Hexcel (HXL): The Composites Gold Rush

Transcript

Intro

Thomas: Welcome to Second Spark — we break down emerging technologies to show you what innovation will be transforming next. I'm Thomas.

Katie: And I'm Katie. Let's get to the truth.

The Setup

Thomas: It's nineteen forty-six, in a basement near San Francisco. Roger Steele and Bud Hughes, two engineers with Berkeley ties, are turning out panels of hexagonal cells on machines assembled from spare parts — nearly all air, but stiff enough to hold an airplane together. They call it expanded honeycomb. Nobody in aerospace has asked for it. They keep the machines running anyway, betting that the future of flight belongs to structures that weigh almost nothing.

Thomas: Today, the newest widebody airliners fly more than half composite by weight — and it all started in that basement.

Katie: And the bet paid off — that's tonight's problem. The market now pays up front for everything that basement became, this recovery included. Even if it lands exactly as ordered, a buyer at today's price can still lose money.

Katie: Before any of that history — plainly, what is Hexcel, and how big is it today?

Thomas: Hexcel makes advanced composite materials — carbon fiber, and the honeycomb that started it all — the structural material modern airframes are built from, for commercial and military aerospace. And the honest measure of its size isn't this year's revenue. It's what's already on order.

Katie: As of the end of June, Airbus and Boeing sat on a combined backlog of more than sixteen thousand aircraft — and by Hexcel's own math, that order book already implies more than eleven billion dollars of future Hexcel sales, roughly five and a half years of current revenue, pre-sold.

Katie: That's what a buyer of this stock actually owns: a claim on airplanes that have been ordered and not yet built. Backlogs slip and deliveries get deferred, but very few industrial companies start with years of demand already written into their customers' order books.

Thomas: And here is why we're covering it tonight rather than next year. The A three fifty and the seven eighty-seven — the composite-rich widebodies at the heart of that order book — only got their build rates back to pre-pandemic levels this year, after six lost years.

Thomas: That is the recovery Hexcel pre-built for, arriving on the calendar right now.

Katie: And the business is improving, right on schedule. In the first half of this year, adjusted operating income grew almost forty-two percent on sales growth of about nine percent, with the A three fifty and the seven eighty-seven selling like they haven't since before the pandemic.

Thomas: So here's tonight's promise: by the end, our listeners will know what this recovery is actually worth, who already owns it, and the exact prints that will settle who's right. Because this is the story of a single material, a company that nearly died over and over learning to own it, and whether the price already spent it.

History of the Business & Founding

Katie: Take me back to the beginning. Who actually built this company?

Thomas: Two engineers with Berkeley ties — Roger Steele and Roscoe Hughes, Bud to everyone who knew him. In nineteen forty-six they set up in Hughes' basement near San Francisco and started building what they called expanded honeycomb — a light sandwich structure for aircraft.

Thomas: The idea is the geometry. Bond thin sheets into hexagonal cells and you get a panel that is nearly all air but carries load like solid metal — stiffness without the weight. For a postwar airframe, that trade is everything.

Thomas: And the Air Force showed up almost immediately. They incorporated as California Reinforced Plastics in September nineteen forty-eight and won an Air Force contract that same year, honeycomb for radar domes. A fuel-cell panel contract on the B thirty-six bomber followed in nineteen forty-nine, and in nineteen fifty-four they renamed the whole company after the shape of the cell: Hexcel.

Katie: A basement shop with the Air Force as its first customer. How far does honeycomb by itself carry them?

Thomas: To the Moon. The first overseas plant opens in Welkenraedt, Belgium, in nineteen sixty-seven. Two years later, Apollo eleven's lunar module is standing on the Moon on Hexcel honeycomb footpads. Then a New York Stock Exchange listing in nineteen eighty, and through that decade its material rode the Space Shuttle and the record-breaking Voyager airplane.

Katie: And look at who's paying in that run — radar domes, a bomber, Apollo, the Shuttle. Government programs built this company.

Thomas: And while honeycomb was growing up, the material that would define the modern company was being invented somewhere else. Nineteen fifty-eight: Roger Bacon at Union Carbide, in Parma, Ohio, demonstrates graphite whiskers — the founding moment of high-performance carbon fiber. Akio Shindo pioneers the PAN production route in the early sixties. And in nineteen seventy-one, Toray commercializes its T three hundred fiber, and leadership of the new industry settles in Japan.

Thomas: Toray enters this story here and never leaves it. The modern Hexcel gets built in that company's shadow.

Thomas: Then, in under three years in the mid-nineties, Hexcel bought nearly everything it is today. February nineteen ninety-six: Ciba-Geigy's composites division. June nineteen ninety-six: Hercules' composites division — which is how it got the Salt Lake City carbon-fiber plant, the root of the HexTow fiber franchise it still runs. And in the fall of nineteen ninety-eight: Clark-Schwebel, glass fabrics for printed circuit boards.

Katie: The sizes are the story. How big were these deals for the company doing the buying?

Katie: Ciba's division alone did about two hundred ninety million dollars of sales in nineteen ninety-four, and Hexcel paid mostly with itself: Ciba took forty-nine point nine percent of Hexcel's stock — just under half the company — plus seventy million dollars and change. And that deal closed one year after Hexcel emerged from bankruptcy.

Katie: Clark-Schwebel cost about four hundred sixty million dollars, bought at the very top of the cycle, and it pushed sales past a billion dollars in nineteen ninety-eight. The leverage from that deal is what weighed on the stock afterward.

Katie: How does the company that put footpads on the Moon end up in bankruptcy court?

Thomas: Losses. Robert Witt ran the company from nineteen eighty-six, and the losses piled up until he resigned in July of nineteen ninety-three. Five months after that, in December, Hexcel filed for Chapter Eleven.

Thomas: The equity survived the reorganization — the old shareholders kept their piece. John Lee and John Doyle ran the restructuring as co-chief executives and brought the company out in February nineteen ninety-five, and it was Lee who then led the acquisition wave you just priced.

Katie: Equity coming through a bankruptcy intact is rare — in most reorganizations the old shareholders get wiped out. Somebody decided this core business was worth preserving.

Thomas: And with hindsight, you could see the filing coming. The company had sprawled into too many businesses, and the fix was the predictable one — narrow back to composites, then bet big on them. That's what the restructured company did.

Thomas: The second near-death came from outside. After September eleventh, commercial aerospace went into a bust, and by March of two thousand three chief executive David Berges needed rescue money in the middle of it.

Katie: And the terms tell you what that moment costs. A hundred twenty-five million dollars of convertible preferred, from funds affiliated with Goldman Sachs, with Berkshire Partners and Greenbriar Equity alongside — convertible at three dollars a share. That rescue marked the bottom for the stock.

Katie: The Goldman funds were not strangers, either. They had bought Ciba's entire stake in Hexcel back in December two thousand, with up to three board seats attached and a blocking right over any change of control. They exited through a secondary sale in August two thousand five.

Katie: So that's what rescue capital costs when a cyclical business arrives at the trough needing money: board seats, a veto, and conversion priced at the low. The rescuer gets paid for showing up when nobody else will.

Thomas: Twice in a decade, then — once from its own sprawl, once from a bust it didn't cause. At this company the cycle isn't background. It's the whole story.

Katie: So they survived it. Walk me forward — how does that company become this one?

Thomas: With one contract. In two thousand eight, Airbus handed Hexcel the A three fifty award — the largest contract in company history — and Hexcel answered with a building program to match: a greenfield carbon-fiber plant in Roussillon, France, ground broken in twenty fifteen, another in Illescas, Spain, and an engineered-core plant in Morocco that opened in twenty eighteen.

Thomas: Those plants are the center of tonight's argument. The capacity for the recovery everyone's pricing today was designed and paid for back then — the margin story we get to later runs on those buildings.

Katie: Building years ahead of demand is expensive, and shareholders carry the cost of the wait. Did the market ever pay them for it?

Thomas: For six years, handsomely. Twenty thirteen is the breakout — the A three fifty flies for the first time, the seven eighty-seven ramps, and Hexcel's stock rises about two-thirds in a single year. That starts the compounding run: from roughly twenty-five dollars at the end of twenty twelve to about seventy by twenty nineteen.

Thomas: By the end of that run the market had learned the lesson it still believes today: when the airplanes come, Hexcel's earnings come with them.

Thomas: Then the third near-death. January twelfth, twenty twenty: Hexcel announces an all-stock merger of equals with Woodward — a deal that put Hexcel's side at roughly six and a half billion dollars. By the sixth of April it is dead, mutually terminated as aerospace collapsed under the pandemic, no fee paid on either side — and before that year ended, roughly thirty-five percent of the workforce was gone.

Thomas: The stock told the same story — from the mid-seventies a share just before the pandemic, merger still pending, to a low just above twenty-five dollars.

Thomas: And that pandemic year showed exactly how this machine breaks: revenue fell forty-four percent peak to trough, and four carbon-fiber lines in Salt Lake City went idle.

Katie: That's the flip side of owning all this capacity — when demand vanishes, the plants and their costs stay.

Thomas: Even the recovery had a false start. Through twenty twenty-four and twenty twenty-five, the A three fifty and seven eighty-seven channel in Europe worked down its inventory, Hexcel's shipments decoupled from build rates, and management only called it largely behind them entering twenty twenty-six.

Thomas: That's the caution here: shipments and build rates can come apart for months with demand fully intact, because the pipeline between a fiber line and a finished airplane is long, and inventory hides inside it.

Thomas: In the middle of that arrives a new chief executive, Tom Gentile, and the first big moves are subtraction: the Hartford additive-printing business divested early in twenty twenty-five, the Welkenraedt plant in Belgium closed that June, the industrial-prepreg business in Neumarkt, Austria divested by the third quarter — out of wind energy, out of marine, down to aerospace-grade carbon fiber.

Thomas: So score the deal list for me. The acquisition wave built this company — what's the record been since?

Katie: Nearly silent. No acquisition since ARC in January twenty nineteen, and over the whole decade the company bought only about sixty to seventy million dollars of revenue against a base near one point nine billion. So the growth is understated by portfolio activity, not inflated by it — and margins are structurally higher because of the pruning.

Katie: The exits were honest, too. No goodwill impairments — the charges taken were divestiture and closure items, the price of shrinking on purpose.

Katie: So compress it for me. A bankruptcy, a rescue at the bottom, a cancelled merger — what's the single-sentence version of this company?

Thomas: It keeps betting the balance sheet a cycle early — honeycomb before the jet age, carbon-fiber plants before the airplanes existed — and it keeps surviving long enough to collect.

Katie: And the collecting isn't finished. Gentile said so himself on the fourth-quarter call in January: "Aircraft production peaked in twenty eighteen at seventeen hundred and thirty-four aircraft. In twenty twenty-five, production was still just fifteen hundred and three aircraft, or about eighty-seven percent of the pre-pandemic level." Full recovery, he said, finally arrives this year as an industry — with widebody production a couple of years further behind.

Katie: The recovery is real, and it's not finished. That unfinished piece is where the argument over this stock lives.

The Technology Today

Katie: Before we do the money, explain the material to me — what are they actually making, and how?

Thomas: Carbon fiber first: a hair-thin strand of nearly pure carbon, stiffer than steel at a fraction of the weight. You don't mine it — you cook it out of a plastic.

Thomas: Hexcel buys acrylonitrile, a commodity chemical, and polymerizes it into PAN — polyacrylonitrile, the white precursor thread this industry starts from. Roast that thread until almost nothing but carbon remains and it comes out as HexTow carbon fiber — Salt Lake City, Roussillon, Illescas.

Thomas: The fiber is woven into fabric, and the fabric meets resin — the matrix that locks stiff fibers into a solid part. Hexcel formulates its own resins and impregnates the fabric with a measured, uncured dose: that's prepreg, the HexPly line, cured the classic way in an autoclave — an industrial oven that bakes a part solid under pressure. Aramid paper and aluminum foil become HexWeb honeycomb core — hexagonal cells, mostly air, stiff at almost no weight — and Engineered Products plants shape it all into finished structures.

Katie: Why own every step of that? What does Hexcel get that it couldn't get buying fiber on the open market?

Thomas: Two things. The fiber's surface and the resin's chemistry are designed for each other as one system. And production runs make-to-order, off customer schedules, not forecasts. Six of every ten dollars of the fiber they made last year never left the company; the rest sold outside.

Katie: Then define qualification for me — I suspect that's the real product here.

Thomas: It is. Qualification means proving a material into a certified aircraft design, batch after traceable batch, until the material is part of the approved airplane. Even Hexcel's own inputs often have just one or two qualified sources, so it signs back-to-back supplier commitments alongside its multi-year customer contracts. All of it runs through plants on both sides of the Atlantic, Salt Lake City and Decatur the giants.

Katie: So the fiber is the least interesting thing they make. The product is the recipe — surface and resin built for each other, proven into a certified design. That's what the customer buys.

Thomas: The proof is flying hardware. Track composites as a share of airframe weight: the seven oh seven, essentially none. Through the eighties and nineties, the seven sixty-seven and the triple seven crept from six to eleven percent. The A three eighty stepped to twenty-three.

Thomas: Then the break: the seven eighty-seven crossed half, the A three fifty flies at fifty-three percent composite by weight, and the newest military airframes are majority-composite. And it isn't only airframes — Hexcel's map of one engine and its nacelle marks ten positions, fan blades to thrust reverser to acoustic liners. Even an all-metal narrowbody pays Hexcel through its engines.

Thomas: Now the strongest version of the skeptic's question. Toray, by its own disclosure, holds the largest share of the global fiber market — several times Hexcel, whose share of world tonnage is single digits.

Thomas: That's the company that commercialized this industry. So why does Hexcel still own the only tier that actually pays?

Katie: The answer is structural, and it starts with a split: the same material sells into a pair of markets that share nothing but a name.

Katie: Tow — the industry's unit of sale, a bundle of parallel filaments on a spool — clears two prices. Aerospace-and-defense-grade runs about eighty dollars a kilogram and has held flat for years; commodity tow, the wind-blade grade, has collapsed to around twelve.

Katie: Wind is forty-five percent of the tons and twenty-two percent of the value; China holds more than half of world nameplate capacity, nearly all of it commodity.

Katie: Then the wall. On the aerospace tier the material is specified into the aircraft's type certificate — the regulator-approved design itself. Switching a primary-structure prepreg mid-program means years of requalification and a bill in the tens of millions, so a position lasts the life of the program. In industrial, switching costs are near zero. Same molecule, opposite economics.

Katie: Hexcel read that split and retreated on purpose: industrial was about an eighth of sales before the pandemic, wind the biggest piece; when blade-making commoditized, it closed or sold those plants. Industrial is under five percent of revenue today.

Katie: The contrast is SGL Carbon, which stayed broad: a shrinking fiber unit, restructuring charges, impairments, a failed sale. Hexcel's aerospace franchise, meanwhile, hasn't budged — its Airbus and Boeing revenue shares have been stable for three straight years.

Katie: So the paying tier is an effective oligopoly — Hexcel, Toray, Syensqo, Mitsubishi Chemical — a short list holding most of the value. And Hexcel's American and European plants sit next to Airbus and Boeing, full traceability on every batch — nothing a Chinese producer offers a Western airframer today.

Katie: The chemistry is replicable; the decades of qualification data are not. What Airbus buys isn't fiber — it's a qualification record no rival can shortcut.

Thomas: So make it concrete. Against the biggest names on that short list, where does Hexcel stand — with numbers?

Katie: One honest caveat: nobody discloses a prepreg market share, and no credible source computes one — the fair comparison is aerospace-composites revenue and program positions.

Katie: Hexcel: about one point nine billion dollars of sales last year — the pure play, all of it advanced composites.

Katie: Syensqo, the old Solvay composites arm, runs about one point two billion euros a year, the fastest-growing of the three — up more than sixteen percent last quarter.

Katie: Toray's aerospace slice: about a hundred twenty-two billion yen — call it eight hundred million dollars. Upstream, in bare fiber, Toray dwarfs everyone — twenty-eight percent of the world market, by its own count.

Katie: And the tell: Toray targets a hundred eighty-six billion yen of aerospace by fiscal twenty twenty-eight — up fifty-three percent. The fiber king intends to close the composites gap.

Thomas: Then size the tier that pays — what's the headline number, and what's Hexcel's slice?

Katie: The headline: a roughly five point four billion dollar global market, growing high-single to low-double digits by either forecaster. It checks bottom-up: Toray's published capacity divided by its disclosed share implies a market within a rounding error of the independent demand count.

Katie: Now cut it honestly. The slice Hexcel can address — aerospace-and-defense-grade, in qualified forms — is roughly two billion dollars: forty to forty-five percent of the headline value on ten to fifteen percent of the tonnage.

Katie: And capture improves downstream: prepreg, honeycomb, and structures carry two to three times the value of bare fiber, and realized markup runs about one point three times cost of sales — set inside multi-year contracts with adjustment clauses, not list prices.

Thomas: Now turn that skeptic's question onto the original product — the honeycomb the company is named for, older than the jet age. Is the moat still intact on the technology side, or just incumbency?

Katie: Hexcel's nineteen ninety-four filing already called the company the world leader in honeycomb for almost fifty years, with the largest share worldwide — and thirty-one years on, the same number-one claim stands, roughly eighty years into the product's life.

Katie: And the challengers are museum-vintage: Gill, founded nineteen forty-five — by its own account one of the world's largest honeycomb-panel makers. Showa Aircraft, nineteen thirty-seven. Euro-Composites, the eighties entrant, Airbus-qualified across the A-series interiors. Plascore in the niches. Toray makes no meaningful core at all — no new Western name of scale anywhere we looked.

Katie: What keeps them out is physics and paperwork. Hexcel's filing names its qualification database and total raw-material traceability as the entry barriers. Gill, then a sixty-year incumbent, qualified to one Airbus core specification only in two thousand eight. A Chinese maker says its COMAC cabin-core qualification alone took over two years. And the feedstock is a chokepoint — a handful of aerospace-grade aramid-paper makers on Earth.

Katie: Now the honest erosion. Honeycomb lost primary structure a generation ago — sandwich panels trap moisture, and that pushed modern wing and fuselage skins to solid laminate; core's kingdom is secondary structure, interiors, nacelles, blades. The fastest-growing substitutes, thermoplastic cores and printed lattice, are growing off small bases.

Katie: China is inside the tent for interiors-grade: a COMAC-qualified aramid-core supplier that also claims adoption on the newest A three fifty — the company's claim, unverified. And core doesn't out-earn the cycle: the honeycomb-heavy Engineered Products segment grew all of one and a half percent last year.

Katie: Share numbers exist only as estimates: one puts Hexcel's core share around eighteen percent, another says north of twenty-four — no methodology visible on either.

Katie: So, head-on: intact where it matters — same names, same leader, for the product's whole life. The erosion is real, but it's peripheral.

Thomas: The manufacturing reality: the ramp is restarts, not construction. Salt Lake City runs fourteen fiber lines; of the ones the pandemic idled, two are back, the third pulled forward into the fourth quarter of this year, Decatur plants are coming online, and the hiring is mostly done.

Thomas: On last month's second-quarter call, an analyst asked Gentile whether restarting an idled line is as simple as switching the lights on. His answer: "the start-up is not routine. I mean it takes a couple of months of planning and preparation." Then the sentence he wanted on the record: "So bringing the lines on early will be a net benefit for us in terms of our margin enhancement."

Katie: Worth being precise about: an idle line isn't neutral — its fixed costs land on every kilogram the running lines make. Restarting one doesn't just add volume; it removes a drag. That's the floor under the margin story.

Katie: Last piece — it makes the forward math simple. A shipset: everything Hexcel sells into one complete aircraft. The company's own deck prices it: an A three fifty carries four and a half to five million dollars of content; a seven thirty-seven MAX, a few hundred thousand. One A three fifty is worth roughly ten MAXs.

Katie: So to first order, Hexcel's future is a pair of build-rate decisions, made in Toulouse and Seattle. What we can't know yet: is this a single restocking as the world's fleet recovers, or a decade of recurring demand?

Financials & Valuation

Thomas: Walk me through the money.

Katie: Before any numbers, the short list. The widebody build rate, because those shipsets dwarf everything else they sell. The incremental margin, because the factories are already paid for. And the multiple, because the profit and loss is behaving — the fight is the price.

Katie: So here's the machine. Eighty percent of sales is composite materials — fiber, prepreg, honeycomb — and twenty percent engineered products; sixty-one percent commercial aerospace, thirty-nine defense and space.

Katie: Concentration is the headline: Airbus and its subcontractors about thirty-nine percent of revenue, Boeing about thirteen — two customers, half the company.

Katie: In the second quarter commercial aerospace grew eighteen percent; defense slipped seven on a divestiture.

Thomas: And those relationships aren't one-off purchase orders — they're five-to-seven-year agreements, roughly a fifth renewing each year, Airbus contracts running to the end of twenty thirty — and renegotiated ones, management says, are landing strong price realization.

Thomas: So the recovery reads straight off the revenue line: about two and a third billion dollars at the twenty nineteen peak, one and a third at the bottom, just under two billion last year. Every collapse in that line is airplanes that didn't get built — the price never moved; it's fixed between renewals.

Katie: That lock from last chapter has a textbook name: switching costs — pricing power at renewal, a requalification barrier so long nobody switches mid-program, a position won at award and held for the aircraft's life. Not process power — a process can be copied; decades of certification history can't.

Thomas: So if price sits fixed between renewals, where does the margin recovery come from?

Katie: It shows up first in the gross margin, which ran about twenty-seven percent in the late twenty-tens, fell to sixteen in twenty twenty, and is back to twenty-six and a half this half-year — still shy of the old average.

Katie: The mechanism is volume leverage on a fixed base — capacity is in place, the company says, to exceed the old sales peak. That's what produced the headline quarter, sales up eight percent and adjusted earnings per share up thirty-two. Underneath it, the incremental margin was forty-nine percent — nearly half of each new sales dollar dropping to operating profit — the full year is guided to about thirty-seven, and management claims mid-thirties is sustainable.

Katie: And it's structural, because sales are up roughly fifty percent since twenty twenty-one on capital spending held near eighty million a year, with return on invested capital going from two percent to nine — the restart story cashing out. So in July the guidance went up, to sales of roughly two point one billion and adjusted earnings of two thirty to two forty a share, on A three fifty upside and stronger MAX pull. The stock fell anyway, because the second half is guided below the first, on shutdowns, hiring, and restart costs.

Katie: There is an asterisk on the margin story, though. Last October, on the third-quarter call, Wolfe's Myles Walton put the question directly — what do decade-old contracts without inflation escalators cost the eighteen percent margin target? Gentile: "They'll be at about sixteen percent. So about two hundred basis points of headwind from the inflation is really what the impact is." The road back, he said: the peak-rate volume, landing in full.

Katie: My rule, stated up front: two consecutive growth quarters below a thirty percent incremental margin, and the absorption story is spent — everything after is price, which only moves at renewal. Today it's nowhere near tripping.

Katie: And one honest gap: no peer reports margins on the same basis as Hexcel, so the clean side-by-side stops at prices.

Katie: And on price, the nearest peer print, Howmet, trades around fifty-seven times trailing earnings.

Thomas: Before the price, the balance sheet — buybacks with borrowed money at a company that nearly died on leverage. How uncomfortable should we be?

Katie: Modestly. The habit worth knowing: restructuring has been excluded from adjusted results four years running, which means the adjusted margins — eleven percent against nine reported — overstate the steady state. Rebuild free cash flow with stock compensation as a real cost, though, and it holds — a hundred thirty to a hundred eighty million a year, clean by sector standards. The catch is that about four hundred fifty million of buybacks last year outran that cash, rode the revolver, and left net debt near nine hundred million. On the company's own measure that's leverage of two point three times trailing adjusted EBITDA, and the new finance chief, Coogan, has committed to one point five to two this year. And none of that debt comes due soon — nothing significant until twenty thirty-one, at a blended coupon just over five percent.

Katie: But know which recession you're pricing, because they aren't the same. The financial crisis cut revenue sixteen percent with gross margin rising; the pandemic cut over a third in one year, with operating income down ninety-seven percent. The risk is airplanes not being built.

Katie: There is something here for the bull as well: returns on equity ran twenty percent pre-pandemic and sit under nine today on a zero point seven asset turn — restore the turns at mid-teens margins and it mechanically triples. Working-capital detail is in the show notes.

Thomas: Now run the experiment the dead merger left behind. Same airplanes, same recovery — score it.

Katie: With dividends reinvested, from the first close after the termination to this week: Hexcel, up about two hundred twelve percent. Woodward, the partner that got away: up four hundred ninety-two. Howmet: up roughly two thousand percent.

Thomas: One fairness clause: all three start near the pandemic bottom, and Howmet — as best we can date it, just days out of the Arconic spin, leveraged, priced for an aerospace depression — is flattered most; part of that run is re-rating from distress, not operations.

Katie: The explanation is where in an airplane's life the revenue arrives. Hexcel has no aftermarket at all — the material sells at build, and that's the end of it.

Katie: Woodward is the opposite. Computed from its own disclosed dollars — it publishes no share — aftermarket and services ran about half its aerospace segment and thirty percent of company sales last quarter. Services grew twenty-nine percent last fiscal year, and management expects new-engine repairs to pass legacy within a year.

Katie: Howmet built the cushion in real time: spares up from eleven percent of revenue in twenty nineteen to twenty-one last year, adjusted EBITDA margins from about twenty-six to thirty-two percent in under two years.

Katie: Hexcel, same window: sales still about twenty percent below twenty nineteen, margins roughly seven points under their own peak, the road back dated end of decade — management's timeline.

Katie: And Hexcel is the only one of the three that suspended its dividend in the crash, brought it back smaller, and isn't buying back stock while it works leverage down. Woodward expects about seven hundred million dollars returned this year, and Howmet's one point four billion of free cash funds buybacks and a raised dividend.

Thomas: So the deal both boards ended as crisis protection protected, in hindsight, Woodward's shareholders — Hexcel was the structurally weaker side. Then the head-on question: no aftermarket, demand keyed to traffic — is this simply a lower-quality business than Howmet and Woodward?

Katie: On business quality, the honest order is Howmet, then Woodward, then Hexcel — a model with no installed-base cushion ranks below suppliers that own one, and it's why the traffic gauge we'll set before we close cuts deepest here.

Thomas: Now the rebuttal, at full strength. Hexcel owns a production annuity instead: heavier A three fifty variants that management says carry more material per shipset, the year's orders already firm, and capacity in place for peak rates through the decade with no major new spending. And mix is not destiny — Howmet started at the spares share you just quoted.

Katie: I'll take that and keep the ranking: lower quality, cyclically mispositioned rather than doomed — which is exactly why the fight over the multiple, in a moment, matters more here than at either peer.

Katie: Governance — my two standing proxy questions: who controls the votes, and what's in related-party?

Katie: Nobody, and nothing. Single class, one vote per share, no controller; largest holder BlackRock, near eight percent. No pledging — it's prohibited — no family deals, no holdco structures. The proxy reads like a normal company.

Katie: The pay plan predicted the behavior — bonuses on free cash flow and operating profit, per-share dilution-aware equity — and it played out as designed: capital spending cut, over eight hundred million returned since early twenty twenty-four, no dilutive deals. Same wrinkle: restructuring sits outside the pay metrics too.

Thomas: The management story is shorter than the company's: a handful of chiefs since the founders — the chief who resigned into the bankruptcy, the restructurer, the rescue-era operator, Stanage through the boom, now Gentile.

Thomas: Gentile ran Spirit AeroSystems, the aerostructures world Hexcel sells into — a Harvard economics graduate at a company founded by engineers; about seven million in pay, a tenth of a percent owned.

Thomas: On succession, the proxy shows a process, not a named heir.

Thomas: His theory of the job, laid out on the Factory Doctor podcast this spring: performance is not driven by any one part of a company on its own — it comes from how well the parts operate together.

Thomas: Now the yellow flag — innocent reading first. Winterlich, the finance chief, twenty-seven years at the company, resigned last October to join Howmet, with Gentile's blessing on the earnings call: "Patrick has accepted an offer to move over to Howmet, a much larger company than Hexcel." No disagreement stated; no restatement followed.

Katie: And look at what else landed that same day: an earnings decline, a tariff-driven guidance cut, a divestiture, and a three hundred fifty million dollar accelerated buyback — all in one day. He sold a few thousand shares the week after — routine — but the year saw zero open-market insider buys, from anyone.

Katie: Set against that, the scoreboard reads five beats in five quarters, one raise, and one cut, on tariffs. But the February twenty twenty-four investor-day targets were revised down within eight months.

Katie: And Winterlich's last prepared words on the cut call: "We believe the recovery in build rates is real and sustainable."

Katie: I'd weigh the pattern over any single item: credible operators, with a promotional calendar.

Katie: So the fight: what's the recovery worth, and how much of it is already in the price? Street numbers only.

Katie: Hexcel closed Monday at ninety-two dollars and fifty-seven cents — a seven billion dollar company. That's about forty-seven times trailing reported earnings, against a pre-pandemic average just under nineteen. Forward, about thirty-nine times this year's consensus and thirty times next year's.

Katie: The furthest full-year consensus with real depth behind it, twenty twenty-seven: three dollars and twelve cents, from fifteen analysts. Give it twenty percent upside — three seventy-four — on an honest eighteen times: sixty-seven dollars and change, twenty-seven percent below Monday's close.

Katie: As a yearly rate: roughly minus twenty-one percent to end twenty twenty-seven, minus thirteen with an extra year. Break-even: twenty twenty-eight earnings must reach four dollars twenty-nine for zero upside. Steelman it: extrapolate the Street's growth into twenty twenty-eight — four ten to four thirty — and even that lands near zero.

Katie: Analysts estimate Hexcel will compound topline at roughly eleven percent and earnings at roughly thirty-four percent a year over the next three years; the variance around the three-year-out earnings estimate is about plus or minus fifteen percent.

Katie: And note where that consensus sits: the three-year-out mean is four dollars and twenty-one cents — below what we just said twenty twenty-eight earnings must reach for zero upside.

Katie: Grant the bull everything promised by decade-end — five hundred million of added commercial revenue, two hundred of defense, all under existing contracts, margins at the target he named, a billion-plus of cumulative free cash.

Katie: That pencils to about five dollars of illustrative earnings — on the same honest multiple, roughly today's price. The bull case, fully delivered, just gets you back what you paid.

Thomas: My concession, and it's real. Everything I admire — the contracts, the qualification moat, the capacity paid for a cycle early — is already in the price. I came to argue you hold quality through the cycle. The arithmetic says a buyer today isn't buying the machine; they're buying the multiple — the only piece of this story nobody has under contract.

Katie: That's where I land too. At this price the bull needs the widebody ramp, the MAX ramp, a traffic recovery, and a multiple this company's history never supported — all at once. I don't underwrite parlays.

Emerging Technologies

Thomas: So what actually comes next in this space?

Katie: The next airplane. But first, the stakes — in the company's own words, because no bear has said it sharper.

Katie: Imad Atallah, Hexcel's vice president of product management, at a carbon-fiber industry conference in Charleston in the fall of twenty twenty-four: "The entitlement of composites is not guaranteed on the next generation aircraft."

Thomas: Coming from this company, that sentence is the whole chapter. Hexcel's entire franchise rests on composites owning the airframe, and its own product chief is telling a room of composites people that the next airframe must be won again.

Thomas: The next airframe is on a calendar now. Both plane-makers have signaled composite-rich replacements for their single-aisle workhorses — Boeing's successor entering service from the mid twenty-thirties, the Airbus follow-on later in that decade.

Thomas: Guillaume Faury, the Airbus chief executive, was asked in an Aviation Week interview this June whether launch preparation has actually begun. He confirmed the schedule — launch around twenty thirty — and answered: "Yes. We say what we do; we do what we say."

Thomas: Hexcel's management has framed that airplane as the prize: a composite wing lifts content per narrowbody from about half a million dollars toward seven hundred fifty thousand to a million — a fifty to one hundred percent step-up.

Thomas: Gentile put the top of that on the record on the fourth-quarter call: the wing is the double, and wing plus fuselage takes a shipset to one and a half to two million dollars — three to four times today.

Katie: One half of that airplane is already decided. By last summer CFM's RISE demonstrator had run more than three hundred fifty tests, and its better-than-twenty-percent fuel saving comes through the fan — bigger, slower, composite.

Katie: As of July, preliminary design reviews are complete on the open fan, the outlet guide vanes, and the compact core.

Katie: Call it five hundred test campaigns in five years, thousands of endurance and dust cycles behind them.

Katie: An A three eighty flight lab wears RISE livery since Farnborough, flight tests on a fuselage pylon planned around twenty twenty-nine.

Thomas: Lilian Brayle, one of Hexcel's aerospace presidents, to Aviation Week around the same time: "A chance to introduce new technologies at a broad scale happens once every forty years."

Katie: A window that rare, with a doubling attached, is exactly when an incumbent should be nervous: the switching costs that protect Hexcel inside a flying program don't exist on a clean sheet. Everyone qualifies fresh. So flip the question — if the other architecture wins, who collects?

Katie: Definitions first. Everything Hexcel sells into today's airframes is a thermoset: the resin cures once, a slow set under heat and pressure in an autoclave, and cured is final. A thermoplastic softens whenever you reheat it, so parts can be stamped in minutes and welded together instead of baked for hours.

Katie: There is also a route around the autoclave for thermosets: resin infusion, where you lay up dry fiber and draw liquid resin through it in a mold, and resin transfer molding, the closed-mold version that injects the resin under pressure.

Katie: The industry's open question is whether single-aisles at very high rates favor exactly those routes — thermoplastics and infusion over autoclave prepreg — and Toray and Syensqo are investing on that side of the bet.

Katie: The leader is not waiting for a launch, either. Toray's expansion program, Ignition twenty twenty-eight, explicitly targets intermediates — the middle of the chain, where Hexcel lives — and localized supply for Boeing and Airbus, and Toray itself flags Asian rivals catching up on quality and pushing into European and American markets.

Katie: So, plainly: if the wing is a thermoset on a Hexcel system, the biggest content prize in a generation lands on a company built to serve it. If it's a thermoplastic wing Hexcel isn't on, the window shuts for decades — with the leader already inside its supply chain.

Thomas: Then the counter-moves are the tell. What has Hexcel done to stay on the winning system?

Katie: Start with qualification. Its M ninety-one prepreg completed a public qualification called NCAMP this summer, announced with second-quarter results — a government-recognized materials database that opens sales to new aerospace and defense entrants who never built a proprietary database with a plane-maker.

Katie: At JEC World in Paris this March, the industry's big trade show, the new-product slate read like a hedge book: a rapid-cure prepreg for press molding, fiber and towpreg for wound pressure vessels, woven textiles that arrive already shaped.

Thomas: Gentile made the manufacturing case himself in June, just after the groundbreaking of an applications center at Wichita State's aerospace research institute. His argument, laid out to the trade journal CompositesWorld: a single-aisle replacement means fifty to seventy-five aircraft a month, a step-change today's composites processes were never built for — so the route is dry-fiber automated fiber placement, robots laying dry tape at machine speed, paired with infusion or transfer molding, out of the autoclave, with skins, stringers and frames cured as one piece.

Katie: Hexcel's own throughput targets say how far that has to travel: automated placement lays about twenty kilograms an hour today, and the factory programs aim at eighty to one hundred sixty; cure cycles run about twelve hours, aimed down toward three or even under two.

Thomas: So handicap it. For: the RISE blades come from the same Safran molding process proven on LEAP fan blades — and every LEAP one fan blade and containment case is built on HexTow IM seven fiber, under a Safran contract signed in twenty thirteen. The cleanest read-across in this story.

Thomas: And Airbus's Wing of Tomorrow has fully characterized a Hexcel dry-fiber system, HiTape infused with RTM six — the exact route Gentile is building toward.

Thomas: Against: the seven eighty-seven's composite wings are Toray's — since two thousand five, extended in November twenty fourteen to the triple seven X. Syensqo renewed its Boeing structures agreement and is qualifying thermoplastics. And Hexcel's own materials concede next-generation content leans further on thermoplastics — growth that shifts value off its thermoset stack.

Thomas: The clock: Airbus you heard from Faury. Boeing's chief executive, Ortberg, in July: "it's going to take a couple more years" to repair the balance sheet before a new jet.

Thomas: Our read, nobody's published date: the down-select lands roughly twenty twenty-seven through twenty thirty-one — Hexcel the incumbent at Airbus, the challenger at Boeing.

Katie: But one honest trade-off: the open fan deletes the ducted nacelle — inlet cowl, fan cowl, thrust reverser, containment case — all listed Hexcel content today, much of it honeycomb.

Katie: What replaces it, big blades and vanes, is work Hexcel can feed — but no source we read quantifies the net direction of engine content. A genuine unknown, and we say so.

Katie: Now size what the fight is over. Airbus's own twenty-year forecast calls for about forty-two thousand new deliveries, a world fleet that nearly doubles — and new-generation types going from thirty-nine percent of that fleet last year to eighty-two percent by twenty thirty-five.

Thomas: Hexcel draws its own bet on a chart: the penetration curve it shows ends in a box labeled sixty percent plus, with a question mark — the next narrowbody's composite share — while the composite-rich widebodies flying today are still under seven percent of the world's commercial fleet.

Thomas: Then price that curve for Hexcel. What is the next airplane worth in revenue?

Katie: Assumptions, out loud: a half-million-dollar wing-only content delta at management's number, an Airbus successor at seventy-five a month — below its stated hundred-plus ambition — and Hexcel just holding its position.

Katie: Roughly four hundred fifty million dollars a year of new revenue on a roughly two-billion-dollar base — twenty-plus percent of today's company, wing only, a single plane-maker.

Katie: Sensitivities: sixty a month gives three hundred sixty million; the full ambition, six hundred million; wing plus fuselage, nine hundred million to one point four billion.

Katie: For scale, that rivals the five hundred million of incremental sales management already promises from existing contracts at peak rates.

Katie: The caveat: it phases in only as next-generation airplanes replace today's lower-content narrowbodies.

Thomas: Which is why the down-select is my prize gauge. We'll get to it on the watch list.

Katie: And the second act isn't only civil — Gentile, on the first-quarter call in April, on missiles: "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".

Katie: Behind the missiles, per management's calls: NATO spending commitments, sixth-generation fighters, drones.

Thomas: So the second act is real on both sides — civil and military. And every decision that settles it — the architecture, the material system, the launch itself — belongs to someone else. Hexcel can only be ready.

What to Watch

Katie: So what should we actually watch, to know who's right?

Thomas: Prints, not opinions — all public, all ahead of the income statement. Start with the company's own capital budget.

Katie: The guide is the tell: capital spending held under a hundred million dollars for fiscal twenty twenty-six.

Katie: Current plants support thirteen A three fifties a month; going above that takes new spending on roughly a three-year lead, managed jointly with Airbus.

Katie: And the rivals' moves are already public — Toray's twenty twenty-eight expansion program adds about seventy-five hundred tons a year, and Mitsubishi Chemical is doubling its high-end capacity.

Katie: The under-spend is not a lack of ambition: it is about four point seven percent of guided sales, because that ceiling was bought in twenty eighteen and twenty nineteen — Gentile, on the second-quarter call: "that capacity is still there and we can grow into that."

Katie: Toray's tons are aimed elsewhere: the lines start up in twenty twenty-six and twenty-seven, but its own deck frames them for industrial demand — aircraft get "preferential supply from qualified existing production lines," and new tonnage is not aerospace supply until qualified.

Katie: The Mitsubishi doubling is high-end niches — sports gear, hypercars, some aerospace — not structural-aerospace scale, and no tonnage disclosed.

Katie: And Toray plans around an Airbus A three fifty system "capable of twelve per month by twenty twenty-eight" — a month below Hexcel's standing ceiling.

Thomas: The fiber lead time is why this gauge fires early: the day Airbus asks to go above that ceiling, the guide breaks first — the growth print and the end of the free ride, both at once.

Katie: The rule: the guide breaking above that line, a new fiber plant beyond that ceiling, or aerospace-grade capacity beyond the moves already announced. Any of those ends the free ride — incremental margins mean-revert toward what capex-funded growth earns.

Thomas: That covers supply. Now the print the bears trade on: Hexcel shipping more material than Airbus turns into airplanes. A warning, or just how supply chains work?

Katie: Both — which is why it needs a rule.

Katie: Wolfe Research counted roughly forty A three fifty shipsets leaving Hexcel in the first half, against twenty-six to thirty-two aircraft Airbus actually produced.

Katie: In July, Airbus delivered sixty-seven aircraft — six of them A three fifties — and Boeing fifty-three. Those monthly deliveries are where you read the single most price-relevant variable this stock has.

Katie: The print you'd rather have — actual fiber pricing — is paywalled, so the gap is the readable version.

Katie: And this gap has fooled people once already — that was the destocking story, which ran through last year, with orders only turning back up in December.

Katie: And the targets to hold it against: Airbus driving the A three fifty toward twelve a month by twenty twenty-eight, Boeing's MAX settled near thirty-eight a month against a forty-two target.

Katie: In fairness, some gap is structural: Hexcel's material leaves the factory four to six months ahead of the airplane it ends up on.

Katie: The rule: two consecutive quarters of shipsets running ahead of Airbus output while the monthly widebody deliveries sit below the rate Airbus publicly claims. Cross both, and the destocking is not behind us — it is repeating.

Thomas: So what does the bull say back? The order book — which lands on an honest problem.

Thomas: Hexcel can't show you a backlog, because it doesn't keep one: its contracts fix a share of whatever the customers need, never quantities or dates. So the book to watch is the customers' — Airbus and Boeing combined, more than fifteen thousand aircraft on order at year-end, up about four percent, near record levels.

Thomas: Gentile answered the gap head-on, on the second-quarter call this summer: "While there can be a perceived disconnect at times between our order profile and current OEM deliveries, our demand is tied to production activity in the supply chain, and we remain confident in our twenty twenty-six A three fifty guidance of at least eighty aircraft. During the Farnborough Air Show earlier this month, Airbus publicly confirmed that they are producing at a rate between eight and nine aircraft per month." And a moment later: "Also, we now have firm orders from Airbus through the end of twenty twenty-six that confirm at least the eighty shipsets for the A three fifty."

Thomas: So the rule on the book: the combined backlog turning down year over year, or that firm-order horizon no longer covering the guided count. Either one says the pre-sold floor is softer than the slide math suggests.

Thomas: And management already reads Boeing skeptically: asked in January on the year-end call why his assumptions ran below consensus, Gentile said Hexcel's own numbers show Boeing pulling a little less than the stated rate.

Katie: But demand is the one print nobody controls: IATA's passenger traffic, and it is already negative — down just under two percent year over year in June, with domestic China, the United States and Japan all down. Traffic downturns are the classic early signal for airlines deferring deliveries, and Hexcel has no aftermarket cushion — its material sells once and flies for the life of the aircraft.

Katie: The rule: three consecutive negative months. Cross that, and the pre-sold book starts turning into deferrable promises.

Katie: And none of it waits for earnings: Forecast International tracks production monthly, IBA keeps tail-level data on ninety-three thousand aircraft, and IATA prints every month.

Thomas: The last print is a calendar, not a quarter: the next-generation single-aisle decision we just walked through.

Thomas: While we wait, watch Hexcel's own qualification footprint — the applications center groundbreaking at Wichita State in May, the Boeing long-term agreements renewed at Farnborough in July.

Thomas: The rule cuts both ways. A launch that puts a composite wing on a system Hexcel is qualified on confirms the largest prize on tonight's board; a thermoplastic-led selection without Hexcel, or a slip of more than a year past the date Faury confirmed, and the window passes them by.

Katie: So we're watching the same board: my tripwire is the shipping gap, your prize is that launch.

The Political Shot Clock

Thomas: One more thing before we land — where do the regulators come into this?

Katie: Mostly on Hexcel's side, which is rare. A regulator sits on supply, carbon rules push on demand, and a court case carries the tail risk. The narrowbody volume in this plan is not actually Boeing's decision.

Katie: It's the FAA's. The agency gates the MAX build rate: the current rate runs with its concurrence, and every step above it is a fresh approval, not a Boeing announcement.

Katie: So the clock cuts both ways: while approval is withheld, it caps the volume — and each approval confirms the ramp is real.

Thomas: And the cost side — tariffs. How hard do they actually bite?

Katie: Three to four million dollars a quarter, about ten cents of earnings per share a year, absorbed into guidance — and with over ninety percent of inputs sourced inside each region, the bite stays that small.

Katie: The carbon rules run the other way. CORSIA, the airlines' international offsetting scheme, turns mandatory in January of twenty twenty-seven, and European carbon pricing stacks on top — both push airlines toward lighter, composite-rich fleets.

Katie: And weight is what the product removes — the rare clock running in Hexcel's favor.

Katie: And labor is quiet: the union contract renewed last October for five years, taking the near-term flashpoint off the table.

Thomas: So which clock could genuinely hurt them?

Katie: The Passaic River Superfund case — a legacy New Jersey site. Hexcel and dozens of other parties settled with the EPA for one hundred fifty million dollars; the district court approved the decree, now on appeal, briefing done since January.

Katie: The mismatch is the risk: remedies costed as high as roughly two point seven billion dollars across about a hundred and twenty parties — and Hexcel's booked environmental accrual: one hundred thousand dollars.

Katie: If the decree holds, this is closed at a settled price. If the appeal reopens it, the remedy gets re-cut. Small odds, big tail.

Thomas: Then the last clock isn't a regulator's at all.

Thomas: Boeing bought Spirit AeroSystems back — closed December of twenty twenty-five — and Airbus took the Spirit plants building its own structures. Hexcel's biggest customers internalized the middlemen who buy its material.

Thomas: That concentrates purchasing power — a tougher other side of the table — but it steadies the ramp: the companies that need the airplanes now own the factories in between.

Thomas: And the consolidation clock is still running: the distressed Western fiber assets — SGL, Toho Tenax, Gurit — are likely to change hands this cycle, and Hexcel itself is a plausible target; the Woodward deal showed this board will entertain a combination, and clearance across multiple jurisdictions decides the timing.

Outro

Katie: Bring us home.

Thomas: Carbon-fiber composites genuinely transformed aerospace, and Hexcel captures that value about as directly as any company on Earth — qualified into the airframe for the life of every program that matters, and paid again on every airplane those programs build. But the transformation is decades old, and the recovery is already sold — contracted and sitting in the customers' order books. At today's price you aren't buying the innovation, and you aren't buying the ramp either; you're paying up front for both, and then betting the multiple holds. The technology is real. The value capture is real. The hype tonight lives in the price.

Katie: Second Spark is produced by Overnight Studios. This show is for information and entertainment only. Nothing you hear is investment advice, and the people behind the show may hold positions in the companies we cover.

Thomas: Thanks for listening to Second Spark. Say hello next week when we cover what's next in innovation.