Hexcel Corporation (HXL) Q2 2026 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to Hexcel's Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Kurt Goddard, Vice President, Investor Relations. Sir, please go ahead.

Hello, everyone. Welcome to Hexcel Corporation's Second Quarter Earnings Conference Call. Before beginning, let me cover the formality. 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 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 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 second 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 Second Quarter 2026 Earnings Call. With us today for his first Hexcel earnings call is our new Chief Financial Officer, Jamie Coogan, who joined Hexcel in early May. Jamie brings extensive financial leadership and broad experience across aerospace and defense as well as industrial manufacturing. We are excited to have him on board as we grow Hexcel. Jamie has hit the ground running, visiting our global operations and meeting with investors, analysts, banks and getting up to speed with our customers and supply chains, many at last week's Farnborough Air Show. You will hear from Jamie shortly. As you read in the earnings release we issued yesterday, Hexcel delivered another strong quarter with solid performance across the company. With the ramp-up in commercial aircraft production across all the major programs now firmly taking hold, our operating leverage continues to strengthen from higher volumes combined with strong execution from our team, which is leading to higher margins and stronger cash flow. Coming out of the Farnborough Air Show last week, the near, mid- and longer-term commercial aerospace trajectory looks bright. Industry fundamentals remain compelling with the backlog of commercial aircraft at more than 18,000 units according to data from IATA, including an estimated unmet demand of more than 5,000 aircraft because of the post-pandemic supply-demand imbalance. Air traffic across most global regions continues to be strong despite the conflicts in Iran. At the Investor Day at the Farnborough Air Show, Airbus was particularly bullish on the A350, Hexcel's largest program. Against this backdrop, airlines continue to need newer, more fuel-efficient aircraft, and that aligns directly with Hexcel's value proposition. With fuel costs remaining elevated and volatile, lightweighting is even more critical in driving fuel efficiency, directly supporting demand for our advanced lightweight composite materials. Before turning to our second quarter results, I want to briefly address the situation in the Middle East. We continue to monitor developments closely and remain in regular contact with our customers and suppliers. To date, the impact on our business has been minimal. Our hedging strategy and disciplined approach to managing key cost inputs have helped mitigate near-term input price volatility, and we will continue to take prudent steps to protect the business going forward as we all hope for a timely resolution to the Iran conflict. Turning to our second quarter results. Hexcel generated sales of $529 million in the second quarter, up 8% from the same quarter last year. Adjusted earnings per share of $0.66. Gross margin improved again year-over-year as higher sales volume generated greater operating leverage through improved cost absorption, which resulted in adjusted operating margins of 13.9% compared to 11.1% in Q2 2025. In our commercial aerospace market, sales were $346.6 million for the quarter, an 18.3% increase over the second quarter of 2025. Rising volumes on the A350 and 787 programs drove growth in this market, while narrow-body sales also increased year-over-year with the Boeing 737 MAX, the Airbus A320 and the 220 programs, all increasing. Sales from other commercial aerospace increased 3.7% over the same period last year, led by regional jets. As we look across the business at this point in the year, we are clearly experiencing strong demand for lightweight carbon fiber as the recovery in OEM production rates continue. Recent production data reported by Airbus and Boeing highlights steady progress in output across the major programs, even as the supply chain environment remains dynamic. The rising production rates reinforce our confidence that the industry is moving forward toward a more sustained production ramp. As we have discussed before, as an upstream material supplier, Hexcel is generally shipping around 4 to 6 months ahead of OEM aircraft assembly. So we manage the business based on production demand, not reported delivery. The purchase orders we are receiving, together with our bottoms-up demand planning continues to support our outlook. When Airbus and Boeing ultimately achieve their publicly stated peak build rates on the major commercial programs, that will generate $500 million in incremental annual sales for Hexcel from our existing contracts. In addition, we expect about $200 million in incremental sales in Defense & Space before the end of the decade. This continued recovery in commercial and military production rates will create improved volume leverage for Hexcel. We have a path to 18% adjusted operating margins as the OEM and defense primes reach their target production levels for each program before the end of the decade. On the A350 program specifically, we continue to see demand signals that support our outlook of 50 -- or excuse me, 80 shipsets in 2026. While there can be a perceived disconnect at times between our order profile and current OEM deliveries, our demand is tied to production activity in the supply chain, and we remain confident in our 2026 A350 guidance of at least 80 aircraft. During the Farnborough Air Show earlier this month, Airbus publicly confirmed that they are producing at a rate between 8 and 9 aircraft per month. We do see some potential upside to our 80 aircraft guide based on purchase orders we've already received and in relation to the continuing dialogue we are having with Airbus. Also, we now have firm orders from Airbus through the end of 2026 that confirm at least the 80 shipsets for the A350. To meet increasing demand for Hexcel's advanced lightweight composite material in the second half of 2026, we will be accelerating hiring and bringing back online carbon fiber lines previously idled during the pandemic. Additional volume improves utilization of our existing asset base and drives further operating leverage, supporting margin expansion and the path to 18% operating margin before the end of the decade. Turning to the Defense, Space & Other market sales were $182.7 million in the quarter or lower by 7%. This sales decrease is primarily a result of lower industrial volume given the strategic actions we have taken over the past year to deemphasize this portion of our portfolio with the divestiture of our business in Austria and the restructuring of our industrial business in Western England. As we noted in our first quarter call, the Defense, Space & Other market can be choppy quarter-to-quarter due to the nature of Defense & Space spending and production timing, particularly for high-value but low-volume platforms. That said, Defense & Space remains a significant priority for Hexcel and a priority market for organic growth. We have existing positions on most current military programs that utilize lightweight composite materials and long-established relationships with leading global defense contractors. Also, we are continually engaging new entrants in the defense market as well as what are commonly referred to as new space entrants. This is a burgeoning market where advanced lightweight composite materials provide the necessary performance characteristics for those platforms to operate in extreme environments. Our advanced composite materials play a critical role in enabling greater payload, extended range and enhanced performance characteristics including load survivability across Defense & Space platforms. With our vertically integrated global footprint, Hexcel is uniquely positioned to support this market across regions. We are the only vertically integrated U.S. domiciled manufacturer of high-strength aerospace-grade composite materials for commercial aircraft and Defense & Space platforms. Additionally, our vertically integrated operations across Europe provide access to ITAR-free capabilities as well as secure and sovereign access to advanced lightweight composite materials for customers outside the U.S. For all these reasons, we are optimistic about the long-term prospects in the defense and space market. We expect growth from Defense and space, along with regional and business jets to provide Hexcel with an estimated $200 million of incremental sales growth this decade. Longer term, we see accelerating growth in our defense and space market. With that, turning to capital allocation and guidance. Our balance sheet and liquidity position remained solid in the second quarter, and our capital allocation priorities remain unchanged. We intend to continue paying down debt with the goal of returning Hexcel's leverage to our targeted ratio of 1.5x to 2x net debt to adjusted EBITDA. We remain committed to paying a dividend. And after we return to the targeted leverage level, we are committed to returning cash to stockholders absent any inorganic opportunities that meet our strategic thresholds and return targets. Given the continued recovery in production rates, we announced in yesterday's earnings release that we are increasing our full year 2026 guidance for sales and adjusted earnings per share. We now expect sales in the range of $2.025 billion to $2.125 billion compared with our previous range of $2 billion to $2.1 billion. We are also raising adjusted EPS guidance to a range of $2.30 to $2.40 compared with our previous range of $2.10 to $2.30. Our guidance for free cash flow remains unchanged at greater than $195 million, and CapEx remains unchanged at less than $100 million. The sales increase reflects expected upside to some of the commercial aerospace platforms, including the A350 and the 737 MAX. We are raising guidance with an appropriate degree of balance. The second half of the year will include typically seasonality in the third quarter as well as some increased hiring and start-up costs as we accelerate bringing additional capacity back online. Even with those considerations, the underlying demand profile and the operating leverage in front of us support a stronger outlook for the year. In addition, we will continue hiring in the second half of the year and we'll start up an additional carbon fiber line to be ready for the production rate increases that we expect in 2027. Now turning to some notable events for Hexcel during the second quarter. Our team received recognition from a number of customers that highlight the value we deliver and the strength of our long-term customer relationships. Embraer named Hexcel its Best Supplier of the Year in its standards and materials category for the second consecutive year. Airbus recognized Hexcel with its Accredited Supplier Award, the highest distinction within the Airbus Supplier Quality Improvement Program. And IHI in Japan recognized Hexcel with the Supplier of the Year award. We are honored to receive these recognitions from our customers. This recognition reflects the dedication of the Hexcel team and our continued focus on quality delivery and operational excellence. Also during the quarter, we made a number of significant announcements. In May, we announced the groundbreaking of the Hexcel Application Center at Wichita State University's National Institute for Aviation Research, NIAR. The new center expands our long-standing collaboration with NIAR and supports innovation in composite materials, automated processing and aerospace manufacturing, which are all foundational research and development areas to grow composite adoption across aerospace platforms. In June, we announced a long-term industrial partnership and supply agreement with Deutsche Aircraft for advanced composite solutions for their next-generation regional turboprop, the D328eco. And last week, our team attended the Farnborough International Air Show, where we had the opportunity to engage with the industry including customers, partners and other key stakeholders. During the airshow, we made a couple of key announcements. First, we announced a series of new and extended long-term agreements with Boeing, reinforcing our collaboration with them across commercial, defense and space programs. In addition, we announced that we have completed qualification for our HexPly M91 carbon fiber reinforced epoxy prepreg system through the National Center for Advanced Materials Performance, NCAMP, an initiative through NIAR that makes this product available more broadly. The NCAMP database is particularly helpful to new A&D entrants as they can readily access the performance data to assist in their material selection. Overall, we are encouraged by the demand we see for Hexcel's advanced lightweight material solutions across commercial aerospace, defense and space. Our broad, differentiated product portfolio, technical expertise and innovation, customer relationships and the vertical integration across multiple regional positions enables Hexcel to serve these markets well as volumes continue to rise. Against this backdrop, we are confident in the strategic priorities we have set for the company, executing on the commercial rate increases for our OEM customers, investing in innovation to secure positions on next-generation aircraft, capturing organic growth opportunities in defense and space and deploying capital in a disciplined way. Our team is well positioned to deliver for our stakeholders. I want to thank the entire Hexcel team for an outstanding second quarter. With that, I'll turn the call over to our new CFO, Jamie Coogan, to discuss the second quarter financials in more detail. Jamie?

Thank you, Tom, and I'm excited to be participating on my first Hexcel earnings call. I've been here about 3 months now, and I'm quite impressed with the team, the industry reputation of Hexcel, the innovation and most importantly, the growth opportunities ahead. I visited 4 of our sites at this point with plans to visit every facility in the near future. I've been actively meeting with various stakeholders, and as Tom mentioned, just returned from the Farnborough Air Show. I've now personally met many of you on this call, and I look forward to our continued engagement. My priorities are fully aligned with Tom and the Hexcel leadership team as we focus on execution, strengthening the balance sheet and driving margin expansion through organic growth and cost control. Hexcel is in a period of strong cash generation, and I will be working closely with Tom and the Board to ensure a disciplined capital allocation strategy. Now for the financial results. Second quarter 2026 sales of $529 million grew 8.1% in constant currency as commercial aircraft build rates ramp. Strong commercial aerospace growth was partially offset by lower defense, space and other sales following the divestment of the Austrian industrial business on September 30, 2025, and the winding down of the industrial business at our Leicester U.K. site as disclosed last quarter. As a side note, I will refer to constant currency percentage change for the remainder of my comments. By market, commercial Aerospace second quarter sales totaled $347 million, increasing 19% compared to the second quarter of 2025 and comprised approximately 66% of our total quarterly sales. Growth was led by wide-body A350 and 787 platforms, while narrow-bodies, A320, 737 MAX and A220 all increased year-over-year as well. Overall, we are pleased to see the stability and growing demand from our commercial aerospace customers. Sales for other commercial aerospace in the second quarter increased 4% year-over-year from growth in regional jets. Defense, Space & Other second quarter sales totaled $183 million and represented approximately 34% of sales. Second quarter sales decreased 8% on lower industrial sales following the divestment of the Austrian industrial business last year. And as I mentioned in my previous comments, we have now ceased industrial operations at our Leicester U.K. site effective June 30. Annual sales at this site were around $15 million, and this site will continue to work on aerospace R&D projects. In terms of our Defense & Space business only, second quarter 2026 sales were unchanged compared to the second quarter of 2025. Strength in fixed wing, both in the U.S. and internationally, along with strength in international helicopters and growth in satellite sales were offset by temporary softness in some other programs, including launchers and rocket motors. Remember that production volumes of many defense and space programs are low, so some quarters can be impacted by temporary timing issues and customer schedule shifts. The Other category for industrial sales now comprises just under 5% of our total sales. Gross margin of 26.1% in the second quarter of 2026 increased from 22.8% in the second quarter of 2025 on improved operating leverage and price realization. We continue to grow back into our existing capacity. And as we restart idle assets, the overhead absorption benefit is meaningful as illustrated in our second quarter results. Prior portfolio pruning actions were a modest tailwind to margins and unlike the first quarter of 2026, which saw favorable onetime benefits, there was no meaningful onetime contributors to call out for the second quarter. In terms of higher oil prices and their impact on the business, our purposeful strategy of reducing the volatility of input prices through our hedging and procurement contracts has generally insulated the business during the second quarter. Sequentially from the first quarter of 2026 to the second quarter of 2026, the combined spend for utilities, including natural gas and electricity, plus the spend for acrylonitrile, or AN, the primary raw material used in the production of carbon fiber increased only minimally. However, if oil prices remain elevated, the impact to energy and AN costs will be layered into the business over time. As a percentage of sales, selling, general and administrative expenses were 8.9% in the second quarter of 2026 compared to 8.8% in the comparable period in the prior year, increasing nominally on higher employee-related expenses. R&D expenses were 3.3% in the second quarter of 2026 compared to 2.9% in the second quarter of 2025. Foreign exchange remains a headwind due to the weaker dollar. Second quarter 2026 operating margin was negatively impacted by approximately 90 basis points from foreign exchange. In contrast, the second quarter 2025 had a favorable impact of approximately 10 basis points from the foreign exchange. Adjusted operating income in the second quarter was $74 million or 13.9% of sales compared to $54 million or 11.1% of sales in the comparable prior year period. Turning to adjusted EBITDA for the 6-month period. Adjusted EBITDA totaled $216 million for the 6 months ended June 30, 2026, and an adjusted EBITDA margin of 21%. This compares to $173 million for the 6 months ended June 30, 2025, and an adjusted EBITDA margin of 18.2% -- this is a 25% increase in adjusted EBITDA, whereas year-to-date, sales increased just 9%, illustrating the operating leverage within the business. For comparison, in our peak year of 2019, adjusted EBITDA totaled $585 million with an adjusted EBITDA margin of 24.8%. As we target returning to prior adjusted operating margin of 18%, we are also targeting a return to this prior adjusted EBITDA margin of approximately 25%. And as a reference, trailing 12 months adjusted EBITDA through June 30, 2026, was $390 million. Now turning to our 2 segments. The Composite Materials segment represented 80% of total second quarter sales and generated an adjusted operating margin of 16.8%. This compares to an adjusted operating margin of 14.1% 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%. This compares to an adjusted operating margin of 10.9% in the prior year period. Moving to cash flow. Net cash provided by operating activities in the first 6 months of 2026 was $97 million compared to a use of $5 million in the first 6 months of 2025. Working capital was a cash use of $72 million in the first 6 months of 2026 compared to a cash use of $125 million in the first 6 months of 2025. Capital expenditures on an accrual basis for the first 6 months of 2026 was $37 million compared to $32 million in the comparable prior year period. Free cash flow in the 6 months ended June 30, 2026, was $52 million compared to a use of $47 million in the 6 months ended June 30, 2025. Following our first quarter earnings call and just before I started, the team completed the issuance of $400 million of unsecured senior notes maturing in May 2031 with the proceeds used to pay off $400 million of unsecured senior notes maturing in February of 2027. This financing improves our debt maturity profile with our earliest debt maturity now in 2031. Leverage, defined as net debt to last 12 months adjusted EBITDA, was 2.3x at June 30, 2026, which compares favorably to our December 31, 2025 leverage of just under 2.7x. Although our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase, we have made meaningful progress year-to-date to reduce leverage, and we reaffirm that we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2.0x during 2026. Given our focus on debt reduction, we did not repurchase any shares of common stock in the second quarter of 2026. The remaining authorization under the share repurchase program as of June 30, 2026, was $381 million. The Board of Directors declared an $0.18 quarterly dividend yesterday. The dividend is payable to stockholders of record as of August 10 with a payment date of August 17. Before handing the call back to Tom, I would like to add some additional commentary regarding the revised 2026 guidance. Remember, the third quarter sales seasonality as some of our customers enjoy extended summer holidays, the seasonally lower third quarter sales impact operating leverage and margin as well. Implied second half adjusted EPS is somewhat lower than the first half, reflecting the Q3 seasonality, higher employee costs, including more hiring in the back half of this year to support production rate increases in 2027, some conservatism around oil prices and the impact they could have later in the year and expenditures related to restarting one of our carbon fiber lines at the end of this year rather than in 2027 in preparation for the 2027 rate ramps. We continue to forecast interest expense in the low $50 million range as faster revolver repayments than originally anticipated in the first half of the year has been offset by the higher rate on the refinanced senior notes. We modeled our tax rate in the back half of the year at 20%. And lastly, cash conversion should exceed 100% in 2026 and for a period of time thereafter as capital expenditures are expected to remain subdued, subject to significant new contract wins. With that, let me turn the call back to Tom.

Thanks, Jamie. Overall, we remain encouraged by the continued strengthening in commercial aerospace production rates and the strong demand fundamentals we see across commercial, Defense & Space markets. Airbus was especially bullish on the outlook for our largest program, the A350, in their remarks last week at Farnborough. As production rates increase, our focus remains on disciplined execution, driving operating leverage and delivering consistent performance for our customers and stockholders. With our strong market position, broad differentiated product portfolio and global manufacturing footprint, Hexcel is well positioned to capture the opportunities ahead of us. With that, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Gavin Parsons with UBS.

In the prepared remarks, you talked about the potential to recover the 18% EBIT margin before the end of the decade. Should I think of that as aligned with the time line for the $500 million of aero recovery and $200 million of Defense revenue? And then how are you thinking about your ability to offset cost inflation as you get to that 18%?

Right. So that's exactly right, Gavin, is we are targeting the 18% in line with getting up to the target production rate. So that's the $500 million on commercial and then the $200 million on Defense and Space and other. And in terms of offsetting the cost, in this industry, I would say you have to run fast to stand still. That's normal routine business. We have to always offset the increase in costs through our productivity initiatives. And we have a very extensive, what we call our next-generation factory initiative, along with a margin improvement program that's designed to do exactly that. And it's pricing as our contracts come due, but it's also driving a continuous improvement and then driving and implementing digitization improvement plans throughout our operations, engineering and administrative functions. So it's a combination of all those things to offset the cost inflation that we're going to see, which is normal course of business.

Got it. And then you called out Airbus talking about potentially going higher in rate on A350 above the 12 per month they previously talked about. When would you need visibility to support that higher ramp? And what's your facility capacity currently?

Right. Well, if you go back to the 2018, 2019 time frame, we were capacitized to support 13 aircraft per month for the A350 program. And obviously, that capacity is still there. and we can grow into that. Now in practice, with the increase in mix of the A350-1000s and also the freighter, those take more material. So that puts a little bit of pressure. But at the same time, we've driven productivity. So we can still do 13. Above that, we would have to be considering capacity. Its about a 3-year lead time. And we would work very closely with Airbus on that and to determine how we put that capacity into place. But one thing I want to make absolutely clear is the A350 is our biggest program. Airbus is a great partner, and we will absolutely support them with whatever decision they decide to make with regard to the A350 production rate.

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

Jamie, maybe I just wanted to follow up on your comments regarding the '26 guide and second half because the guide implies, as you referenced, lower EPS and a significant deceleration or step down in the incremental margins. I mean you called out headwinds around hiring oil prices, restarting at least one line and some conservatism. Maybe how do we think about those? Or can you get any more granular on the respective impact? It sounds like hiring and restarting the line probably bigger headwinds, but may be any incremental detail as you walk through those would be helpful.

Yes. I think you hit the nail on that. We're trying to be thoughtful as we think about back half performance and positioning the business to be able to execute on the sort of expected increase in rates as we move into 2027. And so we put our hiring plans together here. We're looking to pull that line in. That is going to be sort of a bigger driver of the overall sort of margin headwind. Some of the conservatism around the Middle East, we're just watching the situation very closely, and we baked in some minimal incremental expense in the back half associated with that. And then it's also important to remember the seasonality. We just -- given the lower sales volume that we typically see in the third quarter as our European partners here take some extended time away, that does sort of go the other way for us on the operating leverage and it's historically done so as we look back at the way that seasonality impacts the business. All in all, though, we're very well positioned, right, to execute and finish the year strong. We -- I think that our guide with the raise in the guide, we see the potential incremental margins actually step up from our prior expectations as we move into the full year results, and we want to make sure we're positioned to be able to execute going into 2027.

Okay. And as we think about the revenue guidance increase, is it fair to assume that you've basically added, call it, 3 to 5 A350 units with maybe some incremental or higher MAX shipments in that as well? Is that really the right way to think about the guidance increase?

Ken, I would say, yes. We think there's a little bit of upside on the A350 guidance we had of 80. Lars Wagner in Farnborough said they're producing at 8 or 9 a month right now. We've been pulling at kind of around 8 in this last quarter, and that continues to step up. And so we have purchase orders, firm purchase orders now that support the 80 plus for the rest of the year. And then the other one -- the other major program, I'd say that's increased is the 737. We saw that pulling at just above 42 for the quarter. And Boeing has said themselves that they're expecting now 500, and that's kind of what we're expecting as well.

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

Great quarter. Maybe if I could just ask about following up on the margin question. I appreciate the seasonality driving the second half margin ramp down by 100 bps. Tom or Jamie, can you maybe talk about where you are in your hiring process of the 400 heads and the incremental carbon fiber line, can you just remind me, Tom, is that in Salt Lake? How much capacity does that take on? And as a follow-up to this, how do we think about incremental margins going forward once you've kind of taken on these start-up costs?

Well, we had kind of 400 for the year originally. We've already hired 300 of those as of right now. And we'll complete the 400 in the back half of the year and we'll add to that because we do see the demand picking up, and we want to make sure we're ready for it. And the carbon fiber line is one that we had in Salt Lake City. We have 14. We had idled 4. We had already brought back 2. So we're bringing now 1/3 back. So we still have one that will be down. But we're bringing that third -- that was supposed to come online next year. We're pulling it into this year because we see the demand picking up so much in the back half of this year and through the first part of 2027. So that's where it is in Salt Lake City. It's the 13 to 14 lines, and the hiring is to support that. Now in terms of incremental margins, you saw for the quarter, it was 49%. For the year, at the midpoint, what we're seeing 37%, which is up from kind of low 30s in the original guidance. And we expect margins to continue to improve as production rates go up and we get operating leverage. And that's what really helps us in part get to the -- on the path to the 18% by the end of the decade. But it really is about operating leverage. And as production rates go up, we're going to continue to see margins improve, including incrementals. And that is exactly what we see in the first half of this year. We expect more in the second half and certainly into 2027 and 2028 as production rates increase and we get more operating leverage, our margins will continue to increase towards that 18%.

Got it. So this is the 30% to mid-30s is a good incremental margin going forward?

Yes.

Your next question comes from the line of David Strauss with Wells Fargo.

This is Josh Korn on for David. I wanted to ask about FX and the impact you see in 2027 as compared to this year.

Yes. So as we think about FX, through the 6-month period here, we've seen the dollar weakening. It's been a bit of a headwind to margins. We had about a 90 basis point impact here in Q2 explicitly. We do have some hedge programs in place, which is moderating some of the volatility that can occur in that FX environment. We haven't put together and discussed yet our plans on 2027. We're going to be in the process of pulling our plans together for 2027, where we'll think about what that looks like going forward. Obviously, continued dollar weakening is not -- doesn't benefit us as we move forward, the strengthening of the dollar would provide some benefit as we move into '27.

Yes. So stronger dollar is better for us and it just is what happens in the macroeconomic environment will determine that. But we haven't put our plans together for '27, but the stronger dollar helps us, we'll see where that goes.

Okay. And then on the A350, are you currently profitable?

Yes. So as we think about the A350 program, right, we -- our asset utilization levels and our production and our operating leverage that we're receiving, that program is profitable as we move ahead as we continue to see an increase in the ramp rate, the rate of ramp increase over time for that program that will continue to improve profitability on a go-forward basis.

Yes. So at the current production rate, profitable on the A350.

Your next question comes from the line of Richard Safran with Seaport Research Partners.

So I was particularly interested in your comments about defense positions on many platforms. You're no doubt aware the government is looking to accelerate aircraft and missile production. So I'm just going to ask one 2-part question. How are you expecting defense to trend as a percent of sales longer term, considering growth in defense and commercial? Second, are you still selling to defense pretty much on commercial terms? And so as defense grows, should we expect margins for defense to be pretty much comparable to commercial?

Okay. Well, in terms of defense as a percent of sales, right now, it's about 35% Ultimately, I'd love it to be 50%. The challenge is commercial for us is going to be growing so fast in the next 3, 4 years as production rates fully recover, defense will struggle to keep up. But that said, I think defense will continue to grow. And ultimately, we're going to be at 40% to 50% in terms of our defense spend relative to commercial because defense will continue to grow. Now yes, we do sell our defense products at commercial terms. And so as we go forward, that will not be dilutive to our margins because we sell a commercial terms. So that won't be dilutive.

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

I was wondering if you could speak to the rolling of LTAs. Maybe first on the non-Airbus side, you had an announcement about extending agreements with Boeing. And maybe the broad thought here is, are we at the sweet spot of LTAs that were sort of just on the cusp of the price escalation that we saw in the '22, the high inflation period rolling over, and we're getting the benefit of that. That's one question. The second one is, if Airbus does decide to pull the trigger on the A350-2000 by the end of the year, which seems like something they're thinking about seriously, is that going to pull forward your negotiation for price for your overall contract given you have to put more CapEx in the ground maybe to next year?

Okay. So on the first one, what I would say regarding long-term agreements is our agreements tend to be for about 5 to 7 years. So every year, 15% to 20% of them come due. Now obviously, the Airbus ones, which represent 40% of our business expire at the end of 2030. So those don't come due. But when the other contracts come due, we are negotiating and we are seeing price increases in the renegotiation. And it really reflects the value we bring and the investments that we have made. And so that's been something that we see is that we are seeing strong price realization on renegotiated LTAs. So -- and that will continue. And in fact, this quarter, we benefited from some of that price improvement on LTAs. So that's a positive, and it will continue and continue to be reflected in our performance. Now on the A350-2000, it's going to be a stretch. And so the good news with that is a longer aircraft requires more material, and we provide the entire material system for the A350. So that will be a big positive for us. And that's something that we will work closely with Airbus to support. Now you asked about whether it would pull forward any of the pricing discussion. I don't think the 2 are related. So I don't anticipate any connection to that. What we will work on, though, is understanding what the impact will be on capacity and how we put capacity into place for the future. And we will, at the right time, talk with Airbus about how we do that in the most constructive way.

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

Just a follow-up on Myles' question on the A350-2000. If that aircraft were to be powered by the GE9X engine, what could your shipset content be on that variant?

That's a lot of speculation. So we -- what I would say is the A350-2000 will be a longer aircraft, so more material that will benefit us. We obviously have a very significant position on the 777X and on the GE9X engine, both in terms of the fan blades and the fan case and parts of the nacelle. I won't speculate on whether those things will go together, but both of those things would be beneficial to Hexcel.

Okay. And then, Tom, you talked about kind of driving productivity. You closed down a couple of facilities in Europe, but you also expanded your footprint in both Morocco and Decatur, Alabama, where energy costs aren't as high. Are there other footprint optimization efforts underway to reduce costs or shift production to lower-cost locations?

Well, we're always looking for those, but the big ones are done. We sold our Neumarkt facility. We closed our Belton facility. We've expanded in Morocco, as you said. We've also really closed down our industrial operations in Western England, and we sold off a 3D printing plant we had in Hartford, Connecticut. So those are the big ones. We'll look to continue to optimize. But as you say, by shifting more work to Morocco, it's a very competitive workforce, very highly technically trained, lower energy costs. And in Alabama, we're introducing now our first carbon fiber line, which should save on some logistics and also benefit from lower energy costs as well. So those are all things. And these actions that we've taken on, what I would call portfolio pruning have really helped drive some of our margin improvement. And you see that reflected in the Engineered Products margin this quarter. So overall, the portfolio pruning helped, but we also drove productivity in some of those engineered product plants as well as getting pricing on some of the LTAs. So a combination of those 3 things, portfolio pruning, pricing and productivity is driving margin enhancement, particularly in our Engineered Products segment.

Your next question comes from the line of Kristine Liwag with Morgan Stanley.

So Tom, can you just level set us in terms of what production rates you're able to support with the capacity increases included in your plan if you're able to restart all 4 idle carbon fiber lines? And I guess, are there areas that you need to grow CapEx in some of your more value-add noncarbon fiber manufacturing portion to meet what Boeing and Airbus want to build in 2030?

Right. Well, the answer is we have sufficient capacity in place already. Now we have to bring some of it back online, and we have to complete the 2 plants that we started in Decatur. So we started one, what we call polyacrylonitrile plant, which is a precursor and carbon fiber line. Both of those have to come online. But with all that capacity, we have enough capacity to meet all of the peak production rates that Boeing and Airbus and the defense primes have articulated for their various programs. So that's why we've said that our CapEx over the next several years can remain under $100 million. Now if Airbus decides to go above 12, for example, on the A350 or there's a big new win on next-generation narrow-body, that would require additional capacity, and we would work with our customers on that. But to meet the current targets that they have for peak production across all the programs, we have sufficient capacity in place for coming online to support it.

Super helpful. And if I could follow up, when you're restarting the idled carbon fiber lines, how operationally challenging is it? Is it as easy as turning on the lights and dusting off the cobwebs? Or is there more heavy lift? And also, as we think about volumes going through the lines, how do we think about margin trajectory? At what point -- how quickly does that line get filled up? And when does the margins from that line become accretive to overall segment margins?

Right. Well, the start-up is not routine. I mean it takes a couple of months of planning and preparation. And then -- but once they've gone through that, they're doing a lot of maintenance and lubrication and cleaning, it only takes a couple of weeks. The team is able to bring the line up and get it to production. And from there, maybe a couple of months before it's at full productivity. And so we've done this a lot over the years, either starting up a new line or restarting a line, particularly following the pandemic. So the team is fairly experienced at it. And it takes a couple of months to get up to full productivity. Now in terms of margin, again, we've been suffering from the lack of fixed cost absorption because we've had idle lines. So as those lines come on and we're producing and we're getting absorption now, fixed cost absorption and operating leverage, we will see the margins go up. So bringing the lines on early will be a net benefit for us in terms of our margin enhancement.

Your next question comes from the line of Mariana Perez Mora with Bank of America.

Welcome Jamie. So as a starting question as a welcome question, you talked about capital deployment in the prepared remarks, and you talked about being disciplined, but also considering like inorganic opportunities if they were to match this criteria. Considering that you have this operating leverage, there is capacity and you're getting to a net leverage in line with the overall ranges. How are you thinking about inorganic opportunities that could meet the criteria? Is it exposure to right end markets? It is like a material capabilities? Like how are you thinking overall?

Right. Well, when we think of inorganic, and we're continuing to look. It's not on our current agenda because we're paying down debt. But what we've said is we're focused on advanced material science, heavy aerospace and defense focus with a return on invested capital and ROIC of 15% plus. So those are the basic criteria. And we're going to have a high bar because we've got a lot of opportunity to execute on the current production ramp, and that's going to create a lot of operating leverage, improve margins and drive cash flow. And so we're not going to get distracted from that. We're laser-focused on execution. If the absolute best opportunity comes inorganically that meets those strategic thresholds I mentioned and the return criteria, we will consider it. But absent that, we'll focus on our dividend and share repurchases.

Right. And then when we think about the margins that mostly incremental cash margins as we think about like going into 2030, how should we think about that?

Yes. So over the long run, we sort of in that mid-30% range is incremental margin opportunity for us as we move ahead. We're going to see better leverage overall as we benefit from productivity initiatives, pricing and bringing our business back up to line to be able to absorb the fixed cost base that we have here. Tom noted, we've got between the commercial aerospace peak rate recovery, there's $500 million worth of incremental sales there. We're going to continue to grow the space business, adding around $200 million. And all of that gets us to the sort of 18% operating margin performance by the end of the decade. As we move beyond that, we'll have repricing opportunities on our A350 contract going into that next decade into that period that's going to provide incremental uplift opportunities. And in the interim, we're going to continue to look at the cost base, right? So we're going to try to control costs as we move forward. We're going to look at ways to expand margins in the near term to the best of our ability while continuing to support the rate ramp. So we feel really good about the growth opportunity ahead, and we feel very strongly that there's margin expansion opportunities and really strong cash generation for us over the next couple of years.

Yes. What I would add to that is that once we get up to the peak production rates, '28 and into '29, we're likely to stay there for a very long time because the backlogs are enormous. It's close to 10 years of production, particularly on the widebodies, which favors us. And while there's discussion of the next narrow-body sometime in the future, which we're working on, there's no discussion of a replacement for the current wide-bodies like the A350 or the 787 or the 777, all of which are big programs for Hexcel. So we see a continued sustained opportunity to be at those high levels of production for a long period of time, getting great operating leverage. And while our target is 18% by the end of the decade, we're certainly not going to stop there. We're going to be driving productivity and pricing initiatives to continue to benefit from the investments that we've made and the value that we bring to our customers.

Great. And one last one, if I may. So you talked about the pricing opportunities, especially getting into next decade. But then by the time you'll be having those pricing discussions, the new narrow-body, the new wide-body replacements will be also part of the conversation with the OEMs. How are you thinking about positioning to this negotiation on a stronger way than the prior wave?

Right. Well, look, it's always a negotiation on all these things. We want to maintain great customer relationships. As I always say, we want to make sure we get a fair return on the investments we've made and the value we bring our customers. And that will guide us in terms of our negotiation. And we want to make sure that the platforms we're on today continue to be successful. And of course, we want to be on the next-generation platforms which -- and the one that's currently in focus is the narrowbody at some point in the future. The widebodies, there haven't been any discussions about those.

We're going to continue to see as we go through pricing relative to the current cost environment. And as we move ahead and think about where that cost environment is, we need a return on the investments that we've made in the business to support the customers. And I think it's really important that as we go into those negotiations that we recognize that we do provide meaningful value as part of those conversations, and we'll be willing to have the right conversations with those customers in support of their long-term initiatives, but ultimately making sure that Hexcel receives the benefit as well for the value that we provide given the current cost that we're seeing for these programs.

Our final question comes from the line of Gautam Khanna with TD Cowen.

This is Anton on for Gautam. I just curious on the MV-75, there's been some funding challenges. Is there any potential impact from this baked into the 2026 guide? And just what's your exposure there?

We're -- so the MV-75, which is the follow-on replacement for Black Hawk is a great program. We've been in discussions with Bell, continuing to determine what our final positions will be on it. It's still in early phases of development. And so it has no impact on 2026 guidance. But it's a great program, and we look forward to continuing the discussions with Bell about how we can support it. It's a really outstanding program. It is moving forward overall, I think, from original projections, but no impact for us on 2026 guidance.

Got it. And then just quickly, if I can. The Boeing contract was announced at Farnborough, how is that any different? Or what's the difference between that and the old contract?

Well, it's just a renewal. We have extensive operations with Boeing on their commercial and defense platforms and space. And so in the normal course of business, when those contracts come due, we renegotiate them, and that's what this was. So it was just a normal renewal for the long-term agreements that we have with Boeing, which are quite extensive.

There's a number of LTAs, not a specific one-to-one match there, right? So there's a number of LTAs that were aggregated together as part of that just to reinforce that relationship and the strength of that relationship.

That ends the Q&A portion of today's call. Ladies and gentlemen, this concludes the Hexcel Second Quarter 2026 Earnings Call. Thank you all for joining. You may now disconnect.