our customers as they increase commercial and military aircraft and rotorcraft production rates. We are also working with customers on developing innovative advanced material solutions for next-generation commercial and military platforms. As we look at the opportunities in front of us, the outlook for Hexcel is compelling. At our September Board meeting, which centered on strategy, we reinforced our strategic focus of advanced material science with an emphasis on the aerospace and defense market. This is our North Star as we navigate a dynamic near-term environment and look to take advantage of the medium- and longer-term opportunities in the aerospace and defense industry. The aerospace recovery from the pandemic has been frustratingly slow with numerous start stops for original equipment suppliers like Hexcel. However, we have growing confidence that we are seeing the beginnings of a more sustained ramp-up in production based on our customer discussions and actions as well as what we see in the aerospace supply chain. The demand for fuel-efficient lightweight aircraft is clear. Air traffic has more than recovered to 2019 levels. The backlog for commercial aircraft has grown from 13,000 units before the pandemic to more than 15,000 today. Even with limited availability of near-term production slots, airlines around the world continue to place orders with Airbus and Boeing. As we look at the macro environment for the commercial aerospace industry, we are clearly seeing growing momentum as past supply chain constraints subside. While we may experience some lingering destocking in the fourth quarter of 2025, we expect to exit 2025 fully aligned with the commercial aircraft build rates of our customers and positioned for growth in 2026 and beyond. Positive news developments in the past few weeks further support the rate ramps for each of our key platforms. Beginning with the A350, our largest program, where we provide the entire lightweight material system, anticipated production rate increases by Airbus will be impactful for Hexcel in terms of driving capacity utilization. Airbus is targeting 12 aircraft per month by 2028 on the A350 program. Rising build rates will drive operating leverage for Hexcel and the EU approval last week that allows for the Spirit AeroSystems merger to move forward is another positive data point as those operations become streamlined into Airbus and Boeing. On the A320, Airbus is targeting 75 planes per month by 2027, with the expectation that build rates will be in the 60s in 2026. GE Aerospace just raised their 2025 LEAP delivery guidance for engines, and Safran just announced a new LEAP-1A engine assembly line in Morocco to support Airbus and the A320 program, and that should be operational by the end of 2027. On the 737 MAX, production has reached 38 airplanes per month and Boeing recently received FAA approval to increase to 42 airplanes per month. On the 787, Boeing is now at 7 a month as they target 10 aircraft per month in 2026. Boeing is currently expanding its 787 production capacity in their Charleston facility, so there may be future upside beyond Rig 10. We visited Charleston recently and saw the construction underway. All of these different signs of improving production system stability in the 4 major programs for both Airbus and Boeing give me and our Board increasing confidence that their production targets are now getting traction. This growing confidence, coupled with actions that we have taken to clean up our portfolio, including the divestiture of our plant in Austria, will help us approach the margin levels we enjoyed in the past as production rates increase and drive operating leverage for Hexcel. We are clearly at the start of a multiyear growth cycle for commercial aerospace original equipment production, which will benefit Hexcel given the strong positions that we have on all the major programs. Turning to our financial results. Hexcel generated $456 million in sales and adjusted diluted EPS of $0.37 in the third quarter of 2025. These results are in line with our expectations for the quarter, which we knew in advance would be challenging due to slower seasonal sales and continued destocking by the commercial OEMs. Hexcel's gross margin for the third quarter was 21.9% compared to 23.3% in the third quarter of 2024. This was partly driven by tariffs and our decision to reduce finished goods inventory in the quarter, which impacted operating leverage and margins. As build rates rise into 2026, that increased sales volume will drive operating leverage and margin expansion. Regarding our markets, Commercial Aerospace sales were $274.2 million for the third quarter. Commercial Aerospace declined 7.3% year-over-year on a constant currency basis, primarily due to destocking on the Airbus 350 program and to a lesser extent, on the Boeing 787 platform. That lower volume was partially offset by a 9.3% increase in other commercial aerospace sales driven by regional jet sales growth. Looking ahead to 2026, Hexcel is already seeing increased order activity for the first half of next year from the commercial OEMs, which supports our growing confidence. We experienced continued strength in our Defense, Space and Other segment with $182 million in sales for the third quarter, an increase of 11.7% on a constant currency basis over the same period last year. This growth was broad across several platforms for domestic and international customers that include fighters, rotorcraft and space. As defense budgets in the U.S. and with allied countries around the globe continue to increase, particularly to support the introduction of new platforms, we see continued strength in the underlying demand for Hexcel's advanced lightweight composite materials. Our innovative solutions enable greater range and payload as well as lower observability for stealth platforms. In August, we were honored to host the U.S. Secretary of Labor, Lori Chavez-DeRemer at Our Salt Lake City facility. This is our largest global facility. We produce both carbon fiber and prepreg at this facility, and the site also hosts our newest research and technology center of excellence. This visit was an opportunity to highlight Hexcel's critical role as the only vertically integrated U.S. domiciled manufacturer of high-strength aerospace-grade composite materials for commercial aircraft and defense platforms. It was also an opportunity to showcase our innovation as we develop and deliver even lighter, stronger and stiffer composite solutions that are designed to support high production volumes by our customers. Our innovation is a mix of evolutionary steps by improving upon existing products, such as enhancing the adhesion characteristics of the carbon fiber surface and revolutionary steps such as new resin systems that cure more quickly and at lower temperature to enable greater throughput by our customers. While we see commercial aerospace production rates starting to rise in the fourth quarter and into 2026, we still expect lingering OEM destocking in Q4. Tariffs also remain a headwind. As we look at how the year may close out, we have narrowed our sales expectation to the bottom of the prior range, and we have reduced EPS guidance due to the impact of lower production from lingering destocking and the incorporation of tariffs into our guidance. We have also continued our cost reduction actions as we streamline operations through site rationalization. At the end of September, we completed the divestiture of our Neumarkt, Austria plant, which supplied wind energy and recreational markets using third-party purchased glass and industrial carbon fibers. This action follows the closure of a high-cost facility in Belgium and the divestiture of an additive manufacturing business that was not strategic for Hexcel earlier this year. These actions are part of our broader strategy to focus our operations and reduce our cost profile as we prepare for the upcoming production rate increases in our major programs. As we have throughout this year, we continue to manage headcount closely. In previous calls, we stated that our headcount at the end of 2025 will be no higher than it was at the end of 2024. Our headcount has continued to decrease this year due to attrition and streamlining our operational footprint as well as lagging production schedules until we see clear evidence of increases. At the end of the third quarter of 2025, our headcount was around the levels of year-end 2023 and well below where we ended 2024. Our inventory acts as a near-term buffer for unexpected demand spikes, and we expect to begin hiring again sometime in early 2026. We are comfortable that we will be able to attract and train the workers we will need. We do not ever intend to be a bottleneck for our customers' production. In addition to our cost reduction actions, we continue to drive productivity. This includes our future factory initiative to drive greater unit cost efficiency with more use of automation, digitalization, robotics and artificial intelligence. Along with cost and productivity gains, we will continue to work to realize price. As we have shared before, about 10% to 15% of our contracts come up for renewal annually. As we negotiate new contracts, we are realizing price gains and expanding escalation and pass-through clauses. Once publicly disclosed peak build rates are reached, our existing sole-source contracts with Airbus and Boeing will generate an incremental $500 million of annual revenue. Defense-based business and regional jets are all additive to that number. So the path to sales growth is very clear. And again, the increasing sales drive operating leverage and margin expansion for Hexcel. As we grow back into existing capacity, capital expenditures will remain subdued for a period of time at less than $100 million per year, likely for the rest of this decade. These factors will all drive strong free cash flow generation. We are forecasting to cumulatively generate more than $1 billion of free cash flow over the next 4-year period of 2025 to 2028. With the forecasted production rates finally firming, our primary focus for the immediate future will be executing on the rate ramp, innovating lightweight materials to earn a position on the next generation of aircraft and organically growing our defense business while returning excess cash to our stockholders. Given that the business is generating cash in excess of reinvestment needs, the Board and the management team spend a lot of time thinking about capital allocation. In the past 18 months during my time as CEO, we have undertaken an extensive review of potential inorganic growth opportunities. We have not found any business that meets our stringent and disciplined strategic criteria for M&A, namely innovative advanced material science with an emphasis on aerospace and defense and a return threshold of 15% ROIC or greater. What we do see in front of us is unprecedented and pent-up demand for modern lightweight aircraft. This represents a tremendous organic growth opportunity for Hexcel. While OEM production schedules have been challenged for the past several years, we are seeing the OEMs increase production as the supply chain stabilizes. The individual catalysts for each major program that I mentioned earlier have helped remove obstacles to production rate increases. Hexcel is uniquely positioned in this market as the largest and most vertically integrated aerospace-grade carbon fiber composite manufacturer. Our industry segment has significant barriers to entry given the large sums that we have invested in our material system and production facilities globally. We have industry-leading technology and intellectual property. And most importantly, we have our people, a highly trained and skilled workforce that we know can deliver on the rising demand in front of us with safety, quality and the on-time delivery our customers expect. Our confidence is growing that the ongoing recovery in build rates is at an inflection point to a sustained ramp to peak rates, providing us greater optimism in our sales outlook and future cash generation. Given all these factors, strong cash generation profile driven by significant organic growth that provides us significant volume leverage, combined with cost control and productivity to improve margins and an unmatched position in the marketplace, we believe now is the right time to repurchase Hexcel stock. Since 2013, we have returned more than $1.5 billion to stockholders through share repurchases. In the past 7 quarters, we have repurchased $350 million of shares and retired almost 6% of our float. Yesterday, Hexcel's Board of Directors authorized an additional $600 million share repurchase program, and we also announced an accelerated share repurchase program, or ASR, of $350 million. We will fund the ASR from our revolver, which we will then repay from future cash generation. Launching this ASR now and making a significant repurchase of our stock underscores our strong belief in commercial aerospace production rate increases and our ability to execute with safety, quality and on-time delivery to our customers. We are seeing resolution of major supply chain problems that have plagued the industry the past several years, and we see all the OEMs making solid progress on increasing their production rates. I also want to be clear that we remain committed to a disciplined financial policy. We target a leverage ratio of 1.5 to 2x debt to EBITDA. We plan to repay the ASR borrowings as soon as possible during 2026 to return Hexcel to this targeted leverage range. Now before I turn the call over to Patrick to provide more details on the numbers, I want to comment on the 8-K we just filed announcing that Patrick has accepted an offer to move over to Howmet, a much larger company than Hexcel. I am thrilled that Patrick has this opportunity to work with a company that plays such an important role in our industry. For 27 years, Patrick has been a transformational leader at Hexcel and has helped position our company to capture the opportunities I have described. He has also been a terrific partner in helping me transition into my role at Hexcel over the last 1.5 years. We all wish him great success in his new role. Patrick has agreed to remain as our CEO during a transition period through the end of November, and we've already launched a process with a leading global executive search firm to recruit a world-class CFO to succeed them. So with that, over to you, Patrick, for your final Hexcel call.

Thank you, Tom. I appreciate your comments. Total third quarter 2025 sales of $456.2 million were unchanged year-over-year as strength in defense and space was offset by Commercial Aerospace destocking. By market, Commercial Aerospace third quarter 2025 sales were $274.2 million, representing approximately 60% of total third quarter sales. Third quarter Commercial Aerospace sales decreased 7.3% compared to the third quarter of 2024. While the third quarter is seasonally slower due to summer holidays taken by our customers, 2025 third quarter sales were also impacted by destocking. The A350 program was most impacted, followed by the 787. Sales for the 737 MAX program continued to lag stated Boeing build rates as we expected, though we did see positive progress in the third quarter. For the A320neo, third quarter 2025 sales increased nominally compared to the prior year period. Sales for Other Commercial Aerospace in the third quarter increased 9.3% year-over-year, led by regional jets. Defense, Space and Other represented approximately 40% of third quarter sales and totaled $182 million, increasing 11.7% on a constant currency basis from the same period in 2024. Demand was strong across a number of fighter, helicopter and space programs, both domestically and overseas. For fighters, sales increased for the F-35, the Rafale and the Eurofighter. For helicopters, European demand was strong, along with the Black Hawk, including replacement helicopter blades. And it was a solid quarter for space sales, including launches, rocket motors and satellites. Gross margin of 21.9% in the third quarter of 2025 decreased from 23.3% in the third quarter of 2024 as sales mix, tariffs and inventory reduction actions negatively impacted operating leverage. The lower third quarter sales from seasonality and destocking magnified the underutilization of carbon fiber assets, pressuring margins. As our customers increase production rates, higher sales levels in 2026 and beyond will drive strong operating leverage and lead to margin expansion. So said another way, higher sales levels are critical for us to return to mid-teens margins. As mentioned above, tariffs are also a headwind. We continue to work on mitigation actions and continue to monitor this dynamic regulatory environment. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 12.1% in the third quarter of 2025 compared to 11.7% in the comparable prior year period. Financial and manufacturing IT system upgrades, which we have mentioned previously, along with the impact of wage inflation contributed to higher operating expenses as a percentage of sales. Other operating expenses totaled $8.8 million in the third quarter of 2025, including charges for the divestment of the Neumarkt Austria industrial business and the closure of the Belgium facility. Adjusted operating income in the third quarter was $44.8 million or 9.8% of sales compared to $52.9 million or 11.6% of sales in the comparable prior year period. Foreign exchange has been a consistent tailwind to margins for an extended period of time as Hexcel benefits when the dollar is strong. 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. This foreign exchange tailwind is now beginning to switch to a headwind as the impact of a weaker dollar begins to work into the business. While our third quarter top line benefited to a modest degree from the dollar weakness, particularly from our European military sales dominated in local currency, the operating margin was negatively impacted by approximately 10 basis points. Now turning to our 2 segments. The Composite Materials segment represented 80% of total third quarter sales and generated an adjusted operating margin of 11.2%. This compares to an adjusted operating margin of 14.5% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 15.5%. This compares to an adjusted operating margin of 11.5% in the prior year period. Net cash provided by operating activities in the first 9 months of 2025 was $105 million compared to net cash provided of $127.3 million in the first 9 months of 2024. Working capital was a cash use of $63.8 million in the first 9 months for 2025 compared to a cash use of $93.1 million in the first 9 months of 2024. Capital expenditures on an accrual basis were $49.9 million in the first 9 months of 2025 compared to $59.6 million in the comparable prior year period. Free cash flow in the first 9 months of 2025 was $49.9 million, which compares to $58.9 million in the first 9 months of 2024. Adjusted EBITDA totaled $249.2 million in the first 9 months of 2025 compared to $291.3 million in 2024. As Tom explained, we are executing a $350 million accelerated share repurchase program or ASR. We will fund this repurchase using our revolver. This action will result in leverage temporarily being over our targeted range of 1.5 to 2x. We will utilize subsequent cash generation to repay the revolver and return to our targeted leverage range over the coming quarters. Following the Board stock repurchase authorization of $600 million and after this ASR is concluded, the remaining authorization under the share repurchase program will be approximately $384 million. Hexcel did not repurchase any stock during the third quarter of 2025. I want to reiterate, we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2x as soon as possible during 2026. The Board of Directors declared a $0.17 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November 3 with a payment date of November 10. We have revised our 2025 guidance, as Tom explained. To share some additional color, operating leverage within the business is strong on rising sales, but conversely is a headwind on softer sales, which we are now forecasting for the fourth quarter of 2025. Our reduced EPS guidance reflects the impact of lower production as we work through some lingering destocking in the fourth quarter and our continued focus on inventory levels. Further, we have now incorporated tariffs into our guidance. And finally, the revised earnings guidance includes the impact of higher interest expense in the fourth quarter from revolver borrowings to execute the ASR. We continue to assume an underlying effective tax rate of 21% for the fourth quarter of 2025. Given some discrete adjustments in the first 9 months of 2025, we expect the average adjusted ETR for the full year 2025 to be lower than 21%. We continue to forecast a tariff impact of $3 million to $4 million per quarter, however, the tariff situation remains uncertain. Our regional sourcing helps to insulate us from the direct impact of tariffs and over time, we will continue to work on mitigation and pass-throughs. I would also like to highlight that the divested Neumarkt, Austria industrial business generated just under $10 million of sales per quarter in the first 3 quarters of 2025. The divestment occurred on September 30, so there will not be any sales from the Austrian business in the fourth quarter of 2025 or going forward. The niche value-add industrial market that we will continue to serve will be supported by existing Hexcel Aerospace facilities using existing aerospace assets. When we first issued guidance in January 2025, we had forecasted 2025 sales for the Commercial Aerospace market to be flat and for sales for the Defense, Space and Other market to be flat. As the year has progressed, Commercial Aerospace has been weaker than initially forecasted due to anticipated destocking, particularly on the A350. Conversely, Defense and Space has been stronger. As a result, we are revisiting these percentages. 2025 Commercial Aerospace sales are now forecasted to be down mid- to upper single digits and Defense, Space and other sales are now forecasted to be higher by mid- to upper single digits on a percentage basis. Consistent with past practice, we provide annual guidance during our fourth quarter and full year earnings call. To reemphasize what Tom already covered, we expect to exit 2025 strongly positioned for growth as we anticipate being generally aligned with our commercial aerospace customer build rate. Sales growth will drive operating leverage and margin expansion in 2026 and beyond, supported by continuing price realization, productivity gains and cost control. Lastly, as I close out my 33rd and final earnings call for Hexcel, I would like to take a couple of moments to express my sincere gratitude to this great company. Companies, as we all know, are ultimately a collection of people aligning to achieve a common goal. And I have been honored to work with so many wonderful people over my 27 years. I cannot thank them enough. I now look forward to joining Howmet and starting what I believe will be an incredible new journey. However, I know for certain, I will never forget my amazing colleagues at Hexcel. With that, let me turn the call back to Tom.

Thanks, Patrick. To close, while the third quarter reflected near-term headwinds, the strong-term fundamentals for Hexcel remain exceptionally strong. The Commercial Aerospace backlog is at historic levels. Defense spending continues to rise globally and the Aerospace and Defense supply chain is finally ramping to support build rate increases. Hexcel is uniquely positioned to capitalize on this momentum. Our unmatched portfolio, deep customer relationships and global manufacturing footprint give us confidence in our ability to deliver accelerating growth over the coming years. We expect to generate over $1 billion in cumulative free cash flow over the next 4 years. That cash flow will support continued investment in innovation, and we will continue to evaluate returning cash to stockholders as demonstrated by the new share repurchase authorization of $600 million and the $350 million ASR that we just announced. We believe the recovery in build rates is real and sustainable. Hexcel is ready to meet that demand and deliver long-term value for our stakeholders. Tiffany, we're now ready to take questions.

[Operator Instructions] Your first question comes from the line of Myles Walton with Wolfe Research.

Congratulations, Patrick, on the move and good luck in the search, Tom. In the context of the $500 million growth that you're looking for at manufacturer production rates, Tom, can you talk about -- I think that implies maybe $1 billion of Airbus revenue out in that time frame. How much of that should it be -- or how much higher should that be if you actually had contracts that allowed for inflationary pricing to have escalated during the last decade?

Well, the good thing about the Airbus contract that we signed in 2008 for the A350 is that it was a long-term contract, and it gave us the confidence and foundation to make massive capital investments to industrialize for the A350. And we extended that contract in 2016 to go all the way out to 2030. Now as you know, the production rates ramp very quickly up through 2018, 2019, they peaked. We delivered 112 A350s in 2019. And our overall revenue that year was $2.355 billion and the margins were 18%. Now since that time, the pandemic hit, volume dropped quite a bit, and we also experienced a lot of inflation. Now where we are today, we're not getting volume leverage across the board. And we've absorbed a lot of that inflation on some of our long-term contracts, particularly with Airbus. When we get back to the $2.35 billion of revenue, probably sometime in the next couple of years, our margins are going to be a little bit curtailed. They'll be at about 16%. So about 200 basis points of headwind from the inflation is really what the impact is. Now when we get the full impact of the $500 million from all of the targets across the major programs, we think that will get us back to 18%. But obviously, we would like to do more than that, and that's why we're driving our productivity projects. So to summarize, the impact of the inflation that we've absorbed over the past couple of years is about 200 basis points, and we're working to offset that.

Okay. And Patrick, one financial one for you. The debt or interest costs we should plan on for '26 in light of the ASR, is it close to $50 million or so?

50, Did you say 5-0? I mean, it should be a lot less than that. And the debt will decrease quite rapidly after the first quarter. The first quarter will probably be a cash usage, it's normal but then we should see the debt coming down quickly as we generate free cash flow next year. So you can assume the revolver about 5.5% interest rate as that balance reduces through next year.

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

Maybe just to stay on both of those topics. Tom, I think you said getting back to that 18%. I mean, so is it reasonable to think that incremental margins can be in that, I guess, implied 40% plus range to get back to that 18%? I mean, is there going to be any disruption with labor add-backs? Or do you think you have more confidence in pricing along the way with -- I think you said 10% to 15% of these contracts renew and then you probably have that bigger renewal out in 2030 with Airbus. But is that the right way to think about incrementals?

Yes, yes. I mean the way I would say it summarize is that as the volumes increase and as our revenue goes up, we're going to get a lot of operating leverage. And we're not going to have to make a lot of capital investment to get there. you always have to offset various things, inflation and productivity and potentially other costs like utilities or logistics. But that's what your productivity programs have to offset. But the biggest driver for Hexcel is that as production rates increase and our revenues go up, that drives an incredible amount of operating leverage, which will create the enhanced margins and the recovery back to the 16% first and then 18% as we get the full impact of all the target rate reductions across the major programs.

Okay. Okay. And then just on the ASR, I mean, maybe a little bit of dilution out of the gate but it sounds like that should be paid down if you're carrying a portion of that interest expense here in 4Q, maybe a full $5 million in 1Q and 2Q but then you're obviously going to have the cash generation. So that should kind of eliminate some of that interest headwind and shouldn't really be dilutive on a full year basis for '26?

It should be positive on a full year basis. So we'll take out 80% of the share count basically on Monday or tomorrow or Monday when those 80% of our shares are surrendered. So you'll have 2/3, 2 months out of 3 this quarter will benefit from that reduced stock count of what, 4 million, 4.5 million shares, I would guess. And then you'll have that benefit offset by the interest charge next year. But I would assume there would be a net benefit to 2026 overall as the debt gets paid down quickly.

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

I guess just following up on the margin question. In 2026, if Commercial Aero revenue is higher than it was in 2024, can margins also be higher?

They can, yes. We have work to do to offset some of the natural inflation that we see normally but that's certainly the goal.

Okay. And then, Tom, I guess, as you plan for 2026, obviously, the supply chain has been pretty lumpy. A350 increases have been set back. How do you think about possible contingencies if destocking does continue longer than you expect? So maybe it's not as operationally disruptive to Hexcel as it was this year?

Well, what we've been doing is lagging a little bit more in terms of the demand, waiting to see it materialize before we go ahead and hire the heads. And we'll continue to do that. We have a lot of inventory, so we can cushion any potential unexpected increase in the short term. But that's really the primary way we've been managing it and cushing it is one is set realistic expectations, lag the growth in terms of when we actually hire and use our inventory to make sure we have a proper cushion for any unexpected demand.

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

Patrick, congrats.

Thanks, Scott.

Tom, you referenced the LTA negotiations and historically, your LTAs have included language where some of the productivity benefits are shared between Hexcel and its customer. So as those agreements come up for renegotiation, are you making sure that you get to keep a larger share of the productivity benefits going forward?

Well, we always want to keep as much as we can. That's for sure. But at the same time, you've got to make sure any negotiation ends up being a win-win. And a lot of the productivity projects that we drive do require engineering resources from our customers. And so you want to make sure you can obtain those resources. So yes, the goal is always to make sure we get a fair return on the investments that we make and the value that we deliver but also recognizing that we want to make it -- we want to facilitate the fact that we need some help and engineering from our customers.

Okay. And then we've seen some airlines complain that the A321 XLRs range is a little bit shorter than advertised and they produce their orders. But just given that your material reduces the weight of the aircraft, is there an opportunity for Hexcel to potentially increase its content on the A321 XLR if Airbus were looking to extend its range?

Well, lightweight materials always help, and there's always an effort to look at material substitution and to change out higher weight materials for lower weight materials. Those efforts are ongoing. A lot of the ones, I'd say the low-hanging fruit has already been captured. So there's probably limited opportunities to, frankly, to change it on the existing aircraft but a lot of opportunity on the next generation. The A321, all the versions, the 19, the 20, the 21 LR, XLR, et cetera, are only 15% carbon fiber composite. The A350 is 50%. so the next-generation narrow-body will for certainly be much higher ratio of carbon fiber composite lightweight going forward. But the current aircraft, probably most of the material substitution has already been captured.

Your next question comes from Ken Herbert with RBC Capital Markets.

And Patrick, let me extend my congratulations as well, and thanks for the help over the years. Maybe -- yes, first question, Tom, last quarter, you were pretty explicit in terms of expected delivery schedules on some major programs. It looks like the guidance maybe implies about 5-ish A350 units were pushed out of the fourth quarter. Can you just talk about if we're thinking about that appropriately? And specifically, maybe you sound very confident in the exit rate on that program this year, sort of where you expect to be exiting this year as you think about that program?

Yes. I think that's about right, Ken. What we're seeing is that Q4 is a little bit lighter than we thought. We only had about 5 aircraft per month full in Q3. And Airbus has gone to 7 aircraft per month now. That change has been made, but it's not necessarily flowing all the way down yet. And so as a result, the orders for Q4 were a little bit lighter than we expected. Now that said, the orders going into 2026 are stronger than we expected. And so that, again, gives us confidence in this rate ramp really taking traction. Airbus is at 7 now. They're supposed to go to 8 sometime in the middle of the year and maybe even get to 9 aircraft per month by the end of the year is the current schedule. But yes, it was a little softer in Q4, but the orders going into 2026 are actually higher than we expected. So that's very promising.

That's great. And with the tariff impact, is there any opportunity to recapture to call back some of those incremental costs at some point in the future?

Yes, there are. There's a couple of different provisions if the goods are for export or if the goods are for military use. There's lots of different areas that we can push and pull to try to recover, and we're doing that. It's just -- those are a little bit more longer term and the impact, the dollars that we pay out are right now, and that's been about $3 million or $4 million a quarter. But we do hope to recover some of that as we go forward and frankly, to shift some of our foreign supply to domestic sources to avoid the tariffs.

Your next question comes from John McNulty with BMO Capital Markets.

Patrick, again, congratulations on the move. So I guess I was hoping you might be able to quantify or give us a little bit of an idea of how big do you feel like that inventory cushion that you have actually is? Is it a couple of months? Is it a couple of quarters? Yes, I guess as you're thinking about the ramp going into 2026, I'm just trying to get a better understanding of that cushion.

Yes. Well, we've been running pretty high on inventory the last couple of quarters, over 100 days, north of $400 million total amount. And that's down to about 90. Back in the 2018, 2019 time period, it was more like 70 days. So we've got a 90-day cushion on inventory but it should more in kind of static terms and steady state, be more like 70%. So that's the goal. So that's where we are. We do have that inventory. We've been burning it down, and you saw some evidence of that in this quarter. By burning down some inventory, we had some absorption impact, and that impacted our margins a little bit.

Got it. Okay. Fair enough. And then I guess when you're thinking at least as of now about the ramp for your customers next year, I guess, how much in terms of labor will you have to be adding? Because it does sound like you've drawn it down a decent amount this year. And it almost feels like you're trying to thread a pretty small needle here with letting labor come down and only to basically rehire or hire next year. So I guess, can you help us to think about that?

Right. Well, we're really right now starting some of the hiring in Europe in Q4 because we see this very high strong demand that has come in for 2026. And we'll be hiring in the early part of '26 and really throughout the years -- throughout the year in order to align to production rates. So we know how much labor we need for the production that's on the books, and we'll be hiring that. As I said, some of that hiring has actually started in Europe in Q4, and it will continue into the first part of 2026.

Your next question comes from the line of Pete Skibitski with Alembic Global.

Congrats, Patrick. I guess maybe, Tom, you could talk more about Space and Defense, just the growth you've seen over the last 2 or 3 quarters. Does it feel like this is the start of kind of this European secular defense spending trend? Or are we not there yet? And I was wondering, should we expect a pretty big ramp on the CH-53K as well now that Lockheed got the full rate production contract?

Yes. Well, on Europe, I mean, honestly, we saw growth in Europe at European Defense at about 18% for the quarter. So that was very strong. And I think it is an indication that we're really seeing defense spending in Europe increase. Obviously, they had 1% of their GDP historically, and they've committed now to 5% going forward. So there's going to be a massive ramp, and we've seen that with a lot of the companies in Europe. And an example of a program is the Rafale program. It's been around a long time, but France has said that they are going to be increasing production of the Rafale in the coming years to meet the demand for European defense. And we have a very big position on the Rafale. So that's going to bode well for Hexcel. So the answer to that is yes. European defense is growing, and we expect it to continue growing, and we're going to be doubling down on that. Now with regard to the CH-53K, this was probably a bit of a softer quarter, Q3 on the CH-53K but you read that Lockheed signed a $10 billion deal with the Navy and the Marines to deliver 99 units that will take it out to 2032. So that is a great sign of confidence in the CH-53K program. And so we have a very large position on it, $2.5 million to $3.5 million per ship set. And so we're very excited about that program, very excited about this multiyear deal that Lockheed and Sikorsky were able to sign with the Navy and the Marine.

Tom, just one more program, the F-35, just because Lockheed got the Lot 18 and 19 contracts definitized. Is that pretty steady state for you guys? I know it's a big program for you as well. Is that pretty steady state for you guys for a while?

It is. They've been producing at about 156 aircraft per year. I think this year, they might do 170 to catch up a little bit. But in general, at 156 is a good steady state amount, and that will go for years and years to come. So that's what we will see is a little bit of an uptick on sustainment. Some of the materials that we make for the F-35 are consumable based on usage and flight legs. And as the fleet grows and they fly more, that will drive a little bit more of that material sales for us.

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

Patrick, congratulations and Tom, good luck. And maybe, Tom, if I could ask you on the first question Myles asked going back to that. Just the $1 billion of free cash flow over the next 4 years on an additional $500 million of revenue, assuming that 35% incremental historically holds, it still assumes some working capital lift. Can you maybe talk about how we should think about inventory unwind from here?

Well, the goal is to continue to drive it down. We've been running heavy on inventory because sales have been lower, and we produced, and we're managing that now a lot more tightly. And so the goal is we're, call it, 90, 95 days of receivables on hand and the goal is to drive that down into 70. That's more of a steady state for us. And if we can do better, we will but that's the target right now on inventory. So we will be winding inventory down in the coming quarters.

Got it. And then if I could just ask on the margin commentary for '25. How do we -- I know you didn't have a direct margin guidance but as we think about the implied margins, it seemed like they're down 100 basis points versus the prior guide and the tariffs were about 60. So what could you attribute the remainder of that to?

A little bit of it was this inventory drawdown, which is absorption for us. So as we don't produce and take out of inventory, that creates some pressure on our operating -- and so that was part of it. We also, as we've mentioned in previous calls, have been investing in a new ERP system, Microsoft D365. And the implementation of that is a little bit of a hang. And then just the lower volume in general because of the destocking and some mix changes and kind of the combination of all that is what weighed on the margins this quarter.

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

Congrats, Patrick.

Thanks, Gautam.

Guys, I may have missed it, but can you update us on what the A350 equivalent shipments are expected to be this year? Previously, I think you were saying low 60s. And I just want to make sure I understood what happened in Q3 and...

That's not -- 60 is the right number. We started off much higher. Our original plan was 84, and that dropped after the first quarter to 68. We're staying about 60 right now.

And your best guess, given what you know now about 2026 equivalents would be?

I'd say in the 80 range.

Okay. And to your point, you already have kind of capacity, labor, et cetera, to meet that rate. So in theory, the incrementals next year could even be -- I know you answered the question on 40% but could they even be higher given the absorption?

You always have other factors that you have to offset. But there's no doubt that as those production rates, particularly on the 350 go up, we get better operating leverage and that drives higher margins.

And last question just on tariffs. Previously, I think you said $3 million to $4 million a quarter, and I just wanted to know what is in the 2025 guide aggregate tariff headwind?

That's what we've incorporated into the updated guidance is that amount.

And is that's for 3 quarters or for 2?

Yes. Yes, right. And then I mean, if you look at it, basically, it's about $0.10 of EPS. So we dropped our midpoint on EPS from $1.95 to [ $1.75 from $1.95 to $1.75. ] And so $0.10 of that was based on the tariffs.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Patrick, let me add my thanks for all your help over the years.

Thanks, Noah.

If I look at consensus right now, it has total company revenue up 12% full year 2026 versus 2025. Is that kind of growth directionally achievable? Or does the aerospace new build destock last long enough into '26 to make that look steep?

It probably looks a little bit steep. I don't think -- we're confident that we've reached the inflection point and it's going up but I don't think we want to overcall it. I think we want to be conservative in terms of what that outlook is. So it's definitely going up, and it will be a healthy increase but 12% is a little aggressive, and we'll see where we end up. But I think we'll also be conservative in our outlook of what we plan for and build and wait and see the increases happen before we get too far out in front of it.

Okay. That makes sense. And Tom, at a high level, if I look across the aerospace supply chain and I take the 2025 operating margin versus the pre-pandemic, the 2019 -- there aren't that many suppliers that are down, a lot are similar and a lot are up considerably, and Hexcel is down. What do you attribute that to? And I know you have some pretty significant contract renegotiations over the next few years. Are there things you're looking to change in your contract terms with your customers to improve the profitability protection in the case of downturns and industry disruptions?

Yes. Well, first of all, let me answer the first question. The reason our margins are down and maybe others in the industry aren't down is we are mostly original equipment and others have more aftermarket. If you look at the industry, air traffic dropped 96% in April of 2020. and it recovered fully within 4 years. But production peaked in 2018 at 1,734 units. Last year, we were only at 1,230 units, only 75%. So while air traffic increased, production didn't. And probably 3,600 aircraft that should have been built in that period weren't built. And that meant that the fleets were older and people had to spend a lot more on aftermarket. So anybody who's had aftermarket exposure has done extremely well. For better or worse, Hexcel makes material that goes into structures that don't wear and don't have a lot of aftermarket. And so the fact that we are so heavily tilted toward original equipment for commercial aerospace and that production is only 75% recovered. And by the way, only 50% recovered on widebodies, that explains why our margins are still down and others are higher because they have this great aftermarket exposure. But as the production rates increase, we will get huge amounts of operating leverage. And that's why the next 4 or 5 years for Hexcel are going to be absolutely great because we're going to benefit from the $500 million of incremental annual revenue and the increased cash flow that, that will generate. So that's what I would say. And then in terms of the contracts, yes, the contracts as we go forward, first of all, they won't be longer. The 22-year contract is not what we're going to be looking for. And we'll also have more tiered to volume. So as volume goes up and volume goes down, the price will change. We'll probably also look at more pass-throughs on costs that we can't necessarily control some of our resins or chemicals and products like that. So the contracts will be more sophisticated to reflect a more dynamic environment that we face today that we didn't face back in 2008.

Your final question comes from Scott Deuschle with Deutsche Bank.

Tom, just to clarify your response to Ken's question, do you expect to enter 2026 at 7 a month on the A350?

Yes, we do. They're there. A little bit of destocking in the fourth quarter, but they'll have a couple of months under their belt at 7, and we expect to enter '26 at 7 going to 8 and possibly 9 by the end of the year.

Okay. And then, Patrick, can you offer any quantification as to what the FX headwind that you flagged in your prepared remarks could look like going forward? I'd imagine it's fairly immaterial, but I just want to check on that.

Well, it was very immaterial really in the fourth quarter, just 10 basis points, as I called out, the hedging mechanism that we have in place and have had in place for many years smooths the peaks and the troughs. We are at this cusp of a turning point from a strong dollar to a weaker dollar, so into a slight headwind now into 2026. But again, I wouldn't overstate the 10, 20, 30 basis points maybe in 2026 but it all depends on where the dollar now moves.

Okay. And one last question, if I could. I mean, Tom, if you see value in the stock today, just trying to understand why you didn't buy back any in the third quarter when the stock price was 20% lower than it is right now. It would have been.

A $350 ASR. I think that's my response.

We have time for one more question from Richard Safran with Seaport Research Partners.

Patrick, wish you all the best. It's been a pleasure. Listen, Tom, I know you're coming off of facilities in Austria, Hartford and Belgium. I was just wondering if you're contemplating any further changes in the portfolio.

Well, we're always looking at the portfolio to figure out how to streamline and optimize it. And so there could be a few more things that we do. These were the big ones, but that's an ongoing part of our normal operating cadence. And so we're going to continue to look at that and figure out how do we optimize so that we get the best cost and make sure we're focused on the strategic priorities. And the #1 priority for us in the next few years is making sure we can ramp up to meet the production rate increases for our customers, the safety, quality and delivery. That's our #1 priority, and we'll continue to optimize the portfolio to help achieve that.

Okay. And on the -- just quickly on the buyback. I was just accelerated buyback. I just wondered what drove the change in capital deployment strategy? It seems a bit out of character. And should we take that in the future, you're going to do more of these with the $1 billion you're anticipating over the next 4 years?

Well, the answer to that is yes, we'll continue to look at that, and it will be a top priority. I think what changed is a couple of things. One is we're looking at the market and the market clearly is at an inflection point and the rates are going up. So we now have great confidence in that. Secondly, as I mentioned, our capital deployment strategy has always been fund productivity, fund R&D to get on the next generation of products, fund organic growth and then look at inorganic growth. Well, we look hard. We did a very comprehensive search. We didn't see anything out there that met our strategic priorities or our return threshold. And so we said we've got all this excess cash that's coming. The best investment in aerospace right now is Hexcel, that's where we put our money. And that's why we did the ASR, and that's why we made the reauthorization as big as it is so that we could do more in the future once we pay this one down and get back to our target leverage ratio.