Howmet Aerospace Inc. ($HWM)

Thank you all for coming. It's a real honor today to have John Plant here with us. For those of you who don't know John, John is the Executive Chairman and CEO of Howmet Aerospace. So John, thank you for taking the time out. I know it's a crazy busy time in the industry and the world and everything, so thanks for making time to come over.

Thank you.

Maybe we start with just timely, last week, you all hosted an investor event in Whitehall. Is there any like high-level highlights that you'd like to mention? I know you guys talked about digital thread and some of the automation you do and some of the various things in the process.

We don't make a regular sort of thing of showcasing our manufacturing. But we thought given the recent, I'll say, significant investments we've made and seeing, let's say, the generational improvements from what we had done for, let's say, 2015 and that level of, I'll say, build-out and the amount of automation that we showcased of, let's say, improving those facilities and expanding in the investments that we had made in building a new plant out on the same campus in 2020, then that was a worthwhile event and thing to do. And then more recently, for the build-out that we did in 2025 and still building out in terms of placement of new equipment, it was worthy of showing how we had produced and introduced the very latest technologies into that site that we have done elsewhere in Howmet and also how we're trying to bring together the thread of machine learning and use of artificial intelligence to improve the quality and yield of our parts and how we're providing an extraordinary level of traceability and capabilities in that plant. So we thought it was something that was worthwhile doing, especially given the change of an improvement in manufacturing process while at the same time producing extraordinary increases in the technical performance of the parts all at the same time. So that's what we're really trying to get across and convey last week of how we're moving the goalpost once again in terms of increasing the moat around the Howmet business.

And when you think about the business, maybe that's a good transition to pretty much every end market you're exposed to now is on fire. Commercial aerospace is very, very strong. Defense is very, very strong. Industrial gas turbine is very, very strong. How do you think about deploying capital to those various markets when they're all very robust?

Well, of course, building capacity out is always -- I'll say, first of all, it's a pleasure compared to the opposite of shrinking one's business, so I guess that's very positive. But at the same time, when you're building out an enterprise, then you have a lot of considerations to take into consideration there, which is how much capital expenditure you should deploy, what's the going to be ability to get people, what's the counter to that in terms of automation? And so the principle is exciting, but you have to be cautious and careful because there, you're building costs into your business, which you have to have a return on today and also in particular, over the coming years. So that's an interesting part of the equation. And then also, you have to consider the end markets that you're serving, not just your direct customer, but indeed what's happening to those end markets. And there are different, I will say, risk indicators for us when we look at all of those different end markets and the considerations we take into account when we want to capacitize for, so we'll have slightly different flavors, for example, between our commercial aerospace customers to our defense aerospace customers and to, let's say, land-based gas turbine customers. So they have different characteristics, different levels of, I will say, historical cyclicality and say, security around them and also the volume and a variety of considerations. So you're trying to take all of those factors into account when making those investment decisions. And you have different levels of knowledge also. For example, you have backlog numbers that you'll have for your commercial aerospace clients, which you don't have that -- quite that same level of clarity that you have in the industrial gas turbine markets.

And so I mean, maybe I'll change gears a little bit because usually, we jump right in commercial. Why don't I start with industrial gas turbine? How are you thinking about that? I mean it does seem like maybe 4 or 5 years ago, at least in the investment community, we weren't really thinking that, wow, we'd see this boom in industrial gas turbine. How are you thinking about that for your business?

I guess I've also evolved my own thinking around those markets because previously, it wasn't the biggest end market for us to spend a lot of time thinking about. And maybe historically, I'd been maybe too dismissive of the preparedness to invest. I consider it to be a much more volatile, short cycle part of the business and one plagued by many new product introductions, which led to, I would say, increasingly small batch sizes and continual product development, which was the antithesis of getting good yields for your parts. And so it didn't seem to be the most profitable, the most secure and therefore, relatively uninvestable by comparison. And it was more on a maintenance basis of that capacity. But things began to change in 2024, I felt. First of all, some of our customers were more interested in repeatability of their own turbine builds and therefore, far less volatility around NPIs. So you had that aspect. Then you began to appreciate that the move to renewables probably wasn't the best solution for all of the customer set and having that base level of demand uncertainty and the ability to respond to, let's say, underlying energy requirements meant the gas turbines really were a good place to be, and it was probably going to give us at least a consistent demand level of maybe single-digit growth for the balance of the decade and beyond, and so it was one where it was worthwhile to replace and repair capacity and maybe increase slightly. So we began to tick up the investment a little bit in '24, then it seemed to change again in 2025. And I do remember just after the last presidential election in the U.S., also, it seemed to change again due to the emphasis on fossil fuels versus renewables and that caused us to again rethink the amount of capacity that would be required in terms of the natural gas turbine. And it could be whether it was from natural gas or indeed hydrogen and dual use, it was more investable. And then bit by bit, you began to get convinced that the electricity demand was going to increase with the data center buildout, which has been going on for some time. And so every aspect of what we were looking at, whether it was the base load looking at European, I'll say, energy requirements, particularly for the next decade, those things which have been uninvestable, for example, in the defense industry in Europe became so and the same for, I'll say, natural gas in terms of an energy provision and the ability of the U.S. to provide LNG tankers across to Europe, again, commensurate with energy security, it became far more interesting for us. And then, of course, you had not just the underlying data center buildout, but then you had the increasing emphasis on data centers and what's been an extraordinary level of capital investment, which seems to change almost every 6 months now. So even that which we had looked at in the second half of last year by way of an investment program for the next few years through '26, '27 and '28 by February of this year, it changed again. And you saw certain of, I'll say, the hyperscalers announcing, I'll say, investment increase like from $135 million (sic) [ $135 billion ] to $185 million (sic) [ $185 billion ], I think that was maybe Microsoft, and then you had Amazon coming out, so they're going to spend $200 billion. And so none of those levels of increases of investment are currently in our capacity numbers. We just have not yet even considered them. So those very immediate customer being the gas turbine manufacturers, those that we had, let's say, executed agreements with to build additional capacities for them over the next few years, those are already changing once again. So it's quite fascinating. And you also have to consider not just the next 3 years, but you're looking through to the end of the decade and increasingly now, like what's going to happen by 2032, 2035 and the -- not just for large utilities, but also for mini and micro grids, which are providing electricity sources for other industrial complexes where maybe the fundamental electricity supply won't be sufficient. So it's -- there's a lot of things to think about, both in the U.S., but for other markets in the world and also what the choices of energy source is going to be.

So I mean maybe when you look out to 2030, 2035, how do you think that end market compares to commercial aero?

I don't think I know enough yet to be able to have absolute clarity over what the requirements will be. I can see the aircraft backlogs. I can see what's been ordered or options on aircraft. And therefore, that level of, let's say, security, obviously, you could always have cancellations, but without that build rate increases in commercial aero, then if you were to order a, let's say, a Boeing 787 today, you probably wouldn't get it before 2040, absent rate increases. And so you have that increased visibility. You don't yet have that for the large and small to midsized gas turbines. You have a level of demand and then you have to take into account lots of other energy policy and macroeconomic factors to give you the conviction to be willing to invest to a certain degree. And then you have to consider where do we fit in with that market, which for us, of course, it's not just building out the OE level of capacity because those turbines, which we supply over the next 5 years, which will be a lot higher quantity than the last 5 years, then that's going to give us the replacement market in the 2030s. So we're also trying to evaluate if turbine build were to, let's say, stop growing, then does that mean we would stop growing? Well, the answer to that is no. We would continue with the OE build, but then we'd have all the spares for all the turbines that we produce over the next 5 years. So it gives us a level of repeatability, which is quite different for Howmet compared to just the basic consideration of the OE level of demand. And so you've got all of those considerations to build into it as well. And then also how does the mini and, I'll say -- let's say, average smaller land-based gas turbine, how does that play into the demand pattern over the decade to 2040. So a lot of things to think about, but the conviction that it's a good space to be, it's going to be a significant increase in business for us. It's going to give us significant replacement demand. But then how do we protect ourselves on those investments with the contracts that we were willing to enter into with our direct customer and how does that occur as well. So again, lots of things to think about, which is the propensity to invest with what risk profile and security do we want.

Got you. And maybe transitioning to commercial aero, you mentioned the big backlogs. And for example, on 787, you mentioned if rates didn't go up, it would take a very long time to get your airplanes. How are you thinking about the OE delivery rates? We see the big backlog, but how are you thinking about where deliveries could go and how that impacts your business? And I would say, let me frame it this way, historically, you guys have taken a little bit more conservative view on that and been rewarded for it, you've been right. How are you thinking about that going forward?

Well, I'm convinced that the airframe manufacturers and the engine manufacturers are going to make more. And so that's a good starting point. More is better. And so we are prepared and capacitized to -- and will invest to be able to produce more. But at the same time, we've always maintained a fairly cautious stance over where should we guide in terms of the Howmet, let's say -- let's call it, more of a promise of what we're going to deliver by way of profitability for our shareholders. And so where we guide to and where we can produce to may be different. So should an aircraft manufacturer to be able to produce more, I'm convinced that we will be able to match rate. At the same time, we want to make sure that we don't get caught out. And an example of that might be if you took the aspirations that airframe manufacturers had for 2025, I think every one of them was convinced that, as an example, they would make more wide-body aircraft. You can think of whether it's an Airbus A350 or 787, the thought was production will be higher. Now in the final reckoning, it wasn't as high as people had imagined. And therefore, there's always going to be the drawdown of inventories for parts they'd ordered last year. And so you can see that as an example, you can just take the titanium purchases by Airbus in 2026. They will actually be reduced compared to previous thoughts because of what had already been previously purchased. The same where other manufacturers promised, let's say, a rate 38-or-something and struggled and eventually gets there, but -- so you have to take account of all of those inventory cycles of overordering, reductions of inventories or not increasing because they allow those inventories to be used up when rates do begin to increase. So you have a lot of those things rippling through the industry as well. So in the last few years, it's been beneficial to be cautious over what will actually get done while thinking positively and wanting to say if customers achieve those rates, then of course, we'll be able to support them. So I know that we have, in one sense, wasted money. We've recruited people and trained them. And sometimes they have not been made productive at the same rate as expected. But at the same time, where, I'll say, other shortages have come or our peers have not been able to keep up, we've been able to supply in those things. It's been a good equation for us because of the quality and delivery that Howmet has been able to produce has stood us in really good stead in our arrangements with the customer. We've been -- the company has been able to achieve output.

And do you have the capacity in place to meet where OEM demand potentially could go?

Again, it's never the simple binary yes or no. It's always that, well, maybe. And so if you were to say, can we meet if Boeing gets to rate 47 or is it 52 or is it 60-something? Well, the answer is yes. But now if you then ask me the same question, do Airbus -- can we support them getting to rates 65, 75 or higher? Well, the answer is yes. But then if you were to stack everybody on top of each other, if you add all of the demand for narrow-body of, let's say, an A220, an A320, a Boeing 737 and by the way, let's now stack on top of the build-out of wide-bodies on top and on top and on top and every one of them, then today, I don't think we could support all of that at the moment. Therefore, you have to make a judgment, will every one of those rates come to, I'll say, to be or into fruition? At the moment, we would have -- as we gain conviction over the next few years that, that becomes the likelihood, then my suspicion is that we would actually have to put more capacity down to achieve that level of production because if you take the previous peak on narrow-body, it was probably around about 100 aircraft a month in 2019. We're not there yet. But if you stack today's aspirational numbers on top of each other, then you have to be producing 150, 160 aircraft a month. And that's a lot of increase over the previous peak. Now are we in a fundamentally better position, let's say, in terms of the life cycle of new technology on an engine program? Probably yes. But if I suspect if you scan the whole supply base and said, can you produce 50% more than your previous peak? I suspect the answer probably would be no. And I think we would probably fit into that as well, which would say, no, we would need to build out more. Now have we -- if you looked at what we showcased last week in as vital of one of our manufacturing plants, and we've got 60 of them, we provided for additional space such that we could drop machines in should they be required. So providing we're inside our own ability to produce machines because we produce a lot of our own equipment ourselves because we want to keep it hidden from view. But even where we buy on the external markets from third-party machine tool manufacturers, as long as we're inside lead time for those, then we're good. But because you're positive that every one of our end markets is growing, then, I'll say, places and capacities of machine tool manufacturers are becoming very tight. And so we've been trying to make sure that we can reserve capacity in as we can. But again, we've got to accept and believe the demand signals for our customers, and can you stack all of these things on top of each other? Because today, we probably would not have that capacity in place.

How -- I mean just to maybe unpack that a little bit. How tight is machine tool capacity? If you were to order something today, ballpark, how long would it take to -- I've heard things like autoclaves can take 2 years?

Yes. It really depends upon type of equipment. But you're getting at that 2 years and more than 2 years now in terms of -- unless you have reserve capacity, then it's becoming a problem. And so in our dialogue with some of our land-based gas turbine customers, the situation is if you believe that demand and you want to contract for it, then every week that goes by, it's not necessarily lose a week here and therefore lose a week at the end of the timing of introduction. Maybe you lose a week now and you're going to lose 3 months when you need it because of the capacity in the industry and it applies both for plant and equipment, but also tooling. So for example, we just built a whole new plant out for tooling because we need to more than double our own production of dyes, which is extraordinary if you think about it, just to double that and more. And not everybody -- not every company has the -- even the financial capacity to do that, whereas at least with Howmet, our customers, I think, believe that the answer is we can. And I think that's really important to them that they know that should we commit to doing it, then we have the management depth to be able to do it, we have the financial depth to be able to do it. And that's really important at this stage of the economic cycle with the supplier that can.

And one thing you didn't mention was labor. Is labor become a challenge, as you start stacking all this on top of each other?

It's quite strange in that labor has become a little bit easier than it was in the immediate years after COVID, gaining, I'll say, labor in gestation, [Audio Gap] the quantity of additional new employees that have been required. But at the same time, we have experienced elevated turnover and gaining the right quality of employee has been a challenge for us. We've put a lot of effort into that and trying to reduce our employee turnover. And that's been additional routines through our recruitment processes. We've actually built out additional training centers so that we can train people for a long period of time before we put them into -- this is for real in terms of those are production requirements. And obviously, because of the interlinking, let's say, 40 or 50 processes that some of our parts go through, if you make a failure of a part at the early stage, then it cascades through your whole manufacturing process. So training is really important. And we've been emphasizing the recruitment and the training and even the degree to what's the average span of control of, I'll say, maybe manufacturing supervision in our plants such that there's a more intimate personal relationship with our employees to try to gain that because it's very important to us. At the same time, as improving, I'll say, that whole employee turnover, we've also been spending a lot of money on automation. I think you heard a quote last week from our Wheels business, so not in aerospace, where it was 1 robot now for every 2 people, which is a very significant level of automation. And if you looked at what we built out in that new engine plant, again, a very high level of, I'll say, machine input versus the labor input. But that's not just done for, I'll say, labor input costs and to do with variability because of labor turnover. It's also vital for the quality. In fact, some of the tolerances of our parts have now reached a level where it's almost impossible for a human being to replicate that on a consistent basis, let's say, hour by hour, nevermind shift by shift. And so automation and machine input is there for quality purposes more than it is for labor cost purposes.

Got you. And we didn't talk about aftermarket demand. So if you've got all these OE programs, where the aftermarket fit in all of that? Because that's even -- that's growing too as a fleet grows?

Yes. I mean, we're seeing demand for the aftermarket growth for fleet growth, for sure, the build-out of both commercial aircraft given the very low scrappage rates that we have been experiencing in the last few years. You see it also in some of the major military programs where if we take the F-35 as an example, there's always a lag between producing that new aircraft and then what's the spares demand going to with what the duty cycle is and how many hours between the shop visits for that aircraft. But then as the fleet grows, then we saw -- and we have these predictive models of what aftermarket demand will increase by. And so the prediction that by 2035, we'd be producing more aftermarket turbine blade parts for the F-35s and OE parts came to be. Now if you blow that forward and say the fleet will increase over the next 5 years by another 150-plus aircraft per year for the 5 years, so there's another 800 aircraft, then as you plan that through into the 2030s and that demand and then by 2040, and then those aircraft will probably be in service till 2070-or-something, then you can see what the aftermarket stream will be through those decades. And so that's an important part. Then also with every new generation of aircraft engine, with the increase in, I'll say, emissions requirements or fuel efficiency, then the temperatures rating within the turbine has been tending to increase. The pressures increase because you want to optimize the fuel and gain more fuel efficiency and that in itself produces more exacting environment in the gas path of the turbine, which means that those turbine blades have to be operated and operated tends to be both the barrier coatings that we put on of various types, but also the basic construct of allowing airflow and increasing airflow through those turbine blades where we've reached a level now where we can consciously and deliberately accelerate the airflow or we can decrease it according to where you want those cooling parts to be on the turbine blade. The way we exhaust the air from it and the holes and which -- what type of hole, what shape of hole and then now how we are trying to control the flow of air so that the air molecules will follow the curvature of the turbine blade and all of that is leading to, again, value for us. And so the complexity is increasing. And therefore, the aftermarket opportunity because as each engine has been introduced, then it's -- so far is that the theoretical time to replacement has yet to be achieved, and therefore, it's given us a higher replacement rate. So we're now going through the part where we know that we haven't reached peak yet for the -- for example, on the CFM56 for the CFM area. That has not yet peaked. That's still got some years of growth left in it. And yet we stopped producing it essentially for OE demand 5 years ago. Now we have, let's say, in that particular customer, the LEAP range of engines, which is the shop visits are going to be increasing every year through the next 10 years. So we see that. But also beyond that service demand, which will increase every year for the next 5 years, we're also seeing this temporary, I call it, a bit of a bubble we're going through because of the early life failures of some of those parts in some of the countries in the world where air pollution is greater or you're seeing silica in particular, let's call it sand from the Middle East or whatever, that's causing, again, thermal problems in the -- after the combustor, and therefore, parts are having to be replaced. And therefore, we've got underlying secular demand. We've got, what I call, a bit of a bubble demand. But the thing you know is that the demand is increasing and the sophistication of the part is increasing and therefore, tending to be good for that part of our business.

And will that require more investment in capacity to support all that aftermarket across both those end markets?

Compared to history, probably. And so we're having to make assessments of what those demand requirements are. Also, it's stacking it, as I said, according to what we think the OE level of it will be building out through both narrow-body and wide-body in the coming years. So a fascinating -- it's not a problem, but a fascinating thing to work through. But also, it's like everything, the risk and reward go together or maybe it's reward with risk.

And then with defense budgets have been growing around the world in the U.S., pretty robustly, potentially for fiscal '27, very robustly. I think we -- a lot of us know about the F-35 opportunity. Are there other new potential opportunities for Howmet in defense markets, given the growth there?

Well, we try to work on most things which are going on. So you could look at, first of all, what's the next-generation uplift to performance of the engine on an F-35 or you could say what is going to be the engine of choice for the F-47 or is the Navy going to get a plane and what will be that engine of choice. So we try to position ourselves well for those. I mean the next thing which is quite exciting, which is, again, the degree of demand is probably not able to be really determined at the moment is the future use of collaborative combat aircraft. So these unmanned aircraft that will fly alongside a manned fighter, I mean is it 2, is it 5, is it 25? We don't yet understand what that end demand will be and maybe it will be also a function of defense budgets and the blend between manned and unmanned aircraft. And so -- and we -- neither do we know who will be the airframe manufacturer of choice. Will it be like one of the existing defense primes with one of these newer companies that have been entering the market and who will gain the contracts and who will be successful is like we don't know yet. But we're trying to position ourselves for the engines, as an example. So it's not just the structural parts or the fasting systems, which those CCAs will require, but also what engine. And of course, each airframe manufacturer, there won't be a different engine for every one of them. There will be a common engine, which -- so the eventual choice of who's going to produce them, but they will make those engine selection. So the last 3 selections, we've been part of that. And so we've been positioning for it, believing that it's a good market to deploy our engineering resources, but we don't understand yet its size. But thinking overall, let's say, a 5,000-pound thrust or 8,000 or 15,000-pound thrust engine for a collaborative combat aircraft, it might be bigger than the manned aircraft, depending how many, but we don't know how many. But it's another chip we'll place down on the roulette table and say this is a good thing for us. At the same time, it's not just rocket motors, but some of the larger missile systems are now requiring a turbine as well. So we're sort of trying to cover that part of the market. And also with the -- we've all seen large orders for missiles in the last, I'll say, 2 or 3 years, and it seems like almost a day doesn't go by without another order place for them. And so whether they are defensive missiles like Patriot systems or whatever, we also tend to make sure that we're well placed for parts on those as well, albeit it's not the biggest part of the Howmet business, but it will be an interesting increase in demand for us over the next few years.

And just going down that a little bit. In commercial space, there's been a real push towards reusable rockets that require turbines. Is that an end market that you guys play in or...

Well, I wasn't quite sure what you're referring to there because most of the things -- I mean maybe for a missile, they never come back. So that's something different. I mean they are meant to be destroyed upon impact. So I've never seen one come back yet. On the collaborative combat aircraft, we have no clue. I mean, are they meant to be disposable or are they meant to return? I guess it will be a combination according to what the mission is required at the time. So some will come back and some won't. And we don't know. We're just humble parts manufacturers for...

I was referring to reusable rockets where some of those...

Oh, you mean for like space rockets like for Blue Origin or something?

Yes.

Yes, we do some of that stuff as well. It's been interesting. So we thought -- and our space business has increased a lot as, I'll say, the amount of parts which have been used in -- whether it's been SpaceX, Blue Origin or any of the others, USC or something, I don't know. It's been increasing. But what's been interesting is that a lot of other markets have seemed to have like come up more rapidly and gone beyond them in terms of opportunity. So right now, the area which seems particularly hot once you got through the, I'll say, new fighter aircraft or new stealth bombers and that build-out, which we're involved with as well, it's been the CCAs and the missiles, which has suddenly become a lot more interesting because you've got now beyond just like there's another lot and it's difficult for us to capacitize just for another lot because once you've done a lot, well, you can do the equipment. So there's a reluctance to capacitize for it. But when you're seeing now demand for, say, you can see for certain missile systems demand for 7 years, it becomes more investable, and therefore, the considerations around capital deployment become different.

And then maybe, just as a last question, your own supply chain, do you worry about them? I mean how tough has that been to manage given you're ramping, they have to ramp too?

For the most part, we buy base metal. And so the difficulties obtaining alloy or alloyed metals has been fairly small for us. We do buy, for example, for our Rings business, where we do buy alloyed metal from other suppliers. And we also produce it for ourselves. So maybe we are 40% self-sufficient in where we do buy alloyed metal, whereas 60% comes from the outside. It's only like 5% to 8% of our business. The rest is base metal. So we're buying from, I'll say, traders or smelters directly. So it's -- metal input has not been an issue for us at all. Right now, given the build-out, I'd be more worried about machine tool capacity than base metal capacity. Now we'll have to think about what the overall picture is. So is there enough alloy being prepared for all [Audio Gap] well, under the right circumstances or the right commercial arrangements, yes, we could. But that's not really our normal business. We only supply, to a degree, to our internal requirements. So we will alloy ourselves on base metal for, for example, our turbine blade business. But for our Rings business, we'll access just part of the market, say, up to a maximum of 8% of our material input from the alloy manufacturers.

Got you. Well, I think we're out of time, John. Thank you very much. That was a lot of fun.

Thank you. Nice to talk to you, Ron. Thank you.

Thanks.