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

Good day, and welcome to the Howmet Aerospace Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you Chloe. Good morning, and welcome to the. Howmet Aerospace Second Quarter 2026 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Patrick Winterlich, Executive Vice President and Chief Financial Officer. After comments by John and Patrick, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find the factors that could cause actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income and EPS, mean adjusted EBITDA, adjusted operating income and adjusted EPS. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP measures can be found in today's press release and in the appendix in today's presentation. In addition, unless otherwise stated, all comparisons are on a year-over-year basis. With that, I'd like to turn the call over to John.

Thank you, PT, and good morning, everyone, and welcome to the Howmet Q2 earnings call. Let's start with the highlights on Slide 4. Howmet completed a successful second quarter. Headline revenues were up 24% year-over-year with strong incremental margins of 4% to 6%, and that was after some impact from the CAM acquisition. Excluding all the M&A activity this year, organic growth was very healthy at 21% for the quarter and 20% for the first half. EBITDA margin in Q2 was 32.1%, an increase of 340 basis points year-over-year, including the absorption of CAM starting in April. 2027 is the focus year for our CAM optimization plan to begin to drive noticeable synergies. Operating margin was 28.8%. Second quarter free cash flow was just under $0.5 billion, and free cash flow totaled approximately $840 million for the first half. Earnings per share were $1.33, an increase of 46% year-over-year. A total of $600 million in shares were repurchased in the first half of the year, with $300 million being made in the second quarter. We continued to repurchase shares in July for a further $200 million, which resulted in repurchases in 2026, already greater than in 2025. In addition, a further $186 million of debt was retired. I'll now pass the call to Patrick, who will set out the end market growth percentages and provide some segment commentary.

Thank you, John. Good morning, everyone. Please move to Slide 5. It was another strong quarter for Howmet with all end markets growing. We are well positioned for the future and continue to invest for growth. Total revenue was up 24% in the first quarter. Excluding the net impact of the 3 transactions we completed this year, revenue was up 21% year-over-year, an acceleration from the 19% organic growth rate in the first quarter. Commercial aerospace growth was strong at 28%, with organic growth of 26%, driven by demand for both new builds and spares. We continue to see higher spares demand both legacy and next-generation engines. Defence aerospace growth continued to be solid at 11%, with organic growth of 7%, reflecting healthy spares activity as well as higher legacy fighter demand. Commercial Transportation revenue was up 12%, driven by the pass-through of higher aluminum costs. On a volume basis, wheels was down 8%. However, on a sequential basis, wheels volumes were up 7% as the North American market began to recover. Gas turbine growth remained very strong with revenue up 38%. Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers. Growth in other markets of 39% was largely driven by the Brunner Fastener acquisition completed in February. Within Howmet markets, spares growth remained robust. Total spares revenue across the commercial aerospace, defense aerospace and gas turbine markets was up 37% to approximately $560 million. Spares represent a greater portion of our total revenue than historically, now at approximately 22% through the first half of 2026. In summary, continued strong performance in commercial aerospace, defense aerospace and gas turbines with the commercial transportation market recovery underway. Moving to Slide 6, starting with the P&L. Second quarter revenue, EBITDA, EBITDA margin and earnings per share all exceeded the high end of guidance. On a year-over-year basis, revenue was up 24% and 21% organically, the strongest quarterly growth rate for the company since the first quarter of 2023. EBITDA continued to outpace revenue growth, up 39%, the strongest growth in EBITDA since the third quarter of 2021. EBITDA margin increased 340 basis points to 32.1% despite the most headwind from the CAM acquisition. Incremental flow-through of revenue to EBITDA was healthy of 46% year-over-year. Earnings per share were $1.33, up 46% year-over-year. Now let's cover the balance sheet and cash flow. The balance sheet remains strong with a quarter-end cash balance of $564 million. Free cash flow in the quarter was excellent at $479 million. Net debt to trailing EBITDA finished the quarter at 1.4x following the completion of the CAM acquisition. During the quarter, we paid down our $186 million Japanese yen term loan due November 2026. In addition, during the quarter, we entered into a cross-currency swap to synthetically convert our $300 million notes due 2028 into a Japanese yen liability. The combined effect of these 2 actions saves approximately $12 million in annualized interest expense. Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program, $450 million of which was drawn to support the CAM acquisition. Turning to capital deployment. CapEx was $104 million in the quarter. The majority of our capital spend continues to be in the Engine Products segment as we continue to invest for growth in both the aerospace and gas turbine markets. Investments are backed by customer contracts. In the quarter, we repurchased $300 million of common stock, an average price of $251 per share. We repurchased an additional $200 million in July at an average price of $277 per share. This brings year-to-date repurchases to $800 million at an average price of $248 per share. As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $700 million. We continue to be confident in strong future free cash flow. We announced an increase in the Q3 quarterly stock dividend of 17% from $0.12 per share to $0.14 per share payable this August. Finally, turning to M&A. We completed the previously announced CAM Fastener acquisition on April 6, for approximately $1.8 billion and the integration is on track. Now let's move to Slide 7 to cover the segment results for the second quarter. The Engine Products team delivered another excellent quarter for revenue growth, EBITDA and EBITDA margin. Revenue increased 32% to $1.37 billion. Commercial aerospace was up 37% and defense aerospace was up 17%. The gas turbine market was up 38%. Demand continues to be strong for both original equipment and spares. EBITDA outpaced revenue growth with an increase of 51% to $517 million. EBITDA margin increased 470 basis points to 37.7%, while absorbing approximately 485 net new employees in the quarter, positioning us well for future growth. Please move to Slide 8. Fastening Systems had another solid quarter. Revenue increased 37% to $589 million, including the impact of the CAM and Brunner acquisitions. Commercial Aerospace was up 39% and defense aerospace was up 45%. Commercial transport was flat year-over-year. Excluding the impact from acquisitions, total fasteners growth was double digits. EBITDA outpaced revenue growth with an increase of 40% to $177 million. EBITDA margin increased 90 basis points to 30.1%, reflecting continued operational execution. As expected, margins declined sequentially and driven by the addition of the CAM business in the second quarter. Moving to Slide 9. The Engineered Structures team continues to drive improvement in the business. Revenue declined 13% to $269 million due to the divestiture of the Savannah Disc forging facility on March 31. Excluding the impact of Savannah, revenue growth was approximately flat. We continue to focus on higher margin and stronger return opportunities in the business. EBITDA margin increased 170 basis points to 23.8% as we continue to optimize the structure segment to maximize profitability. Finally, please turn to Slide 10. Forest wheels delivered another healthy quarter. Revenue was up 14% as an 8% decrease in volume was more than offset by higher aluminum pass-through. Volumes rose 7% from the first quarter as the North American market began to recover. EBITDA was $88 million, an increase of 16% despite lower volume. EBITDA margin increased 30 basis points year-over-year but declined 270 basis points sequentially, reflecting the dilutive effect of sharply higher aluminum cost pass-through. Higher metal pass-through diluted margins by approximately 360 basis points year-over-year but had no material impact on EBITDA dollars. This dilutive impact on margin percentage is likely to continue at least for the next couple of quarters. EBITDA dollars were largely unchanged sequentially. We continue to outgrow the market, driven by our premium products. Now let me turn the call back to John.

Thank you. Thank you, Patrick, and please move to Slide 11. Let me turn to the outlook. First, as you can see, the first half target outcomes have been achieved while also facing a turbine and economic and political backdrop. The tailwinds experienced have reflected more robust build rates for commercial aircraft and also for a positive order intake for commercial truck builds. In addition, IGT demand has been extraordinary. . Moving specifically to commercial aerospace. The ongoing conflict in the Middle East has resulted in increased volatility of jet fuel and gasoline prices and has impacted recent commercial air traffic activity. Howmet has not experienced any changes in cost of demand. Throughout the conflict to date, airfreight volumes have continued to strengthen. At the same time, interest rates have climbed reflecting higher inflationary signals and the outlook for near-term rate cut has dimmed, despite the issues in the Middle East orders for new aircraft have continued to grow and the overall backlog has increased. This bodes well for future aircraft build rates with increases being seen for the balance of 2026 into 2027 and beyond. The business jet segment also continues to be strong with increases both in new aircraft build and spares. Defense sales also continue to be strong, especially for spares and legacy aircraft, with the F-35 OE build continuing to be solid. The near-term outlook for our missile business continues to strengthen, with demand increases being either seen or signaled for the PAC-3, FAD, Tomahawk and some classified programs. The focus on engines for large missiles, drones and collaborative combat aircraft continues with growth expected in the medium term. Turning to gas turbines. We have completed negotiations with the last of our 7 major customers, although the overall picture continues to expand with some customers already wanting to revisit and add to their demand outlooks. This gas turbine demand growth, both for large, small- and medium-sized turbines is further supported by new gas turbine blade applications and also increased new product technology introductions. And these will help Howmet to outgrow its current market share. Our capital expenditure requirements continue to increase. And while this year, we are now likely to exceed $500 million in capital spend, we are already seeing the need to further increase this in 2027. This increased level of capital expenditure provides support to our future organic growth expectations. The outlook for free cash flow conversion and net income is maintained at a 90% target conversion throughout the period. The resulting cash flows to date have enabled us to deploy capital for organic growth, execute share buybacks and support dividend growth while also absorbing a significant acquisition. Continued healthy cash generation should allow us to return our leverage level back to approximately 1x net debt to EBITDA by year-end. The same level that we exited 2025. Given the level and the high level of our capital expenditure, plus our acquisitions of almost $2 billion and the share buyback of the amounts already exceeding 2025, our leverage level is very comfortable and allows us to consider all paths of optionality going forward. Moving now to the commercial truck wheels business. The results are strong, even after coping with extraordinary increases in the aluminum LME and Midwest premiums, [indiscernible] into the second quarter accelerated and the outlook for the balance of the year looks healthy with external forecasters now envisaging and even stronger 2027. Moving to specific numbers for the guide and reflecting the typical third quarter seasonality, including European vacations, numbers are revenue in the third quarter of $2.75 billion, plus or minus $10 million, EBITDA of $830 million, plus or minus $5 million, earnings per share of $1.35, plus or minus $0.01. For the full year guide, this has increased again to revenue of $10.05 billion, plus or minus $50 million, EBITDA of $3.23 billion, plus or minus $20 million, earnings per share of $5.27 plus or minus $0.04. Free cash flow seemed to be $1.9 billion plus or minus $50 million. These guide increases are across the board given our growing confidence in the year. In closing, the Howmet team delivered a solid first half performance, with prospects for further growth and a robust second half as outlined. In November, at our Q3 earnings call, we expect to provide our first siding at the 2027 revenue, which we expect will be an increase over 2026 million. And with that, we'll now move to the Q&A session.

[Operator Instructions] The first question today comes from Sheila Kahyaoglu with Jefferies.

John, you noted IGT customers continue to revise upward their demand outlook, and I don't blame them who wouldn't want more. you're talking about higher CapEx for the foreseeable future. What are you seeing in the competitive dynamics at play in the IGT market in terms of the technology advantage you have, the scale which you could produce? And how are you thinking about your own ability to support these ramps as a few of your peers also seeking business there?

Thanks, Sheila. Let's deal with scale first. And I think I'll start off with saying it's important to note that Howmet has a market share in excess of 50% globally for turbine blades in the IGT market. And therefore, the growth of that market is dependent upon our willingness to invest, which we're doing. We've already commented in previous calls about the new plant we built in Japan. The major expansion in Europe, always call it a new plant. And also building out the capital in our existing footprint in Virginia in the U.S. in addition to facilitization that we're very substantial investments in new capital equipment, we have created additional space in our Virginia plant by exiting some or moving some nickel alloy work such that we can either make additional IGT componentry or if not some additional titanium castings. And I guess we'll deploy that space on a first come first serve basis and see expansion. Bonding for sure, it's going to be sold out pretty quickly. . We're also seeing, as I commented in my earlier remarks that we have several new applications for existing technology. And also, we have several new project introductions that we have to make over the next 2 or 3 years. And that leads us to believe that our market share will further increase. To date, the market is roughly split equally for turbine blading between Equiax and directionally solidified parts. The single crystal still being a fairly minor part of the overall turbine blade topology at sort of less than 5%. So when you think about technologies, first of all, for the movement through the normal sequence through turbine blade applications. We see the opportunity of further moving from Equiax to directionally solidified and then to single crystal albeit at the moment to demand is such that customers we really just want whatever we can make. And so for the next couple of years, I expect the demand increase to be roughly split between Equiax and directionally solidified. In terms of where does this go in the future, clearly, we're going to move to an increased use of core blades to allow airflow through them. And again, that plays very much to the Howmet strength and our capabilities in very large core blade capabilities, and we'll see that increasingly we deployed as we go through towards 2030 and beyond. So I feel as though both for the applications -- we had new applications we're seeing, the technology movement and a drift that will go on. and the capacitization that we have a fairly good situation for us, plus the elevated CapEx. So we have being significantly deployed in 2026. And in my comments about the future direction, is that we will see another significant step up in 2027, which will be both for the industrial gas turbine markets but also for commercial aerospace. I certainly don't want to forget the commercial air space because as recently as last week, I signed off in fact, the building of a new plant in that area as well. So my expectation is we will continue to meet market demand, we'll grow with the market. And I think we'll also grow with those new project introductions beyond the market and increase our overall share. Just address for a moment because I do want to cover something which has been topical of late, that is, is there a threat for data centers in space. So I'll just speak very briefly to that because it is something which has been raised. Clearly, conceptually, the opportunity of getting more direct access and using solar array is possible. It's a big solution to solve what may be a permitting problem at the moment. But there's a lot of technical things which have to be overcome. I mean, starting with if you're going to put a gigawatt of capacity into space, then maybe you've got lift 20,000 tons. And on what sort of rockets and frequency of launches that you need to get that. And so I imagine to do one data center using a current Rocket technology is going to be 1,000 launches or maybe it's 150 or 200 starship launches. And that's obviously a lot more than we have today. And I mean the benefit is you don't need to get permits, but the issues of maintenance or replacement of GPUs every couple of years, and also the sheer scale of the solar arrays and the issue of space debris and how do you fix them. Once it's been hit with debris over, let's say, 4 square kilometers of unit, those are big things to overcome. So I think we're looking at really some time in the 2040s or maybe it's a 2050 to consider this as a likely outcome. So I just like to try to give that perspective while talking about the overall current market as well.

Next question comes from Doug Harned with Bernstein.

Just John, continuing on the ICT path here, as you've talked about, the demand is extraordinary. And you've talked about a number, 6 or 7 new agreements that you've signed. And what I'm trying to understand here is how quickly can one respond to demand in terms of sort of signing a deal and then actually delivering products on that. And I say it because your reference to SpaceX. I mean this week, they talked about adding at least 15 gigawatts of terrestrial capacity over the next 18 months. I mean, is it possible to respond to this kind of growth since you're the leading player on blades.

So I'll start with 2026, Doug, and are, let's say, 30% -- 35%, 38% increase in revenue has actually exceeded what I thought we would possibly do. And that's been mainly from achieving yield improvements on the existing asset base, albeit if you go back and look at the comments I made towards the back end of '24, where we talked about making some investments in IGT, which was, I'd say, notable because we've not really talked about it before. And then what we've talked about in 2025, especially given the consequences of the new administration and their fossil fuel focus. Then we do have the benefit of some of that capacity coming on stream. So the delivery of our first new large casting machine into Japan and another one is going to follow in the second half. And in fact, that new plant that in fact, I visited that in April, is going to be -- it's already essentially fully spoken for. We have won on casting pit left but I think that capacity is going to be done. So we have a progressive build out of what we've already committed by way of significant investments. But for the new, I will say, gigawatts of capacity coming on, then really we're looking at 2028, 2029 and even the more recent ones, '29 into 2030. So what I expect is that we will see growth throughout the next 4 or 5 years. And we've installed some of that already. Some of it's already logged to come in, in '27, but with another major step into '28 and '29. I suspect that we may not have finished yet because, as I said earlier, we are seeing some of the demand patterns revisited. And so I think there's more play to come. which we haven't built into our future plans yet because until it's more certain, then we'll just hold off on that and I'd be clear. So -- so it's not a single item which equals capacity index. But if we started now, you can assume that it's a brand-new new commitments in, let's say, August of '26, you can say it's earliest August of '28, if you just like say, okay, what's the next piece of machine equipment that we could build or we can get from our machine to all suppliers. And we've had to book capacity at some of those on the expectation of some of this coming through just to make sure we can be responsive to our customers.

The next question comes from Robert Stallard with Vertical Research.

John, I was wondering if you could give us an update on what you're seeing on aerospace OEM and the wide-body market, how those reps are progressing and whether you think Howmet has enough capacity in place for the targeted rates or even beyond that?

Okay. So first of all, by way of capacity, essentially the majority of our manufacturing equipment, that equipment does not know whether it's building parts for narrow-body aircraft or a wide-body aircraft. So it will have, I'll say, similar [indiscernible] similar transfer presses and going through similar I'll say, continuously moving heat treatment furnaces or kids. And so for us, it's more a question of the overall market rather than widebody per se. We do feel as though widebody will increase over the next, I'll say, a couple of years. And there are demand increases signaled that both Boeing for the 787 up to rate 10 until the South Carolina plant is further expanded and then maybe opportunities to go significantly higher after that canton. And then also Airbus, which probably struggled on the A350 over the last 2 or 3 years, and now seem to be entering a period where there's some confidence that their, let's say, rate 5 or 6 will move to 8 or 9 over the next year. And we get increasingly confident that with the freight plus additional A350 demand that, that will also move up significantly in the future. So we do expect, on a percentage basis, large increases in the wide-body market and build rates over the next, say, 2 or 3 years? But also we're going to see, I think, increases in the narrow-body market also for the 737 for the A320. And so we are poised with additional capacities we've already prepared. And I think I just referenced a new plant that we committed to last week, a major expansion and building out of one of the sites we have to create the opportunity for that further expansion that's going to be required.

The next question comes from Scott Deuschle with Deutsche Bank.

John, is today's commercial aerospace growth at Inter products seeing any benefit from shipping these new or higher-value multihemistry coatings? Or is that transition to multichemistry coatings still largely in front of you? And then I was wondering if you could help contextualize the scope of the growth opportunity that, that provides.

Okay. So we have, first of all, again, been increasing coating capacity the last 2 or 3 years and indeed coat both our own turbid bleeds and also those of others in the industry. So that expansion has continued with, let's say, what called new coating guns and pits. And in fact, we have just completed the last available space in our Whitehall facility, pending a decision about whether we again expand the footprint of that. And that is facilitized for multi chemistry and also the opportunity to put all of the coatings on at the same time. So today, we already put on more than one type of coating briefly talking about some of the exotic coating capability. We actually do not do separate barons through that capacity. We're able to deposit all of the different chemistries all at the same time and do to both the external surfaces and also the internal services of the turbine blade some very small rises that need to be -- have this chemical deposition that a particle level of, I would say, technology position on a very consistent basis because you cannot afford to block any of the air flow passages. . And so a short answer is, yes, we're casting facilitizing. We're just building out the bit to do multiple depositions all in one. And we're actually facing the decision now, do we actually expand the plants and is probably a more likely than not given more [indiscernible] disposed to actually buying the advanced equipment for that, which in extremes because we tend to get ahead of these things. It's a 3-year [indiscernible] for some of that very exotic equipment.

The next question comes from Seth Seifman with JPMorgan.

Wanted to ask about the ramp on commercial aero sales in the engine business, it was a pretty -- I think, about 10% sequential growth in the quarter. assuming that, that's driven in large part by new capacity that you've added in terms of that new capacity that started coming online at the end of last year, how far -- I guess, how far are you towards the utilization of that new capacity? And how do we think about that continued kind of sequential trajectory from here?