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

Good morning, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace and Defense Equity Research team. So thank you, Howmet, for being here. John Plant, in case you don't know, Chairman and CEO; Ken Giacobbe, who's over there, sitting shyly is the EVP and CFO; and PT, who keeps us at bay when we're out of control. So thank you, John, for being here.

John, you've done a fabulous job when it comes to Howmet. There was one interesting contrast in the second quarter results, where many suppliers, including yourself, saw an inventory destocking, but Howmet's commercial OE business still grew low single digits unlike many. So in large part because of the actions you've taken over the past year, are you seeing any sense of shift from your OEM customers? And how do you think you're keeping -- how are you thinking about supply chain levels and production?

So I think you start off with where did we see the destocking occur and that really was a continuing theme from the first quarter where I think Boeing were trying to slim their balance sheet and understandably so given the fact that maybe for the last now, maybe 2 years, they've aspired to build at rate 38. And we're taking parts of, I'd say, close to that rate where it was applicable in terms of the ERP system. But if they weren't building, then clearly, they've built up a bank of parts. And post the capital raise, I think they really did want to realize some of that inventory into cash. And so I think that's where the destocking originates from. And then the question is what's the duration of that relative to the increase in their build because now they seem to be achieving a more consistent picture and indeed seem to be rolling out at their stated rate 38 in the last couple of months. And so it's good and especially with statements about wanting to see that increase. And so I guess it's a balancing act between consistent rate production, potentially increasing their rates. And while as I see it taking away some of the safety net they've had by way of parts availability from their own inventory, I assume on the assumption that the supply base is in a much stronger position to be able to produce consistently given the comments that have been made over the last couple of years about the supply chain and the supply chain causing them difficulties of building. So it's quite an interesting, I'll say, balance between all of that. And my expectation is given the rate aspirations, should the FAA agree, then any destocking will be over with fairly soon.

I think it's safe to call you conservative. You start out the -- the guidance for the year with OEM production rates for the 737, 33 for the year; A350 -- A320 in the 50s; both A350 and 787 around 6 per month. I think it's safe to say the narrow-bodies are doing better than that, just given what we've seen in the August delivery numbers. So I guess, how do you think about your confidence in the sustainability of those rates and future rates from Boeing and Airbus? And where do you rank your confidence across those 4 platforms as we head into the second half of this year and into '26?

Yes. I think I went quite giddy at the second quarter call and said rate 33. I think it was lower than that at the -- in the first quarter. So I feel as though it's easy to get bit by being too optimistic about where rates of production are going to be. And we always have to consider what's the aspirational rate compared to where you think it will land and then also are we able to respond by way of our own inventory, the inventory which is at the customer and also then the capacity we have available both for machine tool capacity and also, I'll say, labor training. And so providing that we've got all of that in good order, then there's been no rate that any of our customers have aspired to achieve that we haven't been able to be able to meet. And so any claims of shortage, I have been very firm about rejecting any such statements on that basis.

Would you want to give confidence levels, rank the order of the platforms?

Confidence in meeting rates?

Meeting rate and growing rate into '26.

I feel really positive that rates are more likely to increase now than I have in the recent past. I think the noise about supply chain for the most part is behind us, whether that noise historically was justified or not. But right now, do I think that whether it's Airbus narrow-body or Boeing narrow-body, I think both of them are more likely to increase in '26 than not. And similarly on wide-body, I think we've been in this long period of where there's been an aspiration to increase wide-body build and it hasn't really happened for a variety of reasons. But now I do feel as though we're on the cusp of seeing some rate increases. And it's always going to be one of degree. So does Boeing get to rate 7 consistently, then does it go up further in the year on the 787? Or on the Airbus A350, are they, I'll say, fuselage supply issues that they've had from Spirit Aerospace, do those begin to ease given the fact they had teams of people from Airbus in those operations for some time now? So I think it does. I think it gets better. So I suspect that when we do give some -- possibly in November, some like initial thoughts about 2026 or when we more likely give a more accurate guide in February next year, if you ask me what's my expectation? I feel as that we're going to be seeing a growth picture for next year. Now will it be as much as you want, Sheila?

I want a lot.

Problem is you always want so much. It's insatiable demand and expectations are very high. And as you say, I kind of want to walk on this earth first before being in the cloud with you, okay?

Sounds good. Let's talk spares. So total aero defense, IGT spares represented about 11% of your sales back in 2019. Now you're up to 20% of sales. That's because the business has grown, I think, 40% in the first half. So how do you think about the growth for the remainder of the year and what's driving it?

I think the conditions underlying for spares are healthy for Howmet. And I'd start with the it's a former generation of aircraft using the CFM56 engines or the VM-2500 (sic) [ V2500 ] engines. And it's no secret that the fleet is working harder, and that's really a function of the inability for the airframe manufacturers to produce the -- I'll say, the production levels they really wanted to produce over the last few years. And so you've had sustained underbuilding and therefore, an extraordinary backlog has now developed, but the existing fleet has to work harder. And so I think the overhauls, which are being done for those aircraft and engines when they come in to the MRO shops is being done at a deeper level because I think the expectation is they're going to have to continue to work harder over the next few years than they previously anticipated. So I think it's a longer and deeper overhaul because of the expected duration of those aircraft into the future because I think the aircraft production achievement next year and the year after, we're still going to be below the demand input. And so when you've got that condition, it's really healthy for the spares business. And so let's say, if you use CFM as a proxy for that discussion, previously, people used to talk about it peaking in 2024 or 2025. And a year or so or maybe 2 years ago, they were saying, I think it's more likely going to be 2028. And I think now everybody is coalescing around volumes are going to continue to increase through 2028 and then degrade very slowly from that point. But meanwhile, all the, I'll say, more modern engines, given the achieved duty cycles of those engines, those are coming in more frequently for spares and turbine blade replacements, and so the LEAP engines or the geared turbofan engines, we're all familiar with both, the longer-term outlook providing fundamental secular growth because of the temperatures and pressures those engines are facing. And then beyond all of that is that we are in this, I call it, the bubble for the next 2 or 3 years, whereby the amount of change from the Generation 1 turbine blades is going to be very high because of the lower duty cycles that have been achieved compared to that, which had been, I think, anticipated. And I think its most egregious in some of the countries where the pollution levels are high. I mean those frequency of shop visits have caused -- in fact I know one airline that ceased to exist because there's so many airplanes on the ground. So demand is going to be high and the replacement of the fleet. So when, for example, the geared turbofan advantage engine parts become, I'll say, available next year, then it's going to be an interesting few years between that, which is supplied to OE and that which goes to service and the retrofit of the fleet.

You know what, I just realized that when I first started covering Howmet, I thought about the aerospace spares business is somewhat random, but we really should have been modeling it like we do for a CFM shop visit and the content increases as you get into the LEAPs. Is that a fair comment to make?

I think it is because the story isn't just about the backlog of, I'll say, of aircraft. It isn't just about, I'll say, the lesser duty cycles that have been achieved. It's also a story of content increase as you improve those turbo blades for additional durability and then the retrofit of the fleet. And then you played all again in the defense area as well. So you have to look at F-35. And it looks as though the statement I made a couple of years ago that I thought 2025 was going to be the crossover year when we'd actually produce and supply more spare parts than the OE production. And indeed, in the first half, that's -- we can see it's just occurring right now. And so with the increase in the, I'll say, fleet of aircraft, so if there's, I don't know, 1,075 or 1,100 F-35s out now, by 2030, it's going to be over 2,000; and maybe by 2035, 2040, it's going to be 3,000 of those aircraft out there, then the spares market will indeed continue to increase, and it doesn't increase in a linear way because of the, I'll say, the additional flying hours those aircraft are doing and the shop visits.

I'm looking at PT because I'm going to sneak another question. Of the three spares businesses you have, IGT included and commercial and defense, how do you think about the fastest grower from here? Sorry, PT.

I didn't know that you were restricted on amount of follow-ups on a single topic, but...

On the earnings call only, not here.

Okay. No, I think it's free form here. Anything goes. Definitely, IGT has seen a really strong start to the year because of the existing fleet running harder just because of the fundamental electricity demand that's -- and requirements are going on. Meanwhile, there's not been sufficient ability to build new turbines because you can't just materialize that capacity out of thin air. And so everybody is building the capacity for new turbines, but the fleet is working harder. So spares has also been really strong there. It's so difficult to handicap. At the moment, I'd give it in terms of percentages, I'd still give commercial aero over the next 2 years, the edge on the spares growth. So I suppose the only thing you can take from that is 2026, I think the spares growth will be -- continue to be high and positive.

Great. Let's turn to -- on the high-pressure engine products, you can't ship them fast enough, and there was some talk last year that you were the bottleneck. But you went out of your way, made some charts, showed us your output and squared that away. So how do you think about how much additional volume can you squeeze out of your existing footprint versus the engine production ramps that we have seen from GE and Pratt and what their goals are?

So I think one of the best meetings we had in 2024 was when I wanted to blow away some public statement, which had been made explicitly stating that Howmet was a bottleneck because I didn't like it because it wasn't true. And so I wanted to have Safran, GE and Airbus in the same room, so we'd have one set of data to look at. And so we could all stare at it and indeed demonstrate that our output was up 40%, 50% in the year. And of course, then how that's allocated by our customer with that, which goes to spares compared to OE build is their decision and not ours. So we were very clear there was enough parts to make any amount of OE engines last year. And then I went further in November and said, for the new generation of parts, we put 500 engine sets, not 500 blades, but engine sets of blades into inventory to make sure that the position in 2025 was good. So all of that's occurred. Most important has been us building 1.5 new plants, so a whole new plant in Michigan and, I'll call it, half of one by way of extension in Kentucky to expand our capacity. And that capacity comes on stream really at the back end of this year and going into 2026. And before then, any increases that we're ringing out of the system in terms of high-pressure turbine blades has been more a function this year of yield improvements and also bringing together to the system new tools where if existing tools have been running so hard that they were, I'll say, beginning to decay in terms of performance and to replace them with brand-new tools. And so we've put in place some high degree of new tooling this year to give us the improved yields, which are getting us through this period at the moment before the capacity comes online at the end of the year.

A few years ago, you talked about having increased market share by roughly 1 point per year over 4 to 5 years to around 50% of the industry's high-pressure blades. I think back to your Technology Day back in 2022, there was a case to be made that your quality and tolerance were industry-leading. So how do we think about the couple of hundreds of millions of aero engine CapEx? And if you could talk about where they are and as you look to improve the industry's durability issues?