Howmet Aerospace Inc. (HWM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Barclays Industry Select Conference, 42nd. So we're pleased this morning to kick it off with John Plant, Chairman and CEO of Howmet. John, thanks for getting up early. Kick off so early.

Welcome.

Do you have any opening comments or you want to get right into Q&A?

No opening comment. I would rather respond to you. But I mean, if you want me to talk.

I know you can talk. We'll go into questions. So to kick it off, you just reported, you did raise your revenue guidance slightly. You went from 7.5% to 8%. I don't think you broke out kind of how you're thinking about the different end markets within that 8%. So can you talk about what you're assuming for aero, for defense, industrial, wheels within that 8%?

So you're right in that we did make a small upward adjustment to revenue guide and I think that was maybe based on a little bit more optimism about commercial aerospace and what might happen but then called out build rates, but didn't really specify. For example, we thought commercial aerospace would be 12% or possibly 12% a little over, a little plus. Defense, I think we got it, pegged it around mid-single-digit plus similarly with industrial markets -- and then with, say, a small downdraft in the commercial transportation business with some optimism that maybe by the second half, that will be beginning to recover. So -- that was the broad contours of our thought process and blend it all together at about 8% is how we've pictured the years. Within that, obviously, there's a lot of moving parts to come.

So within that aero, that sounds like a little bit better than 12%. Maybe just the conversation around aftermarket. If you want to take aftermarket broadly, I know you'd lump it all together, but how you're thinking about aero aftermarket, aero spares aftermarket in 2025 relative to 2024 and then maybe talk about IGT and defense spares. I know you've talked about that bucket growing in total from 17% to 20%. But how are you -- over, I guess, some tough period of time, but how are you thinking about that specifically for 2025?

2025, I think we can expect growth somewhere in that 20% to 25% region for spares.

That's all in.

All in. That is aero, defense, IGT, blending all together and call it around that probably again, towards the upper end of that range that I talked about. And if that occurs, then we'll be moving up another, I'll say, 1 or 2 steps towards that 20% of total revenue that I talked about in -- I think it was in the November earnings call. And so moving positively, so I think if the total is 8% and we're moving, let's say, 2025, then clearly, we're going to move above 17%, 18%, 19%. And may not get to 20%, depends because you're never really sure until possibly 2026, and that just depends upon the differential rates of growth that we see occurring then. Clearly, if spares are trending towards 20% and probably will almost get there in 2025, then as a percentage of our engine business, which is the majority of where the spares originate from, then it's a much higher percentage than that. And it's pretty easy to do the math. If you just take the -- I'll say what was almost $1.3 billion in 2024. And you can see the engine sales at about 3.7%. You can see the percentages there.

Okay. That's good color. Pricing didn't really come up on the conference call. So I know you don't really get that much into specifics around pricing anymore in terms of actual realized price. But how are you thinking about, I guess, in broad strokes of the pricing opportunity, I guess how much of '25 is locked in at this point, how much is still to go? How much '26 is locked in. And how do you think about pricing in '25, '26 the opportunity relative to what you realized over the last couple of years? .

Yes. So I think I would like to start with, I'll say, the origination of trying to move price, which was really started in 2019 and really, I'd say, disputing what was then -- what was called out a fundamental fact of this being a deflationary industry and we did not see why that should be the case. And for the products that we offer, I just couldn't see -- there's no reason why we didn't exercise where I thought the pricing power that we had. And so if you track through Qs and Ks over '19, '20, '21 and so on through '23, you'll see that we move that price pull forward. And any number we called out there was completely independent of any inflation recovery. We treat that as completely separate whether that's metal escalation or general inflationary recovery. which, as you know, kicked up particularly around 2022 at the onset of the Ukraine war and the spike in energy prices leading to more generalized inflation combined with some, I'll say, government policies regarding fiscal stimulus. But in 2024, I think in February was the last commentary I really gave about price. And I move the word slightly and so that 2024 would be of a similar number to 2023, which in itself is a new high and it would be that or somewhat greater. And then really haven't commented since if you said we said, "How did 2024 stood out?" It was exactly in line with what I said. And we see 2025 in a similar fashion, which is, I'm going to say, 90% plus already determined and we're beginning to turn our minds now to 2026 and the renegotiations of our long-term contracts, which come up in '26. So David, it's a long answer to saying the journey continues.

And just remind us how much of your contracts kind of come up for repricing every year?

If you just took, most of our contracts are 3 to 5 years. The occasional one will extend beyond that. But where we've come to an agreement that we are willing to extend, then I don't want to have that long-term extension with that price kickers in the back end of the contract. Because there's too much that flows without absolutely knowing everything was going to go on relative to any, I'll say, recovery corridors that we have in our agreements. And so we tend to decide whether we want to go longer or shorter according to how we feel, the competitive nature of the contract but we think the fundamental demand in the industry will move. And so we are very [Audio Gap] to form a good view about that and then determine duration as well as the development percentages. And also a bit -- just to give you a bit more nuance. We also analyze volume variety that we just moved between OE and aftermarket and any changing blend of that or that was just gone totally past model in terms of no longer having OE production. So there's a lot of efforts that goes into looking at all of that because I do consider looking after the top line in my first responsibility, whether that's top line for content, whether it's for share, whether it is for price and always try to make those the [ apt ] conversation rather than an odd conversation.

Tariffs and how that plays in the pricing and your ability to price through potential tariff exposure around nickel...

I just think it's trying to get me going because I've got tariff whiplash. One day, I face left. The other day, I face right. Then sometimes I look up and down, and I'm never really sure -- but the only thing about it is that our intent is one of recovery. So in the case of commodities, then our escalators should take care of it. There's always this worry about do the tariff inputs costs on commodities lead to more generalized inflation? And therefore, the recovery of that and getting a dollar of recovery for more general inflation per dollar of cost is pretty unattractive in terms of the margin profile. But I think we are clear eyed about what needs to be done. I mean, for example, on the Sunday where I think Canada and Mexico are going to have 25% tariffs -- and we were already working that and putting things in place that we said might happen. On Monday morning, of course, Mexico came off. And then in the afternoon, is Canada came off. And so that was a waste of time and effort and energy and emotional whatever you call it, capital to go through. And then -- but then there's China 10. And since then, he's aluminum and steel and tomorrow, it's going to be something else. But we'll deal with it as it comes, and I don't want to appear complacent in any form. Clearly not if I'm taking action on a Sunday in a lot of things that are going to happen potentially by Tuesday. But yes, it's whiplash.

You laid out production rates out of -- for Airbus and Boeing that you've assumed in your guidance. But relative to those production rates, could you talk about where your actual production is? On MAX, A320, A350, 787, are you above or below those rates that you be?

We span all of it. So it very much depends upon the development product line or the different products we have within product lines. So some of them we are below, some of them we're above, and it's really difficult to get a complete picture of that. And -- and some of it's born by, I think, Boeing themselves, deciding to, as an example, to reduce their inventory, which I note the CFO said it ballooned to some $87 billion. So we see some of that. And just try to form a view about what's a number that we think is relevant to the financial guide that we've been willing to put forward and so that you have the ability and any investor or potential investor has the ability to slide rule up and down relative to that. At the same time, it's no real commentary on what Boeing will produce. We note their aspiration to meet rate 38, which has been a consistent aspiration for the last 2 or 3 years. And so we are really hopeful that production rates do increase to rate 38 and indeed, the now rate 42 by the end of the year. I mean, that would be excellent news for Howmet and indeed, the whole industry. We need in one Boeing to be successful because it makes a difference.

Moving over to the industrial side. You recently gave a lot more detail around IGT, your outlook there, your share there. So maybe talk a little bit about what you're expecting out of IGT over the near term. Oil and gas, oil and gas, I know it was really good for you last year. So what are you expecting out of those 2 end markets over the near term? I know longer-term IGT sounds really good, but kind of near term?

Well, in the very near term, so let's assume 2025, it's going to be a case of what additional that we can make given that capacity does take time to come on stream now. Part of it, I'm encouraged by because we took a little bit of a flyer in 2024 and made a significant investment relative to prior investment in IGT over recent years and went above our replacement depreciation because of, let's say, the demand we thought was coming and whether that demand was for additional turbines or for additional spares. And since we made those commitments probably in the first half of last year, the pictures got brighter and brighter again. And so the existing [ fleets ] In the market of turbine is running harder, which is leading to additional spares demand. And now we're being -- and our thoughts are consumed by the opportunity because of the build-out of data centers and for us, it's all about the electricity demand to power all of those GPUs in the server racks and then also the electricity used to cool them down. And so the demand and the build-out and the tens, indeed, hundreds of billions of dollars now being invested by the hyperscalers is truly extraordinary. Of course, we all had a wobble in January with the advent of DeepSeek and what that -- but I think everybody has calmed down now and realizes that the fundamentals are going to continue. It will be trimming around the [ edges ], is what I think we've concluded. But compared to the -- I think the notes I talked to in August of last year and then updated in a more significant way in November, the pictures only got better for us in that -- we talked on the day after the election for our earnings in November. And we're not yet ready to make an assessment of what that meant for the blend of renewable sources of energy compared to fossil fuel, which I really mean by natural gas as a source of input energy for electricity. And clearly, given the contours of energy policy by the new administration, then we think that natural gas is going to be an even bigger feature over the next few years. And therefore, the investment by turbine manufacturers has got better and our win. So in December, we made a reassessment of our strategic plan in the IGT segment and made the decisions that we would actually kick up our investments that we'd already planned in 2025. And I talked a little bit about that on the earnings call, was it last week or last -- track a time now, which weeks we're in. But in terms of what does that really mean? We're building out new -- actually putting new building or building additions for example, in Japan and in Europe now, which were not part of our previous plans because we need the square footage to put in place the additional machinery that need to be brought to bear, and we've also placed orders and begun to build, for example, additional casting furnaces to enable that expansion to occur. And we're seeking to do that in double quick time. And I'll say, getting around some of the, let's call it, government regulatory requirements in terms of, for example, building permits to enable us to be able to support the industries around the world. And so I predisposed to be more optimistic that also some of that capacity will come on stream in 2026, which is necessary to meet the requirements that our customers have. And for us, I just want to say, it is no one particular customer. We do serve the global industry. So whether it's Siemens or Mitsubishi Heavy or Ansaldo or GE Vernova, we supply all of those companies and say, we are really clearly the #1 in the market.

Pivoting back over to the commercial side and the engine side. So you have the upgrade of blades on the 1A, 1B is coming, GTF phase coming, so clearly, you've picked up share or content. You talked about these market share gains that you've been facilitizing for, that are still yet to come. So as we -- I've asked you this a couple of different ways and trying to do more straightforward this time.

So, would you get a good answer this time?

Sorry, I'm going to try different approach now.

Okay.

For 2025, you've talked about, I guess, 12%-plus kind of aero growth. Would you expect your aero growth to accelerate off that 12% -- not grow off at 12%, but your growth rate to be higher in 2026 as these market share gains materialize in a bigger way?

Of course, there's always going to be a blend of all the things that might happen in 2026. So you -- what is, for example, the fundamental build of aircraft, as an example, whether it's commercial or military. But I think all of us should have optimism that that's going to be healthy. We can't keep talking about supply chain constraints year after year. They have to be resolved or may be most of them already are and may be they have been used a bit of a fig leaf sometimes here or there. And so I do have optimism that we're going to break through on narrow-body build and wide body build in -- during this year and to see better times ahead. On top of that, we will be introducing -- we've just made the changeover, the LEAP-1A and so we're manufacturing all of the newer blades too, I'll say, an improved robustness specification that a customer has wanted. I took last week about the cutover on the GTF advantage coming in, I've just said loosely, very loosely, midyear because we do require sign off and agreements by our direct customer, which in that case is Pratt & Whitney. And of course, they themselves require certification from the FAA regarding the engine. And that's both for the complete robustness packages for GTF have taken a bit longer. And then obviously certification these days takes a little bit longer. And there's never any absolute certainty of any particular month of final sign-off. And therefore, when you can begin to make the cutover. But we're in the stage now we are manufacturing -- but the numbers associated with the new advantage level of engine are very modest because we have not what I call mass tooled yet because there's no point in tooling for mass production until we've got the certifications. And so we're poised but not implemented yet to that. So maybe by midyear, maybe it will be early, but it could also be later. So you want to be a little bit cautious there. But year-on-year and were going to '26, that should be good. And likewise, a new -- I stand by my statement that the LEAP-1B is not a '25 item at all. It's going to be a '26 item. In terms of the changeover and again, it's going to be a requirement and sign off by GE, is going to be a required sign off by Boeing, is going to be the sign-off by the FAA and there's a long line of things which need to be certified by the FAA for Boeing. And maybe that will accelerate under the new administration. It's a TBD but at the same time, the -- everything is about safety in the case of Boeing, and this change is more at robustness rather than fundamental aircraft or engine safety because the engines are good.

Wanted to ask about the margin side, particularly at fasteners and structure. So engine margins have been terrific. I think 800 basis points above where they were in 2019, even though volumes maybe are now back to kind of where we were close, somewhere close. The potential for fastener margins to exceed prior peak levels. And then on the structure side, the exit rate that we saw in the fourth quarter, is that -- is that the new normal for structure? Or should we dial back our expectations there? .

If you had asked me at the start of 2024, did I think we would have margin exit rate for our fastener business, which was, I think, 27% plus, I wouldn't have put money on it -- I's rather put money on all the things that we were doing that we were trying to achieve to make the margin improvement to occur. But the one thing which I think has been an outstanding feature of our fastener business in 2024 was the rate of increase in productivity and throughput and of that, I could not be more pleased because we've put through significant volume increases or actually having a lower employment level. Some of it's down to automation, which has been a continuing theme of what we've been trying to do in initial years. A lot of it is just the basic improvement in process control and workflow and line balancing. And so I've been really really pleased by the outcome. Now nothing ever moves in a straight line. It's not as though you suddenly start and everything goes at a constant line. So there's always times of plateau and the times of moving forward. But if I look at the vectors around the fastener business, if we can hold on to that rate and if we get a benefit from additional blend of wide-body build, then that would be a positive for us. So it may be we get a positive with us, it's actually doing much at all -- just on average mix because we know when we get a composite aircraft compared to metallic aircraft, you do get a benefit. So where could we see that it's going to be dependent upon what's the final build in outlook for the 787, also the Airbus A350. And then also any early bills of the 777X which may occur in 2025 for 2026 delivery to customers, if that continues on. Its seemingly now more positive path given the resolution, it appears of the engine pylon problem of '24. And so with that move to composite wings on 777 plus hopefully, increased bills moving towards a 10 per month rate for 787 to a 12 gradually to 2027 for Airbus on A350. Those percentage increases would be higher than the relative percentage increase in narrow-body, but both would be good. And therefore, that should assist with our faster margin. Turning to structures, again, I've been pleased with what we've been doing in the business. First of all, given the lack of build in wide-body and then I'm going to call it the devastation that we had because of fundamental underbuild of the F-35 for several years, we were left with having to -- or Lockheed were burning off their bulkhead inventory as an example. And so we've done well to hold on to a 14% EBITDA margin during that period of time. And the only fundamental thing that changed was the sanctions around Russian titanium for VSMPO, there's only positive we had in all these years. We think that the bulkhead inventory was burned off and we began to line build with Lockheed. So one aircraft as a set of bulkheads became true in the fourth quarter, which was helpful to us. The -- a little bit of pickup in widebody, some good throughput in our titanium business. And that resulted in a significant improvement in margin up into the 18% level. And I've been convinced and have been on record of saying I think this is a high teens margin business. So should get there. We got there in the fourth quarter now. Again, 1 quarter doesn't make a year, but the intent is not to go backwards, David. And so I'm optimistic that we're going to see some good margins in our structures business in 2025.

Great. Can we bring up the audience questions? Real quickly if we can run through these. So I think you have key pads, if you can use those and key in. We take all your responses and then we collate everything and compare across the aerospace and events and compare across all industrials.

I got to look behind me for the answers, right now they're up there. Do you -- on the stock...

Let's go ahead and cycle through them.

Better get moving. I've got to say that David, if I'm not positive, then who will be?

I understand you're an owner.

Yes, I am an owner. It did get pointed out. I have a few shares, have met and yes. So far, I haven't sold a single share, but given that I'm -- maybe in the next 10 years approaching retirement age, I think maybe I should, for my wife, 10 years from now, everyone will be very happy. But I got to -- I know I got to say, at some point, they're going to take some money off the table. My wife wants something. She said she wants...

A new car or two?

I don't know, new dress, new ring. And I better do that because if I don't [Audio Gap] second wife is a lot more expensive.

This is relevant now -- Yes. What are you going to do with all this money?

It's certainly true that our return rates of internal investments are really good.

I think there is one more. All right. I think that's it, John. Thank you very much for the time.

Thank you.

Thank you. .

Thanks, everybody.