[Management View]
Hexcel's management highlighted the company's strong market position in advanced lightweight composite materials, supporting both commercial and military aerospace applications. Key metrics included a total sales of $489.9 million, with commercial aerospace sales at $293 million and defense, space, and other sales at $196.8 million. Strategic priorities focused on managing headcount, contract renewals, and share repurchases to support earnings despite market uncertainties.

[Outlook]
Management reaffirmed full-year 2025 guidance, expecting a strong fourth quarter as destocking ends and production rates increase. Future plans include generating over $1 billion in cumulative cash over the next four years, leveraging increased airframe production rates, and exploring targeted M&A opportunities.

[Financial Performance]
Hexcel reported a decline in commercial aerospace revenue and gross margin erosion in Q2 2025. Total sales were $489.9 million, with commercial aerospace sales down 8.9% YoY and defense sales up 7.6%. Gross margin decreased to 22.8% from 25.3% YoY, impacted by lower sales, inventory actions, and tariffs.

[Q&A Highlights]
Question 1: Can you outline the assumption on build rates or delivery rates for the A350 program?
Answer: Airbus announced reductions in the A350 schedule, with current expectations in the low sixties for the full year. Destocking should end in Q3, with a strong Q4 expected as Airbus increases rates to seven aircraft per month.

Question 2: Is there any reason to think that defense sales growth will continue in the back half of the year?
Answer: Defense spending is increasing globally, and Q2 results were strong. Management is optimistic about continued growth in defense sales for the rest of the year.

Question 3: What rate were you effectively shipping at for the A350 in the first half of the year?
Answer: In Q1, shipping rates were in the low sixes, and in Q2, in the high fives. These rates reflect destocking impacts, which differ from Airbus's stated rates.

Question 4: When would you expect the currency comparison to flip negative given the weakening dollar?
Answer: Hexcel benefits from a strong dollar and expects a net tailwind this year. If rates stay the same, the currency comparison may flip negative in 2026.

Question 5: How do you see the decoupling to underlying rates on the A350 progressing in 2026?
Answer: Destocking should end in Q3 2025, with closer coupling to Airbus's rates in Q4 and through 2026. Airbus plans to increase rates to seven in 2026 and possibly to eight during the year.

Question 6: Can you update us on the 787 program and its progression into 2026?
Answer: The first half of 2025 was soft, but Boeing is increasing rates to seven and plans to continue to rate 10 and beyond. The back half of the year is expected to be stronger for the 787.

Question 7: Is there any reset on pricing you can point to with respect to contract renewals?
Answer: Contract renewals occur gradually, with about 15-20% of contracts renewed each year. Hexcel negotiates price adjustments to reflect inflation and ensure fair returns.

Question 8: How do you use the Airbus supplier award to your advantage in contract negotiations?
Answer: The award for best performance in delivery and quality supports Hexcel's position in negotiations. Management works on productivity initiatives to drive mutual benefits with Airbus.

Question 9: How much of the $24 million restructuring charge is expected to result in cash outflows?
Answer: Approximately 85-90% of the restructuring charge will result in cash outflows, with the majority occurring in Q3 2025.

Question 10: Does the full-year guidance contemplate low 60s for the A350, and how does Q3 seasonality look?
Answer: Full-year guidance expects low to mid-sixties for the A350, with a softer Q3 due to destocking and European holidays. A strong Q4 is anticipated as destocking ends.

Question 11: How should we think about the earnings guidance given the tariff headwind?
Answer: The direct impact of tariffs is about $3-4 million per quarter. The full impact is uncertain, but management anticipates potential pressure on the lower end of the EPS range.

Question 12: How does increased defense spending impact Hexcel's long-term outlook and margin potential?
Answer: Increased defense spending in the U.S. and Europe is expected to drive growth in Hexcel's defense business. Management sees defense as a top growth opportunity, both organically and inorganically.

Question 13: What will drive the operating leverage needed to meet the EPS guidance?
Answer: Increased production rates in Q4 and cost management will drive operating leverage. Management expects strong leverage as build rates increase for major programs.

Question 14: How has the cost breakdown in COGS changed, and has energy become a larger share?
Answer: Materials remain the largest part of COGS, followed by labor costs. Energy costs are still single-digit and have not materially changed in the last year or two.

Question 15: Are you ensuring that you keep productivity gains in LTA negotiations?
Answer: Hexcel aims to keep productivity gains but often needs customer cooperation for changes. Productivity initiatives are shared with customers to drive mutual benefits.

Question 16: Could there be a restocking benefit in early 2026 for the 737 and 787?
Answer: The goal is to synchronize production rates across the supply chain. Restocking is gradual, and the focus is on sustained rate increases for major programs.

Question 17: How do you think about the trade-off between buybacks and M&A?
Answer: Hexcel is disciplined in evaluating M&A opportunities that complement organic growth. In the absence of suitable M&A, the company will continue share buybacks.

Question 18: How does the Kinston facility impact the A350 production timeline?
Answer: Airbus has indicated that taking full control of the Kinston facility will drive more productivity. The deal's closure is expected to improve production rates.

Question 19: Are you seeing any indirect impact of tariffs on Airbus demand in the U.S.?
Answer: The direct impact of tariffs is minimal, but the indirect impact on build rates is a concern. The aerospace industry relies on zero tariffs, and the outcome of negotiations will be crucial.

Question 20: How does the currency mismatch and hedging policy impact margins?
Answer: Hexcel is 80-85% hedged for 2025 and building towards 75% for 2026. A weaker dollar could be a marginal headwind, but the exact impact is uncertain.

Question 21: Why can't Hexcel get more pricing through contract negotiations?
Answer: Hexcel aims to maximize contract value but must negotiate with customers. Trade-offs include securing future program participation and reflecting cost increases.

[Sentiment Analysis]
The tone of the management was cautiously optimistic, focusing on managing current challenges while highlighting future growth opportunities. Analysts' questions were probing, seeking clarity on production rates, pricing, and the impact of tariffs.

[Quarterly Comparison]
| Metric | Q2 2025 | Q2 2024 |
|-------------------------------|---------------|---------------|
| Total Sales | $489.9M | $537.5M |
| Commercial Aerospace Sales | $293M | $321.5M |
| Defense, Space, and Other Sales| $196.8M | $182.9M |
| Gross Margin | 22.8% | 25.3% |
| Adjusted Operating Income | $4.2M | $72M |
| Free Cash Flow | -$46.6M | -$14.4M |

[Risks and Concerns]
- Gross margin pressure due to lower sales, reduced operating leverage, and tariffs.
- Commercial aerospace demand softness, particularly in the A350 and Boeing 787 programs.
- Tariff headwinds with uncertain future changes.
- Cash flow deterioration with negative free cash flow in the first half of 2025.
- Potential indirect impact of tariffs on Airbus and Boeing build rates.

[Final Takeaway]
Hexcel faced significant challenges in Q2 2025, including lower commercial aerospace revenue, margin erosion, and tariff impacts. However, the company remains optimistic about future growth, driven by increased production rates and strong defense sales. Management's strategic focus on cost control, contract renewals, and potential M&A opportunities aims to support long-term profitability and cash generation. Investors should monitor the resolution of tariff issues and the recovery of commercial aerospace build rates for future performance.