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

Welcome. We're going to do a fireside chat. I'll open up for questions, so raise your hand, and we'll have a microphone for you at about like in the middle.

And I'll start with the big question and is what kind of signals you're seeing from the commercial OEMs?

In the case of Airbus, it appears that they'd like more. And hopefully, they'll be able to produce more aircraft. So that will be a good thing. In the case of Boeing, we have a skyline, which also calls for more, although we're seeing in certain product lines some inventory correction as I discussed in our last earnings call. And so we've fully taken account of that. So it's a little bit more mixed in the case of Boeing. Generally, themes for other segments for our customers would be, whether it be gas turbine business or oil and gas, it's more and maybe commercial truck is the only segment we have where it's a little bit less. But those are the signals we're seeing.

Perfect. And when you think about those things of and increasing capacity, what kind of like capital investments you have done? And how, I don't know, like '25 investments compare to last year? And what should we expect going forward?

We made a significant commitment in terms of capacity expansion in 2024 where we increased our capital expenditures about 50%. And our aim was to achieve those sort of investments because of the market opportunities that we had, but while still converting net income close to our goal, which is a long-term conversion of 90% of net income. And I think we ended the year at 88%. So I think we achieved something which I believe was good, if not extraordinary, in those changes, basically, to allow the company to show further growth in the future. When I look at 2025, we've given guidance that CapEx would be at least 2024, and therefore, again, very elevated, if not more, and again, trying to make sure we capacitize for the growth in the commercial aerospace business and also now increasingly in the gas turbine business where we're seeing a lot of opportunity as well, which I've talked to in terms of gas turbines to provide more electricity because incentive of data center build-out for some of the hyperscalers. And if anything that market opportunity became bigger given the recent election and with the new administration putting more emphasis on fossil fuels and less emphasis on renewables. So that's another area of expansion. And so currently, we were either increasing capacities and building out extensions or new plants, again, a couple of them in our commercial aerospace business. And now we're doing a similar program in our gas turbine business where we are putting a new plant, up and extending another one in parts of the world.

How long are these CapEx cycles usually and how they compare like the IGT ones to the commercial aero?

Well, in terms of build-out of capacity, it takes close to 2 years to bring something from conception through -- all the way through to production. And therefore, we won't really see the benefits of, in the case of our commercial aerospace business that capacity until the back end of 2025 going into '26. And even with trying to accelerate everything on the gas turbine side, it's going to be, again, more future going into '26 and into '27.

Perfect. And how the SPS fire affects this, both demand and supply? Can you capture some part of that demand? Or do you need to make any investment to capture that opportunity?

Well, of course, when we planned our year, we had no knowledge and no expectation of one of our competitors having such a fire. And I do understand some degree how devastating that can be because we, in Howmet, had our own fire in the fastener plant. And of course, the capacities I've just talked to in our engine in Air Force business or our gas turbine business had nothing to do with fasteners. And now we're faced with this situation. So when we burned down one bay of our fastener plant in France from that instance through to delivery of parts from that plant when it was completely -- that bay was rebuilt and recertified was 3 years. So my thought in looking at the photographs and aerial images of the SPS plant, it looks very extensive damage. And so it will be an interesting thing to observe in terms of what are the plans to replace that plant, if any, and given its age, location and indeed workforce. So we are in the process of providing responses to our customers in terms of their requests for quotation to respond to that opportunity or in their case, their need. And the only thing in terms of, I'll say, where we have said we will not respond is where we've had distributors contact us, could we supply them parts because it's just them wanting to rent the market and the opportunity they've got inventory, which they can exact price for. And so we're trying to reserve what capacities we may have or can provide by way of increasing our employment and shift patterns and order materials for customers that will work with us and provide business on a long-term basis. So it's based upon contracting for the long term because I have no interest in taking these costs on to only have to delete them later in the year. So that doesn't make economic sense at all. So it has to be business which has duration and obviously an economic return.

Perfect. And then on the SPS plant, there were some like sole-sourced parts. Have you seen any change in the customers' approach to sole source given that like an accident like this could cost like years of inventory?

I think it's too fresh in everybody's work plans at the moment. I think the task forces which have been set up at the -- our customers, whether it's been Boeing or Airbus or whether it's been the engine manufacturers or landing gear manufacturers. So far, all of the energies have gone into how they can get parts availability. And little to no thought about what does it mean for the future. And I suspect that given the age of that plant, things which where there sometimes it drifted into -- it's a very old part, only that plant can make it and therefore, limited effort into providing fresh capacities for something which is very old. So I don't know it's going to change very much. I mean the good news is we have already have certifications for certain of the parts. But for certain others, should we be able to have the opportunity under the right circumstances to supply, then we will need certification for those parts that we don't have.

Perfect. And you mentioned the contracting and how you want this like economic return when you do such an investment. How do you deal with contracting or customers to actually feel confident and comfortable to spend that CapEx and take that time, both in the commercial side, commercial aero and IGT?

Of course, it's us that has to expend the capital. So we have to be secure in the duration of the contract and also that we will see the volumes and also realize the price and profit. It's just normal course of business that we'll carry out. And I suspect that it will be a more involved case than just taking on a few people and ordering a bit more material. I think it will be a bit more involved with that to be able to provide the capacity, which maybe the industry requires to get through that.

Perfect. And if I may touch base on Boeing, you have taken a conservative approach on how much you deliver to Boeing. How do you think about the future?

Well, the conservative approach is actually nothing to do with how much I think the Boeing will actually take or want because I don't think we know. So what I've tried to do is to say we make an assumption which underpins our financials and therefore, the guidance that we have given. And if anybody feels more optimistic about the production at Boeing, then they would increment our revenues. And if they felt more pessimistic, they would decrement them in some way. So it's meant to give a financial guide only. I really do hope that Boeing achieve the skyline that they set their targets at, which is a rate 38 for the 737. And it was meant to be at the end of March, I think, rate 7 for the 787, but that's recently been delayed to now the second half of the year. And then going back to 737, I think it's meant to get to rate 42, I've heard those numbers. And of course, we would vote for that if we had the ability to influence it. So my expectation is that should Boeing produce at the higher rates, then we, Howmet, will support them and achieve the necessary production. And the only thing we need is to make sure that where inventory is corrected is that we are, to some degree, level loaded because we won't be able to make little in one part of the year and a lot in another part of the year because it doesn't work like that in the industry. So that apart, then I'm not sitting here worried about what Boeing actually -- what their rate going to be because I would love it to be the highest number that they can possibly achieve because that would be good for us because I can work out very simply that the more aircraft they get produced the more revenue we have. So I like it.

Perfect. And have you seen any meaningful changes since Kelly took the leadership of Boeing in terms of like...?

Well, the fact that he relocated himself to Seattle was very meaningful. I think that was absolutely necessary to be more engaged in the day-to-day running of what's been the biggest, I think, I'll say, center of manufacturing for the company because without sorting out 737, then that was always going to be a huge problem for Boeing. So the fact that he's there and you see pictures of him on the shop floor, having a more hands-on approach, that's very welcome to see. So I find that refreshing. And how it turns out in terms of what the quantities of production will actually be that's -- again, that's to be determined. But it seems as though the current conditions where they do have, I think it's over 100, what they call good fuselages, which are in really good state for quality. We know they have a very healthy engine supply from -- by the engines we produce well. They were on strike last year and undergoing the additional training that they had. But we read that their CFO is commenting publicly that their inventory is $87 billion. It's too high. Therefore, we know they've got a lot of parts. So hopefully, they bring it all together and the aircraft will be assembled quickly and in higher volumes.

And if they were to ramp up to expectations, how quickly can you ramp up your volumes? And what are the main constraints? Is labor? Material?

I'm convinced that we'll be able to respond because, first of all, we know we're carrying higher inventory than we would otherwise carry. That's one aspect. And that gives us the surety that we will be able to recruit in time. And if they went to rate 38 next week, then I suspect we'll be supplying below that rate. But then I'm not thinking they're going to go to rate 38 next week because that would be in advance of their plans. And where they have reduced requirements because of excess inventory, then that's going to give us some, I will say, some palpitations around the ability to ramp back up because the only way we can cope with it is if they are not able to level load, then we'll have to try to find the means to level load. And so today on a couple of product areas, we are producing at a higher rate of production than we believe they are. And so we're pumping parts into inventory to provide a level loading. So we're smoothing production because I think that's going to be necessary on the anticipation that they are going to increase volumes and therefore, to give -- so I don't -- I think Howmet is going to be the last supplier that's going to cause them problems, I hope. But you never know. I mean we'll have our moments, of course, as well.

Perfect. And now switching gears a little bit to commercial engines. How do you think about the aftermarket demand? Even though you're agnostic in your product, what is the mix between like plates that go to aftermarket versus OE?

Well, we've given numbers for the whole company. So in 2019, about 11% of Howmet revenues were to the aftermarket, which essentially is the turbine blade business. But of course, saying 11% of the revenues of the company when there's obviously things in there like, let's say, commercial truck wheels or there are structural parts, it isn't directly relevant. But the most important thing is directionally that 11% in 2019 now sits at 17%. But if you take 17% of Howmet's revenues and it's, call it, $8 billion and apply that to the engine business, then clearly, it's a much higher number of our engine business that goes to the aftermarket and then you could bifurcate that between that which goes to the defense and IGT business compared to commercial aerospace. But essentially, if it's 17% last year, and I did give a future view, which is it's moving towards 20% of the company over the next couple of years because I believe that the aftermarket was going to grow quite healthily. And of course, it's always -- I mean -- but should OE go up very rapidly, then it's like -- I'd like both to increase personally. But I think we're still trending towards a 20% of the company. But then as a proportion of the business, which is relevant, it's a much higher portion that goes into the aftermarket.

Are you concerned at all from like early retirements or a pickup on retirement?

Not really because I ultimately think that would be good for the industry. So at the moment, I suspect that some of the older planes we're seeing additional demand because of additional visits to the MRO shops for refurbishment. And part of that is the fact that aircraft production has been relatively low and underneath the market demand by airlines. And so the backlog is so large. And part of me thinks that the whole industry would benefit from that backlog being addressed with a higher production. And it doesn't mean to say that I think that our service sales will actually drop. My current thought is between the demand for the CFM56 range of engines or the V2500 engine, then those requirements are yet to peak. It's going to be another 2 or 3 years before those reach peak volume. And then I think the [ decay ] will be very modest over a decade or so. But during that time, then I think the frequency of shop visits for the LEAP range of engines and also for the geared turbofan engine are going to increase. So I see those increases continuing to escalate through the next decade. And so my expectation is that every year for the next 5, 8 years, we're actually going to see an increase in service volumes, which is healthy. And if that can be combined with higher OE production of aircraft then that's really good because we'll have both service increasing and OE increasing. And it's almost like what could be better than that. Those will be really great conditions for Howmet to face. And when I look across the whole portfolio, I see positive signs in the gas turbine business, which I can talk more about if you want. And the only area which is we are seeing demand degradation or have seen it is in the commercial truck business, which did reduce in the second half of last year. And my previous public statements have been I thought that would continue through to the summer of this year. And now it's like I'm not really sure because what will be the effects of tariffs and what will be the overall economic impact. On the other hand, maybe I'll get a bit more optimistic about commercial aerospace production. So either which way, I think it's set well.

How do you prepare for such an uncertainty on the transport business? Like how much you produce for, how much you hire for?

We've adjusted both our employment levels and our materials intake. So we are seeing lower production. The task at hand has been how we could manage our decremental to our profit number. And assuming a long-run average of about 40% on the same number for incrementals and decrementals. And so far, I think we've done, I think, extremely well. In other words, our EBITDA margin has held up. It's about 27%, give or take. And I think that's a really good outcome in the light of the demand reductions of, let's say, 20%. And I can't remember quarter-on-quarter exactly, but I even feel that like Q4 last year was probably up on Q3. But in face with demand destruction to have that margin profile was really good and generating cash.

And on HPT blades, what are the next milestones we should be looking at? When is LEAP going to be fully transitioned to the new blade?

Well, first of all, it's not in our direct control. So we have made the transition for the mass production on the LEAP-1A that has already occurred. We will still continue to produce the former blade, but in much reduced volumes, but it will still be a continuing feature of the business to service the LEAP-1A business. The LEAP-1B is not yet determined. My thought is that it's probably a 2026 item. So I think it's at least a year away. And that's dependent upon certification because that requires the FAA to be involved and certifications have tended to be a little bit longer. And should that be accelerated if the new administration was to take a different view, then our tooling capacity is not yet there. So we'd have to tool for it and that takes lead time. And so I still think we're looking at a 2026 changeover for that, but without date certainty at all. In terms of the geared turbofan engine by Pratt & Whitney, the Advantage now has certification, which was good news, and it was earlier than I thought would be the case. But again, tooling has to be -- we have to increase substantially the tooling to be able to manufacture at rate because you can't change over for a few. We are producing a certain quantity of engine sets per month already, but that's not enough to do a full transition for the OE build. And then I think everybody knows that the transition ideally would involve not only supplying the OE demand, but also supplying into the aftermarket and also doing a retrofit program to accelerate the, say, getting engines back on wing for all that. So there's a lot of demand increase that we are facing. And again, we're doing rate tooling right now, and we have meetings this week to go through all of those plans to look at exactly the timing and date of implementation, which will be in 2025 is my expectation.

When you think about both engine types, how those blades, the new blades compared to the mature comparisons like CFM56 and V2500? And do you have an opportunity to keep upgrading these blades or like having like better airfoils to increase time on wing from here?

I think at this -- if you compare the graph in, let's say, the 1970s to now, then I think the robustness level, so you have to be very careful with the words you use, but the robustness levels are as good, if not better, than they were at the introduction of the CFM engine 40 years ago or whatever. The maturity of the new engine designs is not at the level of the, I'll say, closing of the production of the CFM56 because that had 40 years' worth of learning and was a fundamentally simpler construction and the same for the V2500. And so with complexity and complexity means increased air flow, produce additional cooling and it means additional coring, then that complexity leads itself to increased stress because of the temperature performance. And so the, I will say, performance yet of the more modern engine has not been the equivalent of the outgoing engine. But of course, there are these robustness improvements. That's why there is a next generation already of the LEAP, which has been introduced, I said, on the LEAP-1A and there's the advantage. And those upgrades have been more aimed towards robustness improvements than fuel efficiency at this instance, albeit I'm sure that everybody will return to the task of what's the next improvements we can make for fuel efficiency, maybe 3 to 5 years from now. So they will regenerate again to improve design. So in the life of an engine, those turbine blades are probably changed 4 or 5 or 6 times to, again, further the fuel efficiency because everybody wants to have engines which are producing less by way of carbon emissions and improve fuel efficiency for economic purposes. So there's always a lot of transition going on. And therefore, there's a lot of work that we know we're going to face not only to introduce the new levels of technology for today, but also for tomorrow as well. And the same applies for military engines as well. So we're already deep into improving the engine with our customer for the F-35 for the Block 4 upgrades, which normally are for 2028, even though it may be a bit longer, again, for improving thrust, improving maneuverability, yet providing the power to provide increased power for weapon systems and the avionics, there's a lot going on, again, all requiring more efficiency from the engine and then more efficiency from the turbine and the high-pressure part of it.

When you think about F-35 or the F135, right, the fighter has been us, the prisoner of the politics, not only U.S. domestic politics but also geopolitical. How do you think about demand to actually support and sustain and do maintenance on that engine? And are you concerned at all from the news headlines and that risk perspective?

I think the facts are that it is a superb aircraft with both maneuverability and stealth characteristics. And I believe that the people who drive that aircraft or the pilots think it's an extraordinary aircraft. And so I'll say it's good. And Lockheed have never really yet achieved their rate. So through COVID and beyond, it's been a little bit under in terms of production. Meanwhile, it does appear to have become the fighter of choice by many foreign air forces. So whether it's been the German Air Force or the Swiss or is it the Portuguese or is it the Lithuania or is it the Slovenian, there's been so many countries which have ordered the plane. So when I -- 5 years ago, I thought that maybe we would begin to see production reductions in the second half of the decade. And I don't think that's the case at all. I think we're going to see production static or increasing. And therefore, I'm very positive about the quantity of aircraft, which have been ordered and approved by the U.S. government. Now, of course, do I keep current with the news, which I believe today, there are some articles were saying Canada might rethink its F-35 purchase? Or is it Portugal are going to rethink their F-35 purchase? I mean, of course, it's all possible. But I don't know what they're going to buy. So if they do decide to buy an alternative, if they can find one, then the question is what capabilities will it have by comparison because they must have had a good reason to buy the F-35 in the first place. But I can't put myself in the sense that, for example, if they were to buy the Rafael from Dassault, well, we, Howmet, supply that aircraft as well. And it's very difficult to change production. And these are very approximate numbers, so they're probably definitely wrong, but near enough is that, let's say, if there's 140 or 150 F-35s produced a year, maybe there's 20 Rafaels produced. So to increase that production from 20 to 25 or to 30 would be extraordinary, and it would take many years. So should those countries believe they need to have, I'll say, substantive national defense, I don't see how they would change from their current plans. And given the stance of geopolitics at the moment, it seems as though the threats aren't diminished, but maybe what appears to be the expressed support that people can rely on from the U.S. may not be of the same order. And therefore, I still think that people are going to have to or want to buy what is, I think, the premier defense fighter in the world. So I'm quite a fan of the F-35. But will things change over the years? Will there be more drones? Well, yes, for sure. Will there be more F-35s? Yes, for sure. Will we make more engine parts? Well, yes, for sure. Will we provide a lot more spare parts? Well, yes, for sure. So that's why I stand on it. I mean...

I'm not sure if there's going to be many more competitors to that like increasing demand.

I don't know. And if they want to provide additional support back and reengine or resupport the F-22, well, that's okay, too, because we supply that one. So like I'm good.

Perfect. So let's open up for questions. If someone has a question, please raise your hand. I think we have a quiet audience. So I'll keep -- we have like 5 more minutes. On widebodies...

Yes.

What do you expect? When do you think the international travel will actually recover? When do you think that Boeing can ramp up to 7 considering them, but an entire supply chain that was stopped at like under 5?

I think the fundamental demand and the order intake for the 787, which I think is a superb aircraft has been really strong. And so the backlog, I think, has grown. And when Boeing said they wanted to get to rate 10 in 2026, my belief the market can stand that and more. So I don't think it's a demand issue. I think the demand is really strong. I think it's also really strong for the A350 as well. Again, order intake has been really good and production has not really increased. And there are, I guess, reasons why that production of 787 and A350 has not yet risen to what everybody would like. But the good news is the demand has not gone away. It will be produced. It's a question of when. And so I keep thinking to myself, wide-body didn't really achieve its marks in 2024 and yet we at Howmet, we did okay. And we believe that we've got the right ZIP code for the outcome for '25. And I'm hoping that we're able to deliver the year that we think we can deliver. And should widebody, let's say, not get to rate 10 or rate 9 or whatever the number is later this year, that's okay because I think we'll put up a respectable year and that demand will be there for 2026 and 2027. So it keeps -- so when you think about -- so what's really been occurring is, I think we've been delivering solid outcomes for the company and demand has been not eliminated but deferred. So I used to think '22 or '23, '24 were going to be good years and then as each year has gone by, I think the next 3 year is going to be. And now I think '25 -- see if not '25, then '26, '27, '28 are going to be good. So it keeps getting pushed. And that's okay because it's still there and the future volume is expected to be there. And I think it's going to be there because the backlog is truly strong. And if there were some form of disturbance, so if there were to be, for example, recession as one possibility. I still think the age of the fleet of today's aircraft is such that replacement and production will occur because we need the fuel efficiency. We need the emissions and the economics go with lower maintenance, where the age of the fleet has got significantly advanced during the last few years and therefore, again, it's a good underpinning of what we think we're going to face. But again, it's only a forecast. It's just -- it's a maybe.

And given the strengths of fleet demand, how do you think about the impact of tariffs?

We spent a lot of time on tariffs in the last couple of months, and we've prepared ourselves as best we can. And then obviously, things have changed quite rapidly, sometimes from day to day. And so it's difficult for me to give you a clear and coherent answer on tariffs because I don't know. But actually the one thing that I feel certain about is that whatever they turn out to be, we will address them in a normal course of doing business, which we've always done at Howmet. We just say those are the circumstances now we'll deal with it. And the same as today, if we are facing additional input costs of aluminum from Canada, which really centers on our commercial wheel business, then we'll pass those costs through with the current arrangements that we have with our customers. And so -- and if the thing is like it goes to more generalized inflation, which nobody yet knows, then we'll deal with it, same as we dealt with it in 2022 when inflation went up substantially as a result of the invasion of Ukraine and the change of energy prices, which fed through to a very different picture of inflation, which is more like 8% in the U.S. and 12% in Europe where -- and energy costs, which became extraordinary. So it's just like just another business fact. It will happen or it won't happen, and we'll deal with it should it happen. So I'm not going to get too fuss about it. I regret the fact that I've wasted time because I've been preparing for this way and it changes and therefore, it's not taken us forward, but it's just stuff you deal with.

Perfect. And my last question, because we're coming up on time, on IGT, what's the earliest you could see this demand in the U.S.? And what plant are you supporting right now in the next couple of years?

Well, we've seen the demand already because the existing fleet of turbines is running harder, and therefore, there's an increased spares demand. We also see that our OE customers want to build more turbines. And therefore, we're seeing that demand. And then we're doing our very best to increase our production by every which way we can from the existing equipment. Meanwhile, we did lay in additional capacities by way of additional CapEx above normal in '24, which will come to have some benefits later in '25. And then we're investing again in '25, which will again take some time. So we're addressing what we think will be a substantial increase in future OE build, but also that's going to lead to additional spares demand as well. So we're not sure that we've got it right yet. And it's to some degree, uncertain, but I'm trying to keep pace without getting crazy about the capacity we're adding.

Perfect. So thank you very much.

Thank you.

Thank you, everyone.