Hexcel Corporation 2026 Q3 Earnings Call

Hello, everyone. Welcome to Hexcel Corporation's third quarter 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 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. We will be referencing a supporting presentation today that is available on the webcast. In the earnings release and in today's webcast and the supporting presentation, we reference non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the presentation. 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 Jamie Coogan, our Chief Financial Officer. The purpose of the call is to review our third quarter 2026 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 2026 earnings call.

Beginning with slide 4 of the slide deck. Increasing customer demand across commercial aerospace, defense, and space continues to provide a strong long-term outlook for the advanced lightweight material Hexcel provides. As commercial aircraft production rates recover and we work to capture defense and space growth, our focus is on executing the ramp to deliver for customers and capture the significant growth opportunities ahead. As discussed on our previous earnings call, third quarter results reflected the typical seasonality we experience during the summer months with extended European holidays. With a strong demand outlook in Q4 in 2027, we continue to return idle manufacturing lines to production and to recruit new employees to meet the higher production rates.

While restarting production lines and hiring new workers to support the production rate ramp pressures margins in the short term, it positions Hexcel to benefit from greater operating leverage in future periods. Hexcel has a compelling value proposition with a broad and differentiated portfolio of advanced lightweight composite material solutions, decades of technical expertise, vertically integrated capabilities at scale, and long-standing relationships with leading aerospace and defense manufacturers. We are also building relationships with new market entrants, including defense tech, space, and commercial aerospace companies. These strengths position us well as customers increase production and introduce new platforms that drive demand for Hexcel's lightweight, high-performance materials. In the third quarter, referring to slide 5, Hexcel generated sales of $496 million, up 9% from the same period last year. Adjusted operating margins were 11%, up from 9.8% compared to the third quarter in 2025.

Adjusted diluted earnings per share of $0.50 compared with $0.37 in the third quarter of last year. Turning to slide 6, commercial aerospace sales were $330 million for the quarter, up 21% year-over-year. Volumes increased across all our major commercial platforms, including the Airbus A350, the A320neo, the Boeing 787, and the 737 MAX. As we have pointed out previously, Hexcel is an upstream materials supplier and generally ships several months ahead of final aircraft assembly. We manage the business based on production demand and purchase orders we receive, not reported OEM aircraft deliveries. The demand signals we see continue to support the production ramp and our current hiring plans. Consequently, we are reaffirming our financial guidance for 2026, with revenues between $2.025 billion and $2.15 billion, diluted EPS of $2.30-$2.40, and free cash flow greater than $195 million.

Specifically on the A350, purchase orders received through year-end 2026 support our guidance of at least 80 shipsets. Looking into 2027, current demand signals indicate around 100 A350 shipsets. As we prepare for that step-up in production, we will do so with a focus on maintaining the safety, quality, and delivery performance our customers expect. Turning to defense and space and other on slide 7, sales for this market were $166 million for the quarter. The year-over-year decline primarily reflects the previously disclosed divestiture of our non-core industrial business in Austria and closure of non-core industrial operations at our Leicester, U.K., facility. These actions streamlined our footprint and increased our focus on niche industrial markets that value Hexcel's high-performance, aerospace-grade composite materials.

Sales in defense and space were also impacted by temporary softness in space launchers and rocket motors in the U.S. market, a slow quarter for the F-35 program from timing and customer schedule shifts, and a slower quarter for the Rafale from summer sales seasonality. The defense and space market is a strategic priority for organic growth with its compelling long-term potential. Government budgeting, procurement, and program funding can take time to translate into production and ultimately sales, particularly for companies further back in the supply chain such as Hexcel. We have strong positions across rotorcraft, fixed wing, and other programs with traditional defense primes, many of which are expected to be in service for decades. Also, we are expanding our work with new aerospace and defense entrants.

Hexcel's advanced lightweight materials provide the high performance required for defense and space platforms, and we are confident in long-term demand in this market. Taken together, these demand trends across our portfolio support a promising growth trend. As Airbus and Boeing reach their publicly announced peak production rates, we expect approximately $500 million in incremental commercial aerospace sales annually from our existing contracts compared to fiscal year 2025 sales. We also see approximately $200 million of additional growth opportunities across defense and space, regional, and business jets. As these higher volumes move through our existing capacity, we will realize better fixed cost absorption that will generate greater operating leverage. Combined with pricing increases as contracts renew, productivity improvements, and disciplined cost control, the production ramp provides a path to approximately 18% adjusted operating margins before the end of the decade.

We also see potential upside beyond that 18% as we focus more aggressively on pricing that reflects the value we deliver and the barriers to entry that exist to produce lightweight aerospace-grade carbon fiber composite. I have asked Jamie to take the lead on driving a multi-year margin expansion initiative, which we will describe in more detail on future calls. Looking at capital allocation, our cash generation profile allows us to invest in the business while maintaining a strong balance sheet. Following the increase in debt from our accelerated share repurchase last October, we are on track to return our leverage to our targeted range of 1.5 to 2 times net debt to adjusted EBITDA by the end of 2026.

Reflecting confidence in Hexcel's growth and cash generation potential, our board has increased the share repurchase authorization to $750 million from the $381 million remaining as of September 30th of this year. We will evaluate share repurchases once we return to our targeted leverage range sometime during Q4 of 2026. Also, as we announced last night, the board has declared a quarterly dividend of $0.18 per share. On Slide 8, turning to innovation, our team recently attended CAMX, the largest composites and advanced materials show in North America. We engaged with customers, suppliers, and industry partners at the event, demonstrating how Hexcel's advanced materials and vertically integrated operations support growing demand for commercial aerospace, defense, and space platforms. At CAMX, we announced three advances across our honeycomb and prepreg portfolio.

The announcements highlighted how Hexcel innovation enables customers to build next-generation platforms that are lighter and stronger and can be manufactured faster at higher rates. This focus on material and manufacturing innovation supports broader adoption of Hexcel advanced composites and positions us to secure positions on future aerospace and space platforms. The lower image you see on Slide 8 is an aerospace honeycomb that we recently qualified with an aerospace database called NCAM, which is part of NIAR at Wichita State University, which enables engineers at our customers and prospective customers to evaluate design-ready products. This is one example of how we are supporting new A&D entrants as we streamline the process for evaluating and adopting our composite solutions.

To summarize before I turn the call over to Jamie, the third quarter reflected normal summer seasonality, the restart of idle production lines, and our accelerated hiring to meet rising customer demand. At the same time, commercial aerospace sales volumes continued to increase with a 21% increase. The production rate recovery is taking hold, and we are continuing to focus on execution to meet the rate ramps. Our differentiated portfolio, technical expertise, strong global reputation, and deep customer relationships, combined with our global manufacturing footprint, positions us well to capture growth, improve operating leverage, and generate cash going forward. This supports our confidence in Hexcel's long-term outlook and reinforces our 2026 financial guidance. With that, I will turn the call over to Jamie to discuss the third quarter financial results in more detail.

Jamie? Thank you, Tom. I've now been with Hexcel about six months, and as you heard Tom comment, the key priority and focus for me is margin expansion.