HXL

• Positive signs for sustained ramp-up in commercial aircraft production rates, with IATA noting high backlog and delivery shortfall. Hexcel well-positioned due to vertically integrated composite materials. 2025 was challenging but ended positively with upturn in commercial orders. - Actions taken include cost control, business rationalization (exiting non-core markets), productivity enhancements via automation/AI, headcount management (330 fewer positions in 2025), and initiated $350M accelerated share repurchase. - Dividend increased by 6% to $0.18 per share. Welcomed new leadership members. - Focus on defense and space markets with increasing budgets and demand for advanced composites.

2026 sales expected in range of $2.0 billion to $2.1 billion, adjusted EPS between $2.10 and $2.30, free cash flow greater than $195 million. Commercial aerospace growth to be low to mid-double digits, defense to be low to mid-single digits. Impact of divested businesses (Austrian and Leicester U.K. facilities) on sales. FX to be a headwind in 2026. Cash conversion expected to exceed 100% for a period, inventory days on hand to trend lower.

In the fourth quarter, the Composite Materials segment represented 80% of total sales with an adjusted operating margin of 20.5%, while the Engineered Products segment, making up 20% of sales, had an adjusted operating margin of 11.1%. For the full year 2025, full year sales were $1.894 billion. Commercial aerospace sales in the fourth quarter were $299.5 million, up 7.6% from 2024, driven by growth in A320, 787, and 737 volumes. Defense, space, and other segment sales in the fourth quarter were $191.8 million, down 1.9% due to divestment of the Austrian industrial business. Full year commercial aerospace sales included latest generation wide-body (~1/3), narrow-body (~1/3), legacy (~10%), and other commercial aerospace (~25%). Defense, space, and other sales in 2025 had about 1/3 outside the US.

• Foreign exchange headwind due to weaker dollar. - Uncertainties in commercial aircraft production ramp-up affecting margins. - Potential lower production rates than expected impacting incremental margins.

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

A: Right. And so the 8% is a mix of commercial and defense, space and other. Defense, space and other is diluted. For commercial aerospace by itself, growth rate is low to mid-double digits. Assumptions for A350 are about 80 units delivered in 2026, up from 57 in 2025, based on bottoms-up demand forecast contacting 35 Airbus locations.

Q: I apologize if I missed this, but I was wondering in the fourth quarter composite segment, if you could quantify the out-of-period benefits or the one-timers. And then just one of the things we noticed last year is you had pretty high decremental margins, but the implied incrementals look to be kind of like 30 -- mid-30s. Wondering what would be the case for upside? And why shouldn't we think that there could be just given you get the leverage coming back?

A: Incremental margins are mid-30s. Upside depends on commercial build rates. Hexcel benefits from operating leverage as production rates increase towards pre-pandemic levels, which will drive margin improvement. Adjusted operating margin in Q4 for composite materials was 20.5%, and incremental margins can improve with higher production rates on key programs like A350, A320, etc.

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

A: Managing costs overall, with G&A lower than last year. Had hiring freeze and let attrition, ending 2025 with 330 fewer positions. Only starting to hire as evidence of production rate increases is seen, particularly on A350, with plan to start midyear hiring for other areas. Fixed costs in factories are managed, with direct labor being variable cost, and headcount kept low until production rates confirm.

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

A: Mid-guide is low to mid-30s. Upside exists if production rates on key programs (A350, A320, 737, 787) are higher. Hexcel benefits from operating leverage as volume increases, allowing absorption of fixed costs and depreciation, leading to margin improvement faster than revenue growth. Incremental margins could be mid-30s with higher production rates.

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

A: Costs to demothball additional carbon fiber lines are built into the plan. The tailwind from closing Austrian and Leicester facilities is incorporated. ERP implementation costs are in the numbers, with most of it expected to be done in 2026, not material in overall numbers. The facilities were close to breakeven or slightly negative, and closing them helps streamline operations and reduce costs.

Q: Tom, I may have missed it. Did you guys give -- in terms of the revenue guidance, did you give a breakdown or a split by the end market in terms of what we should expect this year between commercial aero and space and defense? And then just any update on sort of the price cost equation? I know some of the main material inputs, notably acrylic nitrile, some of those prices could be coming down. I know you've got the hedging strategy, but any general update there as well and how that may impact margins as we're kind of talking about this incremental margin?

A: For 2026, commercial aerospace will be low to mid-double digits growth, defense will be low to mid-single digits growth. On price cost equation, acrylonitrile is hedged, so price variation is smoothed. As production rates increase and reach peak levels, it will generate $500 million in incremental revenue from commercial sole-source contracts and over $200 million from defense, space, and other, leading to margin improvement towards 18% by end of decade.

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

A: There were no specific unique one-timers. Solid cost control at the end of the quarter contributed, along with lower incentive compensation payout due to 2025 being a light year, which affected margins, particularly in the fourth quarter as it's when true-up occurs.

Q: Tom, this business, Seemann Composites was recently purchased by another public company. But it seems like something that would have been a good strategic fit for Hexcel given that they make advanced composites for aerospace and defense market. I was just curious if -- yes, it's called Seemann Composites. Karman bought it, a space company. I was just curious if that was an opportunity that you had the -- or a business you had the opportunity to look at. And if so, why Hexcel was not a buyer?

A: Not familiar with Seemann Composites. It's not in Hexcel's core markets, so Hexcel did not look at acquiring it.

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

A: On Boeing's MAX, there was significant destocking in 2025, so Hexcel is being more conservative. On Airbus's A350, based on bottoms-up demand management tool and work with Airbus, they are more confident in the 80-unit assumption for 2026. Boeing's 787 is expected to be around 90-100 units, aligning with Boeing's projections.

Q: Sheila, maybe just to start off, just looking at your revenue assumptions, at least some of the shipset content you've helped frame on the commercial aero side, it seems like you're a little higher on Airbus deliveries than folks expect and a little lower on Boeing. So maybe what's driving some of those assumptions? How do you think about just risks to profitability going forward and how we should be thinking about the FX headwind?

A: On Boeing, due to destocking in 2025, Hexcel is more conservative. On Airbus, based on thorough analysis, they are confident in the 80-unit assumption. FX is a headwind due to weaker dollar, but Hexcel has a hedging program, so the impact is muted. The headwind is built into the 2026 plan.

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

A: Hexcel is working on out of autoclave techniques, including improved layup (faster, higher kg per hour), dry layup, reduced cure time (from 12 hours to 3 or less), improved nondestructive inspection, resin infusion improvements, and better joining techniques. These aim to reduce fabrication time, cost, and capital requirements for next-generation aircraft.

Q: Tom, looking at the production rates from Boeing and Airbus, it's clear that it seems like we're beyond the trough and you've got stability and visibility in your business. Now that we're in this better place, I was wondering, can you discuss how you're thinking about the portfolio today? Over time, when you look at your exposure to OE, do you want to expand more into aftermarket? Do you want to expand more into defense or potentially go to more vertically integrated component structure? It'd be helpful to think about where the direction you want to -- you see the business going in the next few years?

A: Immediate focus is on ramping up commercial aircraft production rates to generate operating leverage. Defense is a key growth area, already 35% of business and expected to grow further. While considering aftermarket and vertically integrated components, the immediate priority is executing on production rate ramps and growing in defense markets.