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DATE

Thursday, April 23, 2026 at 9:30 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Thomas C. Gentile
  • Interim Chief Financial Officer — Michael Lenz
  • Operator

TAKEAWAYS

  • Total Sales -- $502 million, up 10% on a reported basis and 8.8% in constant currency, driven by higher commercial aerospace sales.
  • Commercial Aerospace Sales -- $333 million, representing 66% of total first quarter sales and increasing 19% year over year, with all four major aircraft programs showing growth.
  • Defense, Space, and Other Sales -- $169 million, comprising 34% of total sales and declining 6.9% year over year due to the divestment of the Austrian industrial business in 2025.
  • Adjusted Earnings Per Share -- $0.59 for the quarter, reflecting improved operating leverage from higher volumes and enhanced margin.
  • Gross Margin -- 26.9%, up from 22.4% the prior year, supported by volume, mix, price realization, and a nonrecurring inventory timing benefit.
  • Composite Materials Segment -- Accounted for 80% of first quarter sales with an adjusted operating margin of 17.6%, compared to 14.2% the prior year.
  • Engineered Products Segment -- Accounted for 20% of first quarter sales with an adjusted operating margin of 14.6%, versus 6.8% the prior year.
  • Adjusted Operating Income -- $68 million or 13.5% of sales, up from $45 million or 9.9% of sales last year.
  • Adjusted EBITDA -- $107 million, increasing 26% from $85 million in the same period last year.
  • Operating Expenses -- Combined SG&A and R&D expenses represented 13.4% of sales, up from 12.5%, due primarily to R&D activity timing shifts and a realignment of costs.
  • Free Cash Flow -- Cash use of $6 million, an improvement over a cash use of $55 million in the previous year, attributed to lower working capital usage and improved EBITDA.
  • Revolver Refinancing -- $750 million revolver extended to 2031 from 2028, with no substantive covenant changes and slightly improved pricing, strengthening medium-term liquidity.
  • Leverage -- Net debt to last twelve months adjusted EBITDA was 2.6x, with a stated goal to reduce below 2.0x by year-end 2026.
  • Share Repurchase and Dividend -- Accelerated share repurchase completed in March with about 4.5 million shares retired, no new repurchases in the quarter, remaining authorization at $381 million, and a $0.18 quarterly dividend declared.
  • Commercial Aircraft Program Outlook -- Expected A320 volume at the lower end of low-700s guidance range for the year; A350 production outlook remains at 80 units with potential for upside; MAX and 787 programs tracking ahead of prior assumptions.
  • Defense Growth Timing -- Missile-related sales expected to materially increase in the third and fourth quarters as new orders begin to flow through, while European military rotorcraft and fighter jet programs contributed positively in the quarter.
  • R&D and Innovation -- R&D spending rose due to both timing shifts and increased allocation for testing of new carbon fibers to reach next-generation aircraft programs, with slightly elevated levels continuing forward.
  • Hiring -- Approximately 200 direct labor hires year-to-date out of a planned 400 for the full year to support increased production rates across all aircraft programs.
  • Segment Transition Impact -- Ongoing exit from industrial operations at the Leicester, UK, site will further affect Defense, Space, and Other segment year-over-year sales comparisons, with about $15 million in annual Leicester revenue being removed.
  • Foreign Exchange -- A weaker dollar created an 80 basis-point operating margin headwind, compared to a 60 basis-point tailwind last year under the company’s hedging program.
  • Guidance Reaffirmed -- Full-year 2026 guidance maintained, including adjusted EPS of $2.10 to $2.30, with expectations of a roughly even first half and second half split in earnings cadence.
  • Risk Mitigation -- Commodity and energy cost exposure managed through long-term contracts, hedging programs, and a forward-buying program on natural gas, particularly for European operations.

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RISKS

  • Michael Lenz stated, "Foreign exchange has become a headwind, as the impact of a weaker dollar is now being felt following a lag resulting from our hedging program," leading to an approximately 80 basis-point negative impact on operating margin.
  • Full-year A320 shipment volumes are now expected at the low end of guidance due to engine availability constraints, as Thomas C. Gentile commented, "our original forecast was 700 to 750, so low-700s to mid-700s, and now we are saying it is going to be at the low end of that range because Airbus has highlighted that with the engine situation, they are expecting to deliver fewer A320s this year."
  • Defense, Space, and Other segment sales decreased 6.9% year over year, mainly due to the divestment of the Austrian industrial business, with Management noting that the upcoming cessation of Leicester, UK, industrial operations will add further year-over-year sales pressure in this segment.
  • Thomas C. Gentile said, "uncertainty in the global environment remains elevated," and cited higher oil prices and the Middle East conflict as potential headwinds impacting input and logistics costs despite existing hedging programs.

SUMMARY

Management highlighted that the first quarter delivered improved gross margins and operating leverage, attributing this to higher commercial aerospace production rates and structural margin expansion. An accelerated share repurchase program completed in March reduced the outstanding share float by almost 6%, while the refinancing of the $750 million revolver extended liquidity out to 2031 with modestly better pricing. Commercial segment contributions were robust, as sales grew on strength across major OEM platforms, but the Defense, Space, and Other segment declined due to divestments and industrial portfolio exits, with production ramp in missiles not expected to materially impact results before the second half of the year. Free cash flow usage in the first quarter markedly improved from historical norms, supporting the reaffirmed 2026 full-year EPS guidance, with operational discipline and continued R&D investment maintained as a strategic focus despite near-term currency pressures and elevated macroeconomic risk.

  • The company's net leverage ratio of 2.6x remains elevated after the prior-year revolving credit facility borrowing to fund the October 2025 accelerated share repurchase, with a clear commitment to reduce leverage below 2.0x in the coming quarters before resuming further buybacks or M&A.
  • Management confirmed there are no plans for material M&A activity until targeted leverage is reached, and future inorganic investments will require a minimum 15% ROIC hurdle rate.
  • Production and hiring decisions are tightly linked to near-term and expected aircraft program demand ramps, with a bias toward front-loading hiring after better-than-expected volume trends early in the year.
  • R&D expenditures are expected to remain slightly above prior norms, supporting next-generation material development, and changes in R&D allocation reflect both the timing of activities and organizational cost center realignment.
  • Energy and commodity cost management relies on hedging, forward contracts, and natural geographic sourcing, with most European supply chain purchases sourced from within the region to provide additional resilience amid ongoing global volatility.

INDUSTRY GLOSSARY

  • ASR (Accelerated Share Repurchase): A program where a company repurchases a sizable block of shares at once, often funded with available liquidity or short-term credit.
  • OEM (Original Equipment Manufacturer): Companies that produce finished aircraft, such as Airbus or Boeing, to which Hexcel supplies advanced materials.
  • LRIP (Low-Rate Initial Production): The early phase of defense or aerospace program manufacturing, preceding stable full-rate production, often used to validate processes before scaling output.
  • PAN (Polyacrylonitrile): The primary type of precursor fiber used in producing aerospace-grade carbon fiber composites.

Full Conference Call Transcript

Thomas C. Gentile: Hello, everyone, and thank you for joining us today for Hexcel Corporation's first quarter 2026 earnings call. Our first quarter results were in line with our expectations in terms of an improving commercial market, higher production levels, and channel inventory levels normalizing following the destocking we experienced in 2025. The quarter reflects strong execution across the business in a very dynamic environment, which is creating the operating leverage we predicted as production rates continue to increase. Also, results for the first quarter further demonstrate the long-term value Hexcel brings to our customers as a global leader in the development and manufacturing of advanced lightweight material solutions.

Our market position benefits from our deep technical expertise, vertical integration at scale, and long-standing customer relationships. With a uniquely broad portfolio of lightweight composite solutions, Hexcel is well positioned for returning to growth as commercial aerospace production recovers back to pre-pandemic levels and higher. Before turning to our first quarter results in more detail, I want to briefly address the environment with the current situation in the Middle East. We are monitoring developments closely and remain in regular contact with our customers and suppliers as the situation evolves. Hexcel constantly maintains a focus on taking actions to protect our business from near-term cost volatility.

While some of the inputs to our products are petroleum-based, most of what we buy is under long-term contracts. We also hedge propylene, a petroleum derivative, for eight quarters. These mechanisms mitigate much of the near-term impact from higher oil prices for feedstock, energy, and logistics costs as much as possible. Our focus is on managing near-term impact and maintaining flexibility in our operations along with a disciplined approach to managing the business. Jet fuel is one of the largest operating costs for airlines, which reinforces the importance of efficiency and lightweighting. Recent Consumer Price Index data shows that prices for airfare have risen almost 15% year-over-year as airlines grapple with higher fuel costs.

Newer aircraft deliver improved fuel efficiency, which in a higher-price fuel environment makes lightweighting even more critical. This renewed emphasis on fuel efficiency directly benefits Hexcel. Turning to our first quarter results, Hexcel achieved sales of $502 million, a 10% increase compared to the same period last year. Adjusted earnings per share were $0.59. Rising commercial aerospace demand drove earnings, which enhanced our operating leverage as we grow back into our existing capacity. Gross margins also improved compared to last year. These results reflect improved capacity utilization and strong operating performance across our operations. In our Commercial Aerospace segment, sales were $334 million in the first quarter, an 18.8% increase over the same period in 2025.

Sales increased across all four major programs, the Airbus A350 and A320, and the Boeing 787 and 737 MAX. Other commercial aerospace sales increased 15.6% over the same quarter in 2025 on the strength of regional and business jets. As we have discussed from prior quarters, the commercial aerospace recovery has taken longer than initially expected. In our previous call, we highlighted our growing confidence that a sustained increase for commercial production rates at the OEMs was taking hold. We continue to see that production rate ramp materialize. Our first quarter results aligned with our expected outlook for growing commercial aerospace volumes entering 2026 and continuing over the next few years.

Remember that as a materials provider, the various supply chain partners keep different levels of inventory and there is also scrap and waste, so production rates we provide are approximate. Also, Hexcel is typically four to six months ahead of the OE aircraft assembly, so our assumptions are based on production, not OE deliveries. Here is how we see the outlook for the major commercial programs. First, the A320. Based on recent public announcements regarding A320 engine availability, we now expect our volumes on the A320 to be at the lower end of our guidance of low-700s for the year rather than low- to mid-700s.

We remain confident in the overall catalyst for increased OEM production rates on the A320 to continue going forward. On the A350 program, we are seeing increasing alignment between our production rates and the Airbus build rates, with channel destocking largely behind us. We remain confident in our outlook for 80 units in 2026, perhaps even with a bit of upside. On Boeing programs, we see tangible evidence of progress in the ramp-up of both the 737 and the 787, which includes investments to expand manufacturing capacity in Charleston for the 787 and in Everett for the MAX. While we continue to lag Boeing's production rate for the MAX, the year-over-year first quarter sales growth was particularly noteworthy.

Q1 was our best quarter on the MAX in years, with production at around 40 aircraft per month. Our forecast on the MAX for 2026 was mid-400s, and it looks like Boeing will exceed that. On the 787, our forecast was 90 to 100 units, and that continues to be our expectation. As commercial production rates at the OEMs recover, we expect to see ongoing benefits to our operations from increased operating leverage. At the same time, we are taking a measured approach to bringing capacity online to ensure incremental costs are aligned with sustained demand and that the benefits of higher production rates are not diluted.

Throughout this process, our priority remains on meeting increasing production requirements while maintaining the highest standards of safety and quality. On balance, we see the puts and takes for this year canceling each other out and we are maintaining our full-year guidance. Turning to the Defense, Space, and Other segment, our first quarter sales of $169 million were impacted by the divestment of our Austrian facility, which led to a decrease in sales volume overall in the segment compared to the same quarter last year. Looking at just Defense and Space, our sales increased low single digits compared to the same period last year.

We saw an increase in our volume for our European fighter programs and for both U.S. and European military rotorcraft programs. This was offset by lower volumes for launchers and rocket motors in Space. First quarter volumes for this segment also reflect the inherently uneven nature of defense program funding and spending which can vary from quarter to quarter. We expect to see the impact of increased defense spending in areas such as missiles begin to impact us favorably later this year. As we have discussed in previous calls, organic growth in the Defense and Space market is a strategic priority for Hexcel, and we remain confident in the long-term opportunity.

Defense spending trends for procurement of new platforms by the U.S. and Western-aligned countries continue to indicate increased multiyear defense spending, underscoring the durability and scale of the current rearmament cycle. This increased Defense and Space spending highlights opportunity for Hexcel, as our advanced composite materials enable greater range, increased payloads, and enhanced performance characteristics such as low observability for military and space platforms. All these are areas that differentiate Hexcel. In terms of our balance sheet, at the end of Q1, we refinanced our $750 million revolver, extending its maturity to 2031. This refinancing terminated our previous revolver that was set to mature in 2028. This action further reinforces our strong liquidity position.

As part of our ongoing work to streamline Hexcel's portfolio toward markets that value our high-performance aerospace carbon fiber, we remain on track with the transition of our Leicester, UK business from industrial applications to aerospace development. The restructuring cost from our transformation at Leicester impacted our results this quarter. To recap, our first quarter results reflected the forecasted rise in commercial volumes we anticipated and our expectations that operating leverage will be beneficial. Our operations typically use cash in the first quarter of the year, and this quarter cash usage was low and noticeably favorable compared to past history. This gives us confidence in the 2026 full-year guidance that we provided on our previous earnings call.

Despite the macroeconomic challenges, while uncertainty in the global environment remains elevated, the market fundamentals support sustained demand for Hexcel's lightweight composite material across commercial, defense, and space markets. With our broad product portfolio, market-leading position, and continued operational discipline, we are well positioned to navigate near-term uncertainty and deliver long-term value for our shareholders and other stakeholders. With that, I will turn the call over to Mike to walk through the first quarter financial results in more detail. Mike?

Michael Lenz: Thank you, Thomas. Sales growth was strong in 2026 as commercial aerospace platforms ramped and the higher volume drove margin expansion from operating leverage. Total first quarter 2026 sales of $502 million increased 8.8% in constant currency, reflecting strong growth in the commercial aerospace market. This commercial aerospace growth was partially offset by lower Defense, Space, and Other sales following the divestment of the Austrian industrial business in September 2025. By market, Commercial Aerospace first quarter 2026 sales were $333 million, increasing 19% compared to 2025. Commercial Aerospace comprised approximately 66% of total quarterly sales. Sales increased for all four of the major platforms, including the Airbus A350 and A320, and the Boeing 787 and 737.

Sales growth for the two Boeing platforms was particularly strong, which was admittedly an easier year-over-year comparison as our first quarter 2025 sales to Boeing were light. Sales for Other Commercial Aerospace in the first quarter increased 15.6% year-over-year with strength in both business jets and regional jets. Defense, Space, and Other first quarter sales at $169 million represented approximately 34% of total sales. First quarter sales decreased 6.9% on lower industrial sales following the divestment of the Austrian industrial business last year. Year-over-year comparisons will be influenced through the third quarter of this year due to this previous divestment.

Further, as we proceed with ceasing industrial operations at our Leicester, UK site, as disclosed last quarter, that will add an additional decrement to year-over-year comparisons as the site's annual sales have been around $15 million annually. In terms of the Defense and Space business, international military sales were strong in the quarter, including the Rafale and Typhoon fighter aircraft, as well as European military helicopter programs. Domestically, the CH-53K and Black Hawk sales were strong in the quarter. Space sales were softer year-over-year for launchers and rocket motors. Gross margin of 26.9% for 2026 increased from 22.4% in 2025 on volume, mix, and price realization.

Rising carbon fiber sales improved asset utilization, which drives margin expansion from improved cost absorption. In addition, we had a nonrecurring favorable effect from the timing of inventory utilized. As a percentage of sales, operating expenses, including selling, general, and administrative expenses and R&D expenses, were 13.4% in 2026 compared to 12.5% in the comparable prior-year period, with the increase primarily reflecting R&D expenses. A portion of this was the timing of R&D activities as we continue to invest in innovation to secure a position on the next generation aircraft. Adjusted operating income in the first quarter was $68 million or 13.5% of sales, compared to $45 million or 9.9% of sales in the comparable prior-year period.

Foreign exchange has become a headwind, as the impact of a weaker dollar is now being felt following a lag resulting from our hedging program. First quarter 2026 operating margin was negatively impacted by approximately 80 basis points from foreign exchange. In contrast, 2025 had a favorable impact of approximately 60 basis points from foreign exchange. Now turning to our two segments. The Composite Materials segment represented 80% of total first quarter sales and generated an adjusted operating margin of 17.6%. This compares to an adjusted operating margin of 14.2% in the prior-year period. The remaining 20% of total sales generated an adjusted operating margin of 14.6%. This compares to an adjusted operating margin of 6.8% in the prior-year period.

Net cash provided by operating activities in the first quarter 2026 was $19 million compared to a use of $29 million last year. Working capital was a cash use of $63 million compared to a cash use of $98 million last year. Capital expenditures on an accrual basis were $18 million in 2026 compared to $17 million in the comparable prior-year period. Free cash flow in 2026 was a use of $6 million compared to a use of $55 million in 2025. Q1 is historically a cash-use quarter, but this year was less than typical as the timing considerations we highlighted regarding fourth quarter 2025 cash flow normalized in Q1, in addition to the improved EBITDA result.

Adjusted EBITDA totaled $107 million in the three months of 2026 compared to $85 million in the first three months of 2025, an increase of 26%. We refinanced our $750 million syndicated revolver in March, extending maturity to 2031 from 2028, with a slight improvement to pricing. There were no substantive changes to covenants, and this maturity extension enhances our medium-term liquidity and improves our debt maturity profile. Leverage, defined as net debt to last twelve months adjusted EBITDA, was 2.6x at 03/31/2026, and our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase.

We remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5x to 2.0x during 2026. The accelerated share repurchase concluded in early March with approximately 4.5 million shares repurchased, or almost 6% of our outstanding float. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. The company did not repurchase any shares of common stock in the first quarter 2026, and the remaining authorization under the share repurchase program at quarter end was $381 million. The board of directors declared a $0.18 quarterly dividend yesterday, payable to stockholders of record as of May 4, with a payment date of May 11.

In closing, we had a solid first quarter, and as Thomas mentioned, we have reaffirmed our 2026 guidance including adjusted EPS of $2.10 to $2.30. Our expectation remains for a roughly even split between the first half and the second half of 2026, consistent with normalized historical seasonality. There remain a number of potential puts and takes, with uncertainty from the Middle East conflict and higher oil prices a potential headwind, whereas the possibility of a faster customer rate ramp could become a tailwind as the year progresses. I also want to state how much I have valued my time as CFO and the privilege of working with an exceptional team producing such differentiated products for our customers.

Thomas C. Gentile: Thank you, Mike. Before we open the call for questions, I want to thank Mike for his leadership and contributions as our Interim Chief Financial Officer. Mike stepped into this role at an important time for Hexcel, providing steady leadership while we conducted a search for Hexcel's next CFO. Mike worked with us to close out 2025, assisted with executing the accelerated share repurchase, built a plan for 2026, participated and led the finance sections in two board meetings, refinanced our revolver, and participated in two earnings calls. Quite a set of accomplishments for an interim CFO.

With the hiring of Jamie Kugen, who starts May 1 as Hexcel's next CFO, Mike will finish out his tenure and support Jamie in his transition into the new role. Mike came into this role and was not just a caretaker. He brought new perspectives and helped us get better in a variety of financial areas. On behalf of the Hexcel board and the entire management team, I want to thank Mike for his commitment and the impact he made during his time with Hexcel. To close out, our first quarter performance reinforces our confidence in the direction of the business and Hexcel's value proposition.

As commercial aerospace production continues to recover, we will benefit from improving operating leverage supported by our disciplined approach to bring capacity back online, control cost, and focus on safety and quality. Long-term fundamentals across Commercial, Defense, and Space remain strong, and Hexcel's differentiated portfolio, technical capabilities, and customer relationships position us well to deliver growth and value over the long term. We will now open the call for questions. Julian, we will take some questions.

Operator: As a reminder, to ask a question, please press the appropriate key. Thank you. Our first question will come from David Strauss from Wells Fargo. Please go ahead. Your line is open.

David Strauss: Thanks. Good morning. Tom, is there any change in your outlook? I think you had forecast Commercial up low- to mid-double digits for the year. Is there any change there given the potential upside you are talking about on rates? And then second question on the Composite Materials margin. It looks like the incrementals there were north of 40%. I think you are absorbing a decent kind of FX headwind. Kind of how did you get there this quarter, and how are you thinking about incrementals from here? Thanks.

Thomas C. Gentile: Great. So in terms of the outlook on Commercial, we are basically saying that we are going to hold to our guidance and our overall plan, with some puts and takes. We do see a little bit of upside on the A350 from the 80. Based on the Airbus master schedule, based on our bottoms-up forecasting, and based on the firm POs that we already have, we see upside on the 737, as I mentioned, and 787 is about flat. But we do see some pressure on the A320.

As I said, our original forecast was 700 to 750, so low-700s to mid-700s, and now we are saying it is going to be at the low end of that range because Airbus has highlighted that with the engine situation, they are expecting to deliver fewer A320s this year. So net-net, we see basically a flat outcome for the year in terms of our plan, but substantially up from last year. So again, higher on A350 and 737, flat on 787, and a little down on A320. In terms of the margins, this quarter really benefited from a few things. One, we had strong volume performance.

Secondly, we did get some price on a couple of contracts with customers that came due in the normal course of events, and we were able to capture that. We also benefited, as Mike mentioned in his remarks, from inventory that was built last year and was on the books at a lower cost. When we sold it, we got the benefit from that. And then it was just a lot of operational discipline, holding the line on cost, driving productivity in the factories, and that helped improve our margins. Overall, we were very pleased with that outcome. Thank you.

Operator: Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead. Your line is open.

Sheila Kahyaoglu: Tom, thanks for all the color. Just given the volume incrementals are dropping through really nicely, maybe on the A350 where the mix can be particularly favorable, it sounds like you are feeling better about the destocking trend there, and it is only the A320 that is an issue. You mentioned favorable inventory sales timing in Q1. How does the A350 ultimately flow through to the top line and margin profile as we move through the year? And then just the volume on Defense, when do you expect that to really accelerate given some of your programs in your portfolio and how we see the budget come through?

Thomas C. Gentile: Right. What we see typically, Sheila, is when our volume goes up, we get better operating leverage because we are using more of our capacity, and so that drives the operating leverage for improved margins. And when I say capacity, we have 14 carbon fiber lines in Salt Lake City. We had four of those mothballed during most of the pandemic. We brought one on at the end of last year. We will bring on another one this year. As we go through the year and rates increase, particularly on the A350, using that additional capacity will create more operating leverage for us. And as we bring the next line on, that will create even further operating leverage.

That is really the way it translates: increased volume allows us to utilize more of the capacity that absorbs more fixed cost and increases the operating leverage, which drives margin. And as I mentioned, on the A350 we expect to see the rates continue to increase. As Airbus has said, they are at seven, they are planning to go to eight, and we may see nine before the end of the year. That is why we feel comfortable right now with our outlook of 80, maybe a little bit of upside, as we go through the year. On Defense, it is sometimes lumpy—space launchers and satellites. We do see lumpiness on that. We saw that this quarter.

For example, there was one program that we supplied, the Vulcan, which has been paused, and so that was a pretty good number last year and in the first quarter it was fairly negligible. That is an example of the lumpiness. We saw the same in Europe with some launch systems. But on missiles, for example, we are at a very good rate right now, but that gets better and we start to see it really jump in the third and fourth quarter of this year because there have been a lot of new orders for missiles, and that is starting to flow through. It has not flowed through yet. It will flow through later in the year.

Then on some of the other programs that we are on, I would say they are still in the EMD phase—in terms of Engineering, Manufacturing, Development—going into LRIP, low-rate initial production. Over time, as those rates start to ramp up from low-rate initial production into full rate, we will start to see the benefit of that. So it is a slow build, but we are starting to see it, and it will become more material in the third and fourth quarter this year.

Operator: Next question comes from Scott Stephen Mikus from Melius Research. Please go ahead. Your line is open.

Scott Stephen Mikus: Morning, Tom and Mike. Very nice numbers. Tom, if the numbers in my model are correct, I think the $281 million of commercial aero sales in Composite Materials is the highest for any quarter since 2020, which was not really impacted by COVID. Wide-body production rates are still below pre-COVID levels, so I am just curious, was there a restocking benefit? And then on the pricing comments, was there any specific end market or program that was particularly strong from a pricing perspective? Also, you sounded upbeat on the A350 outlook for this year. Airbus has been in Kinston now for over five months.

Based on your conversations with Airbus, is that facility no longer an issue when it comes to A350 production, and does the ramp mainly come down to business-class seats and, to a lesser extent, engines?

Thomas C. Gentile: Right. On the first one, commercial aero sales were high, and even though wide-body production is still below where it was in 2019 and we expect it to be below for a couple of years, we are seeing the benefits of that increased production. We did not see the restocking that we saw last year. We saw that our deliveries were more in line with the OEM production rates, and so that suggests to us that is normalizing, and we are not seeing the destocking. That is a positive. In terms of pricing, it was not in any particular area.

It was just several contracts that came up for renewal in the normal course of events, and as I have said before, whenever that happens, we do try to align current market conditions with pricing on those contracts, and we got the benefit of that in Q1. We will continue to see that on a regular basis as we go forward. Our contracts tend to be five to seven years, so every year between 15% to 20% of our contracts come up for renewal and we renegotiate them, and we have been getting better prices to align with some of the inflation—the higher cost of labor, material, utilities, and logistics—that we have seen in recent years.

On Kinston, I will let Airbus speak to the specifics of it, but certainly they now have full control of it and they are able to control their own destiny. They have been fairly optimistic in terms of their schedules. What we look at is our bottoms-up demand estimate, where we talk to every plant, including Kinston, and that has been very strong. Then we look at the firm POs—our POs are generally firm five months out into the future—so we are starting to see the POs already for September, which is post the August shutdown, and those are very strong as well. It is on the basis of that we are optimistic on the outlook for the year.

Operator: Our next question comes from Myles Alexander Walton from Wolfe Research. Please go ahead. Your line is open.

Myles Alexander Walton: Thanks. Mike, you mentioned guidance split roughly in half, first half versus second half. Were you referring to sales, EPS, or both? And that $0.10 or so decline that you are pointing to at the midpoint, is that mostly based on margins being lower within Composite Materials because of the lack of benefit from the inventory you had in the first quarter? And then, Tom, anything you want to comment on in the M&A pipeline or outlook for inorganic growth?

Michael Lenz: I was referring to EPS. A couple of things as you think about margins and trajectory going forward. Certainly, that nonrecurring benefit was relatively significant, or I would not have mentioned it. There are other considerations as we move through the year. Thomas mentioned about lines coming back on, which is great because we are carrying the depreciation and get the leverage for that, but you also have some start-up costs when you open up a new line and the phasing of hiring. There is always an ebb and flow along the way. As we looked at the balance of everything—like Thomas said, being pretty good through September—we will see what Q4 comes in.

We saw that as the right balance of conservatism as well as looking at the potential opportunity later in the year.

Thomas C. Gentile: Right. On M&A, Myles, our focus is really 100% on executing on the production ramp, then also making sure we are driving our R&D and innovation to get on the next generation aircraft, and then focusing on organic growth in our core businesses and in Defense in particular. As you know, we did the ASR last year in October, and we took $350 million out of our revolving credit facility, and we committed that we would pay that back and get our leverage down below 2x. As Mike said, we are at 2.6x to 2.7x right now.

Our goal is to get back under 2x by the end of this year, and so we are not really planning on any M&A until we get to that point. In the future, the focus for M&A will be looking at things that are advanced material science and have an ROIC of 15% or greater. In the absence of that, we will continue to repurchase shares in the future, but not until we get back below 2x net debt to EBITDA leverage.

Operator: Next question comes from Kenneth George Herbert from RBC Capital Markets. Please go ahead. Your line is open.

Kenneth George Herbert: Hey, Tom. Good morning. Nice results. I wanted to see if you can provide a little more detail as to how you are managing risk on specifically your European manufacturing footprint. We have had a number of questions on this over the last month as we have seen greater volatility in input costs. Can you help frame the risk and provide confidence that you will not see any sort of uptick or related risk as a result of what is happening with energy prices or other input costs globally, but in particular with your European footprint? And if I could, you have mentioned a few times increased spending to support next generation aircraft.

Do you have any updated thinking on timing as to when we could hear about announcements from your customers? Is the timing accelerating, or has your timing changed at all as you think about next-generation clean-sheet aircraft?

Thomas C. Gentile: A couple of things. First of all, most of what we buy for production in the U.S. and Europe comes from the U.S. and Europe—over 90%—so we have that sort of natural hedge. In Europe in particular, we do have a forward buying program on things like natural gas that gives us a little bit more stability in the energy outlook. Of course, if things persist for a very long period of time, we will see the impact of that in out years, but for the next couple of years we feel very confident with our hedging program and our forward buying program.

That will help mitigate some of those costs, and the fact that most of what we buy for European production comes from Europe and not from regions that are more impacted by the current events. And in fairness, most of our production of carbon fiber is in the U.S. We have 14 lines in the U.S., two in Europe—one PAN line in Europe—and the rest in the U.S. Prepreg is mostly in Europe, which is near the Airbus plant, but carbon fiber production is tilted toward the U.S. On next-generation aircraft timing, nothing has changed.

We are still consistent with what the OEMs have declared publicly, which is that they would not make a decision for another couple of years, maybe launch a program by the 2030 time frame with an entry to service in the late 2030s. There are a lot of discussions going on right now for all different parts of the aircraft, looking at not only what type of carbon fiber and resin system, but also what type of production process. We are deeply engaged in those discussions with both airframe OEMs, Airbus and Boeing, but also with the engine OEMs. I expect that they will stick to the time frame they have announced publicly.

Michael Lenz: And, Ken, as Thomas said, we layer in sequentially over several quarters both the hedging of propylene as well as the pre-buy. In the near term you are the most covered, and then that fades as you go out into later periods. None of us have a precise crystal ball as to how events will unfold over the next few months, so this approach provides balance.

Operator: Our next question comes from Gautam J. Khanna from TD Cowen. Please go ahead. Your line is open.

Gautam J. Khanna: Hey, thanks. Good morning, guys. I wanted to ask if you could quantify what you think your A350 shipment rate was in the first quarter, and maybe if you could give it for some of the other programs as well.

Thomas C. Gentile: Just roughly, I would say A350 was at about seven, a little bit underneath seven. 787 was a little bit above seven. Both of them are talking about going to eight later this year. Boeing is talking about going above that, and Airbus is the same for the A350. As I said, we think we could see nine before the end of the year. On the A320, we were just under 60 per month, so kind of in line with where Airbus is. As I said, we are usually ahead of the OEMs. Our production is more of an estimate because we are looking at the quantity of material, and we are also about six months ahead of them.

It is not deliveries that we are looking at so much as production. On the MAX, we are in the 40 range, which is consistent with where Boeing has said they are. They have been tracking very nicely and they are expecting to go to 47 later in the year, so we will be prepared for that. On the 787, as I said, we are a little bit ahead of seven per month, and they are tracking nicely to the 90 to 100 that they indicated last year; that still seems to be a good number. That is how we look at each of the rates.

Operator: Our next question comes from Analyst from Bank of America. Please go ahead. Your line is open.

Analyst: Last quarter you talked about selective hiring for the A350 ramp-up. Could you give us a sense of where you are in the hiring, and how you are thinking about hiring for everything else that is also ramping up?

Thomas C. Gentile: Because our production is fungible across all of the programs, our hiring is aggregate, so I will give you the overall. As we said, we were a little bit heavy last year in terms of staffing because we had expected higher rates. We hired people and the rates did not come, so we ended up higher. There was no point in laying them off because we knew we had to hire them back this year and train them. We held on to that, and that impacted some of our margins last year. This year, we expect to hire around 400 people in direct labor to help support the production. Through March, we have hired about 200, about half of that.

We were expecting to not start hiring in bulk until the middle of the year, but with the higher rates, we started a little bit earlier. So we had about 200 in the first quarter and expect 400 for the year to support the plan we have in front of us.

Operator: Our last question will come from Scott Deuschle from Deutsche Bank. Please go ahead. Your line is open.

Scott Deuschle: Good morning. Mike or Tom, is this step-up in R&D likely to continue over the rest of the year, or should it normalize back down from these levels? And the high end of guidance implies the average EPS over the next three quarters is about in line or slightly lower than the $0.59 you printed this quarter. I understand you had the inventory benefit, but unless that was really big, it would seem there would be pressure to grow EPS off this first quarter base given the build rate increases. Could you clarify the puts and takes as you go into 2Q?

Michael Lenz: Hey, Scott. A couple considerations at play here. Broadly, our overall R&D headcount is actually down year-over-year, but remember, R&D spending involves other activities as well. We had a degree of an increase in Q1 just with the timing of certain activities related to that. Also, as you start any fiscal year, you revisit where your costs are flowing, and there were a couple of items that were in the factory cost centers that are really dedicated and related to R&D. So there was a little bit of a bucket shift there—nothing drastic or radical. On EPS cadence, we are very well mitigating the various cost increases here in the near term, but not completely 100%.

We are being thoughtful about that. While everybody focuses on oil per se and those inputs, a prolonged elevation of that type of situation impacts other things such as shipping costs. There is also the phasing of the start-up of lines with start-up costs and the need to bring the hiring on before you realize the business and the flow-through. Taking all those into consideration, we felt this was the balanced outlook. Hopefully, we see further acceleration that could lead to potential upside.

Thomas C. Gentile: And that is exactly right. When we are doing testing of new carbon fibers—to increase tensile strength, modulus, and compression—we have to produce batches of test material. Historically those batches just stayed within the plant, but now that they are picking up and there is a little bit more material, we are allocating them more properly to R&D. You will see some of that, and that is the bucket shift that Mike mentioned. In general, we are stepping up R&D to make sure that we have the right products in front of our customers as they make their decisions on the next generation product.

You will see slightly elevated R&D as we go forward—some of it being the bucket shift and some of it being that we are stepping up to be aligned with where the OEMs are, both the airframers and the engine makers, for the next generation aircraft. As for EPS phasing, we are going to be about half and half on EPS for the course of the year—first half and second half. This was a strong start to the year. We will continue to drive production rate efficiencies, hold the line on cost, and drive productivity in the factory. We feel comfortable with the outlook.

With all the uncertainty regarding production rates and oil, we feel it is prudent right now to hold the line and maintain guidance. We will certainly try to drive productivity and improve on it, but right now it is about balance.

Operator: We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.