Hexcel's Q3 2025 Earnings Call: Contradictions Emerge in A350 Production Rates, Inventory Management, and Inflation Impact

Date of Call: October 23, 2025

Financials Results

• Revenue: $456.2M, unchanged year-over-year (Q3 2025)
• EPS: $0.37 adjusted diluted EPS (Q3 2025)
• Gross Margin: 21.9%, compared to 23.3% in Q3 2024
• Operating Margin: 9.8% adjusted operating margin, compared to 11.6% in Q3 2024

Guidance:

• Q4 2025: expect lingering OEM destocking; sales narrowed to the bottom of prior range and EPS guidance reduced (midpoint moved from $1.95 to $1.75).
• Tariff headwind assumed at ~$3M–$4M per quarter (included in guidance; ~ $0.10 EPS impact).
• 2025 commercial aerospace sales now expected down mid- to upper-single digits; Defense/Space expected up mid- to upper-single digits.
• ASR $350M funded from revolver; Board authorized additional $600M buyback; revolver to be repaid in 2026 to return leverage to 1.5–2x.
• Capex expected < $100M/year for the remainder of the decade.
• Forecast > $1B cumulative free cash flow for 2025–2028.

Business Commentary:

• Commercial Aerospace Market Challenges and Recovery:
• Hexcel experienced a 7.3% year-over-year decline in Commercial Aerospace sales due to destocking by original equipment suppliers.
• The company expects weaker commercial aerospace demand in Q4 2025 but anticipates aligning with commercial aerospace customer build rates in 2026.

• The slow recovery in the aerospace market is attributed to lingering destocking effects and supply chain challenges, but positive developments in major programs like the A350 and A320 are driving confidence in a sustained ramp-up.

• Defense and Space Segment Growth:

• Defense, Space, and Other segment sales increased 11.7% on a constant currency basis, reflecting broad growth across domestic and international customer platforms.
• This growth is driven by increased demand for advanced lightweight composite materials, supporting fighter, helicopter, and space programs.

• Continued growth in defense budgets and the introduction of new platforms contribute to the demand for Hexcel's advanced materials.

• Operational and Financial Strategies:

• Hexcel announced a $350 million accelerated share repurchase program (ASR) and a new stock repurchase authorization of $600 million.
• These actions are driven by confidence in commercial aerospace production rate increases and a focus on executing rate ramps while managing costs.

• The company aims to generate more than $1 billion in cumulative free cash flow over the next four years, supporting innovation, debt reduction, and stockholder returns.

• Inventory Management and Capacity Expansion:

• Hexcel's inventory acts as a buffer for unexpected demand spikes, and the company expects to begin hiring again in early 2026 as production rates increase.
• The company aims to manage headcount closely, aligning with production schedules and maintaining a skilled workforce for future demand increases.
• The focus is on optimizing operations and leveraging productivity improvements, including automation and digitalization, to enhance efficiency and margin expansion.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly stated confidence in a sustained aerospace rate ramp and Hexcel's positioning: "we believe the recovery in build rates is real and sustainable." They forecast "to cumulatively generate more than $1 billion of free cash flow over the next 4-year period of 2025 to 2028" and authorized a $600M buyback plus a $350M ASR, signaling conviction in future cash generation and margin recovery.

Q&A:

• Question from Myles Walton (Wolfe Research): In the context of the $500M growth tied to manufacturer production rates and historical contract pricing, how much margin headwind has inflation caused and what are expected margins when revenue returns to prior peaks? Response: The A350 long-term contract absorbed ~200 bps of inflation; at prior peak revenue (~$2.35B) expect margins around ~16%, and with the full $500M incremental revenue margins could reach ~18%, with productivity efforts aimed to offset inflation.

• Question from Myles Walton (Wolfe Research): For 2026, should we plan debt/interest costs from the ASR around $50M? Response: No — interest costs should be materially less; ASR revolver borrowings priced around ~5.5% and debt should decline rapidly after Q1 2026 as free cash flow is generated.

• Question from Michael Ciarmoli (Truist Securities): Are incremental margins on higher volumes expected to be in the ~40% range and will pricing/renewals or labor affect that? Response: Incrementals are driven primarily by operating leverage as volumes increase; limited capital needed, productivity and pricing will offset inflation, enabling strong incremental margins as revenue rises.

• Question from Michael Ciarmoli (Truist Securities): Will the ASR be dilutive in early quarters and net neutral or positive for 2026? Response: The ASR incurs near-term interest but reduces share count immediately (80% surrendered), and overall should be net positive for 2026 as debt is paid down.

• Question from Gavin Parsons (UBS): If 2026 Commercial Aerospace revenue exceeds 2024 levels, can margins be higher than historical levels? Response: Yes — higher commercial aero revenue can produce higher margins, subject to offsetting inflation and other costs which management is addressing.

• Question from Gavin Parsons (UBS): If destocking persists longer into 2026, how will Hexcel mitigate operational disruption? Response: Hexcel will continue to lag hiring until demand materializes and use inventory as a cushion to avoid operational disruption.

• Question from Kenneth Herbert (RBC Capital Markets): Did roughly five A350 units shift out of Q4 and what exit rate do you expect on the program? Response: Yes — about five units were lighter in Q4; Hexcel expects to enter 2026 at A350 rate ~7/month, ramping to 8 and possibly 9 by year-end with stronger orders into 2026.

• Question from Kenneth Herbert (RBC Capital Markets): Any opportunity to recapture tariff costs going forward? Response: Yes — recovery routes exist (export/military exceptions, pass-throughs) and management is pursuing mitigation and shifting supply toward domestic sources, though tariffs remain a near-term ~$3M–$4M/quarter hit.

• Question from John McNulty (BMO Capital Markets): How large is Hexcel's inventory cushion (months/quarters)? Response: Inventory is about 90 days (north of $400M), down from earlier levels and targeted to steady-state around ~70 days.

• Question from John McNulty (BMO Capital Markets): How much labor will need to be re-added for the 2026 ramp? Response: Hiring has begun in Europe in Q4 and will continue into early 2026, aligned to booked production needs; staffing will be added as rates are confirmed.

• Question from Peter Skibitski (Alembic Global): Is the recent Defense & Space strength secular (Europe) and will CH-53K ramp meaningfully? Response: Yes — European defense grew ~18% this quarter, indicating secular strength; CH-53K has a multiyear deal supporting strong content per shipset (~$2.5M–$3.5M) and is expected to be a meaningful program for Hexcel.

• Question from Sheila Kahyaoglu (Jefferies): How should we think about winding down inventory and what drove the margin decline beyond tariffs? Response: Management plans to reduce inventory from ~90–95 days toward ~70 days; margin decline beyond tariffs was driven by inventory drawdown (absorption), ERP implementation timing, lower volumes from destocking and mix.

• Question from Gautam Khanna (TD Cowen): What are A350 equivalent shipments expected to be this year and next (2026)? Response: A350 equivalents are ~60 for 2025 (low 60s) and management's best estimate for 2026 is ~80 equivalents.

• Question from Noah Poponak (Goldman Sachs): Is consensus ~12% company revenue growth for 2026 achievable? Response: Management sees a clear inflection and healthy growth but views 12% as somewhat aggressive and prefers a more conservative outlook while awaiting realized rate increases.

• Question from Scott Deuschle (Deutsche Bank): Do you expect to enter 2026 at 7/month on the A350? Response: Yes — expect to enter 2026 at 7/month with some Q4 destocking but with the program moving to 8 and potentially 9/month later in 2026.

• Question from Richard Safran (Seaport Research Partners): Any further portfolio changes and rationale for the accelerated buyback now? Response: Portfolio optimization is ongoing and additional smaller actions are possible; management sees excess cash and the aerospace recovery as the best use of capital, so the ASR and reauthorization reflect conviction in organic returns when M&A opportunities didn't meet criteria.