Hexcel (HXL) Q2 2026 earnings call transcript

Hello, everyone. Welcome to Excel Corporation 2nd 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 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 Excel 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 Chantilly, our Chairman, CEO, and President, and Jamie Coogan, our Chief Financial Officer. The purpose of the call is to review our 2nd Quarter 2026 results, detailed, and 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 Excel's 2nd 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 is 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 Farmboro Air Show. You will hear it 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 Farmboro 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. Aircrafts across most global regions continues to be strong, despite the templates in Iran.

At their investor day at the Farmboro 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. The fuel cost remaining elevated in volatile. Light weighting is even more critical in driving fuel efficiency, directly supporting demand for 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 discipline approach to managing key cost inputs have helped mitigate near-term input price volatility. 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.

Growth margin improved again year over year as higher sales volume generated greater operating leverage to improve cost absorption, which resulted in adjusted operating margins of 13.9% compared to 11.1% in Q2205. In our commercial aerospace market, sales were $346.6 million for the quarter, an 18.3% increase over the second quarter of 2025. Rising volume from the 8.350 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 our lightweight urban fiber as the recovery in OEM production rates continues.

Recent production data reported by Airbus and Boeing highlight steady progress and output across the major programs, even if the supply chain environment remains dynamic. The rising production rates reinforce our confidence that the industry is moving forward for the more sustained production rent. As we have discussed before, as an upstream material supplier, XL is generally shipping around four to six 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 bottom cut demand planning, continues to support our outlet. 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 HEXL from our existing contracts. In addition, we expect about $200 million in incremental sales in defense and space before the end of the decade.

This continued recovery in commercial and military production rates will create improved volume leverage for HEXL. We have a path to 18% adjusted operating margin 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, excuse me, 80 shifts that in 20.6. While there can be a perceived disconnected time 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 20.68350 guidance of at least 80 aircraft.

During the Farmborough Air Show earlier this month, Airbus publicly confirmed that they are producing at a rate between eight and nine 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 20.26 that confirm at least the 80 shift set for the A350.

We need increasing demand for HEXL's advanced lightweight composite material. In the second half of 20.26, we will be accelerating hiring and bringing back online carbon fiber lines previously idle 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 margins before the end of the decade.

Turning to the defense base and 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 de-emphasize this portion of our portfolio with the divestiture of our business in Austria and the restructuring of our industrial business in Lester, England.

As we noted in our first quarter call, the defense base and other markets can be choppy quarter and quarter due to the nature of defense base spending and production timing, particularly for high value but low volume platforms.

That said, defense base remains a significant priority for HEXL 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 payloads, extended range, and enhanced performance characteristics, including low servability across defense and space platforms.

With our vertically integrated global footprint, HEXL is uniquely positioned to support this market across regions. We are the only vertically integrated U. S. domiciles manufacturer of high strength aerospace grade composite materials for commercial aircraft and defense and space platforms. Additionally, our vertically integrated operations across Europe provide access to I-CAR-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 markets.

We expect growth in defense and space, along with regional and business jets, provide HEXL with an estimated $200 million of incremental sales growth to this decade. Longer term, we see accelerating growth in our defense and space markets.

With that, turning the capital allocation into guidance, our balance sheet and liquidity positions remain solid in the second quarter, and our capital allocation priorities remain unchanged. We intend to continue paying down debt with the goal of returning HEXL's leverage for a targeted ratio of one and a half to two times 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 in an inorganic opportunity that meet our strategic thresholds and return targets.

Given the continued recovery and production rates, we announced in yesterday's earnings release that we are increasing our whole-year $2.6 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 for 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 TAP-X 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 startup costs, as we accelerate bringing additional capacity back online. Even with those considerations, the underlines demand profile and the operating leverage in front of us support a stronger outlook per year.

In addition, we will continue hiring in the second half of the year and will start up an additional carbon fiber line to be ready for the production rate increases that we expect in 2020.

Now, turn to some notable events for HEXL 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.

Embry Air Name HEXL is best supplier of the year and its standards and materials category for the second consecutive year. Airbus recognized HEXL with its accredited supplier award, the highest distinction within the Airbus Supplier Quality Improvement Program. NIHI and Japan recognized HEXL with the Supplier of the Year award. We are honored to receive these recognitions from our customers.

This recognition reflects the dedication of the HEXL team and our continued focus on quality delivery and operational excellence. Also, during the quarter, we made a number of significant announcements. It may be announced the groundbreaking of the HEXL application center at Wichita State University National Institute for Aviation Research, NIAR. The new center expands our long-standing collaboration with NIAR and supports innovation and 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 turbo prop, the D328 Echo. And last week, our team attended the Farmboro International Air Show, where we had the opportunity to engage with the industry, including customers, partners, and other key stakeholders. During the Air Show, 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 had completed qualifications for our HEXFI M91, carbon fiber-reinforced epoxy creep rig 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 HEXPL's advanced lightweight material solutions across commercial aerospace, defense, and space. Our broad product portfolio, technical expertise, and innovation, customer relationships, and the vertical integration across multiple regional positions enables HEXPL to serve these markets well as Mayans continue to rise.

Against this background, 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 HEXPL 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 and more detail.

Thank you, Tom. And I'm excited to be participating on my first HEXPL earnings call. I've been here about three months now, and I'm quite impressed with the team, the industry reputation of HEXPL, the innovation, and most importantly, the growth opportunities ahead. I visited four 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 Barnboro 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 HEXPL leadership team as we focus on execution, strengthening the balance sheet, and driving margin expansion through organic growth and cost control.

HEXPL 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 at 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 left or UK site at 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 8350 and 787 platforms, while narrow bodies 8320, 737 max, and 8220 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 and 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 comment, we have now ceased industrial operations at our left or UK 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 and space business only, second quarter, 2026 sales were unchanged compared to the second quarter of 2025. Strengths in sixth wing, both in the US 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 in customer schedule shifts.

The other category for industrial sales now comprises just under 5% of our total sales. Growth 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 modest tailwind of margins, and unlike the first quarter of 2026, which saw favorable one-time benefit, there was no meaningful one-time 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 contract has generally insulated the business during the second quarter.

Equentially 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 from a Krillin nitrile for 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 the 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 of 2026, operating margin, was negatively impacted by approximately 90 basis points from foreign exchange. In contrast, the second quarter of 2025 had a favorable impact of approximately 10 basis points from the foreign exchange.

Adjusted operating income in the second quarter was $74 million for 13.9% of sales, compared to $54 million for 11.1% of sales in the comparable prior year period.

Turning to adjusted EBITDA for the six-month period, adjusted EBITDA total $216 million for the six-month ended June 30th, 2026, and an adjusted EBITDA margin of 21%. This compares to $173 million for the six-month ended June 30th, 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 total $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 30th, 2026 was $390 million.

Now, turning to our two segments, the composite material segments 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 engineer product 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 six months of 2026 with $97 million compared to a use of $5 million in the first six months of 2025. Working capital with the cash use of $72 million in the first six months of 2026 compared to a cash use of $125 million in the first six months of 2025.

Capital expenditures on a cruel basis for the first six months of 2026 was $37 million compared to $32 million in the comparable prior year period.

Free cash flow in the six months ended June 30th, 2026 was $52 million compared to a use of $47 million in the six months ended June 30th, 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, earliest debt maturity now in 2031.

Leverage defined as net debt to last 12 months adjusted even though with 2.3 times at June 30th, 2026, which compares favorably to our December 31st, 2025 leverage of just under 2.7 times. 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 are reaffirmed that we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2.0 times 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 30th, 2026 was $381 million.

The Board of Directors declared an 18 cents quarterly dividend yesterday. The dividend is payable to stockholders of record as of August 10th with a payment date of August 17th. 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. Applied second half adjusted EPS is somewhat lower than the first half reflecting the two through 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.

We continue to forecast interest expense in the low $50 million range as faster revolver repayment than originally anticipated in the first half of the year has been offset by the higher rate on the refinance 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, a capital expenditures are expected to remain subdued subject to significant new contract wins.

With that, let me turn the call back to Tom.

Thanks, Amy. Overall, we remain encouraged by the continued strengthening and commercial aerospace production rates and the strong demand fundamentals we see across commercial defense and space market. Airbus was especially bullish on the outlook for our largest program, the H350 and the remark last week at Farmborough. As production rates increase, our focus remains on discipline execution, driving operating leverage and delivering consistent performance for our customers and stakeholders.

With a strong market position, broad differentiated product portfolio, and global manufacturing footprint, tech sells well positioned after the opportunities ahead of us.

Morning. And the prepared remarks you talked about, you know, the potential to recover the 18% even margin before the end of the decade. Should I think of that as aligned with the timeline for the 500 million of aero recovery and 200 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. Kevin 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 others. 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 cost through our productivity initiative. 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 contract come due, but it's also driving a continuous improvement and then driving and implementing digitization improvement plans throughout our operations, engineering, and administrative function.

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 and rate on A350 above the 12 per month that 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 timeframe, we were capacitized to support 13 aircraft per month for the A350 program.

And obviously that capacity is still there. 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 on it. But at the same time, we've driven productivity. So we can still do 13 above that we would have to be considering capacity means about a three 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.

Great. Thank you very much.

Yeah, I think you hit the nail net. 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 a expected increase in race as we move into 2027. And so, you know, 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, you know, sort of margin headwinds. You know, some of the conservatism around the Middle East. We're just watching the situation very closely. And, you know, we baked into minimal, you know, incremental expense in the back half associated with that. You know, as our European partners here take some extended time away that does, you know, sort of go the other way for us on the operating leverage and it's historically done.

So, you know, as we look back at that, that's the way that seasonality and tax the business. All in all, though, you know, we're very well positioned right to execute and finish the year strong. We, you know, I think our guide with the rates and the guide, we see them, you know, the potential incremental margins actually step up from our prior expectations as we move into the full year result. And we want to make sure we're positioned to be able to execute going into 2027.

Can I would say, yes, we think there's a little bit of upside on the eight or 50 guides we had of 80. You know, Lars Wagner in Barbara said they're producing it eight or nine a month right now. We've been pulling it kind of around eight in the 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 that's that's increased is the 737.

We saw that pulling at just above 42 for the quarter. And, you know, following has said themselves that they're expecting that 500 and that's kind of what we're expecting as well.

Great. Thanks, Tom. Thanks, Jamie.

Well, we had kind of 400 for the year. Originally, we've already hired 300 of that of those. As of right now, and we'll complete the 400 in the back half year and then 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 idle four. We'd already brought back two. So we're bringing now a third back. We still have one that will be down. But we're bringing that there. 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 improved to the first part of 27.

So, so that's where we're in Salt Lake City. It's the 13th of 14 lines. And the hiring is to support that. Now, in terms of incremental margins, you know, you saw for the quarter, it was 49%. For the year at the midpoint, we're saying 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 impart it to the path to the 18% by the end of the decade. But it really is about operating leverage and is production rates go up? We're going to continue to see margins improve, including incremental.

And that is exactly what we've seen the first half of this year. We expect more in the second half and certainly into 2027 and 2028. As production rates increase, we get more operating leverage. Our margins will continue to increase for that 18%.

Got it. So this is a 30% to mid 30s is a good incremental margin going forward. Yes. Perfect. Thank you.

Yeah. So as we think about FX, those six months period year, we, you know, seen the dollar weakening the benefit of a headwind margin. We have a 90 basis point impact here.

We do have some hedge programs in place, which is, you know, moderating some of the. The volatility that can occur, you know, in that FX environment that we haven't, you know, 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, you know, continued dollar weakening, you know, it's not a, you know, doesn't benefit us as we move forward. The strengthening of the dollar would provide some benefit as we move into 20.

So stronger dollar is better for us. Yep. And it just is what happens in the American economic environment where we'll determine that. But we haven't put our plans together for 27, but the stronger dollar helps us. We'll see where that goes.

So as we think about the 8, 350 program, right, we are at the utilization levels at and our production and operating leverage that we're receiving, you know, that program is profitable move 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 for basis.

Yeah. So at the current production rate and profitable on the eight three.

Well, in terms of defense, right now, it's about 35% ultimately, I'd love it to be 50%. The challenges is commercial for us is going to be growing so fast in the next three, four years as production rates fully recover. Defense will struggle to keep up. But that said, I think defense will continue to grow. And ultimately, you know, we're going to be at 40 to 50% in terms of our defense plan. Well, 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 diluted to our margins, right, because we sell a commercial term.

So that won't be diluted.

Okay. Thanks.

Okay. So on the first one, what I would say regarding long-term agreements is our agreement is attending for about five, seven years. So every year, 15 to 20% of them come due. Now, obviously, the airbus ones 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 then something that we see is that we are seeing strong price realization and renegotiated LTA. So, and that will continue. And in fact, this quarter, we benefited from some of that price improvement on LTA. So that's the 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 be required 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 support. Now, what you asked about whether it would pull forward into the pricing discussion, I don't think the two 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.

Oh, well, that's a lot of speculation. So, you know, we, what I would say is the A350 2000 will be a longer aircraft, the more material that will benefit us. We obviously have a very significant position on the 777X and on the GE 9X engine, both in terms of the fan blade and the fan case and parts of the cell.

I won't speculate on whether those things will go together, but, you know, both of those things would would be beneficial to textile.

Well, we're always looking for those, but the big ones are done. As you know, we filled our Normark facility, we closed our Belton facility, we've expanded in Morocco. As you said, we've also really closed down our industrial operations in Leicester, England, and we sold off a 3D printing plan. We added Hartford, Connecticut. So those are the big ones. We'll look to continue to optimize. But as you say, you know, 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, you know, those are all things. And these actions that we've taken on, I would call portfolio pruning have really helped drive some of our margin improvement. And see that reflected in the engineered products margin this quarter. So overall, the portfolio pruning help, but we also drill productivity in some of those engineered product plants, as well as getting pricing on some of the LTA. So combination of those three things, portfolio pruning pricing and productivity is driving margin enhancement, particularly in our engineered product.

Well, the answer is, is we have sufficient capacity in place already. We go now we have to bring some of this back on line. And we have to complete the two plants that we started in decay. So we started one, what we call polyacrylamitrile plant precursor one carbon fiber line. Both of those have to come on my mind. But with all that capacity, we have enough capacity to meet all of the peak production rates that's only in Airbus. And the defense prime have articulated for their various programs.

So that's why we 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. 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 target that they have for peak production across all the programs. We have sufficient capacity in place. You're coming online to support.

Right. Well, the startup is not routine. I mean, it takes a couple of months of planning and preparation. And then, but once they've gone through that, you'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 full productivity. And so we've done this a lot.

Over the years, either starting up a new line or restarting a line, particularly on the pandemic. So the team is early experience at it. And, you know, 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, the cost absorption and operating leverage, we will see the margins go up. So bringing the line time early, we'll be a next benefit for our margin enhancement.

Yeah, thank you.

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 invest 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 to 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 in organically that meets those strategic thresholds I mentioned in return criteria, we will consider it.

But absent that, we'll focus on our dividend and share with her.

Yeah. So over the long run, we, you know, sort of in that mid 30% ranges, you know, incremental margin opportunity for us as we move ahead. We're going to see better leverage overall, you know, as we benefit from productivity initiatives, pricing and bringing our business back up to line to be able to absorb, you know, the fixed cost space that we have here.

Tom noted, you know, 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, you know, 18% operating margin performance, you know, by the end of the decade. As we move beyond that, you know, we'll have reprising opportunities on our eight 350 contract going into, you know, 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, you know, in the near term, where it's to the best of our ability while continuing to support the rate ramp. So, you know, we feel really good about, you know, 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.

Yeah, what I would add to that is that once we get up to the peak production rate, 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 wide body, which is, which favors up. 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 body.

So we see a continued sustained opportunity to be at those high levels of production, the long period of time getting great operating leverage. While our target is 18% by the end of the decade, we're certainly not going to stop that. 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.

Right. Well, you know, look, it's always a negotiation on all these things. We want to maintain great customer relationships, but I always say that we want to make sure we get a fair return on the investments we've made and that's 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 in the one that's currently in focus is the narrow body at some point in the future, the wide body. There haven't been any discussions about those.

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

We're to the MD 75, which is the far replacement. It's a great program. We've been in discussions with cells, continuing to determine what our final positions will be on it. It's still in early basis of development. And so it has no impact on 2026 guidance, but it's a great program. And we look forward to continue the discussions with fellow 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.

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 to, 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 expensive.

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