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

My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense and Airlines equity research team, in case you're on the webcast. And we have John Plant, who's Chairman and CEO of Howmet. John, do you like what I have in my hand here for the first question?

Is that something you stole?

I did. I stole it from Whitehall, Michigan. It's a piece of a core at a very impressive facility. And I keep it in my bag actually all the time is like a little bit of a lucky charm. And I thought, what better way to start off than say, I stole a piece of the core, and it seems like lots of people are trying to steal a piece of your core, whether it's a [indiscernible], GE, so...

I still think you should hand that back to us. .

No, no. I actually have a spare 1 in case you did try to take this away from me. I have secretly locked up in my jewelry box. So how do we think about your next move from here?

Are you talking about me personally or the company or what I mean -- I don't know. You just in the [indiscernible] you with all the opportunity you have to consider. I'm inviting you to get more specific.

So how do you think about my interest in war games from here and how the scenarios play out? You said on your...

I was rather shocked at 1 of your suggestions. So I decided that you really had lost it in your positioning, that -- but then that's me in the way I think about you Sheila. She who steals parts from us. So my assumption is you're referring to like some recent announcement, SpaceX and that was a topic like a week or so ago...

And then you had another...

Yes. I never want to avoid anything. I think myself, yes, let's talk about it because it's far better than I do because you'll just be relentless in following up questions if I don't. And so my first thought about it is, let me try to put the whole issue of power provision into -- and the demand seen by turbine manufacturers whether it's provision for oil and gas pipeline or whether it's into data centers. And what is all that about? And where are we in that journey? And I think the most important and acute aspect of it is the demand evolution in the data center market because that clearly is -- a data center without power is useless. And availability of turbines has never been less against a greater need. And so where are we? And so I think I've got to start off with trying to make sure that we're all level set on the nature of today's data center demand. So historically, if you go back let's say, the storage of your images on your iPhone or your e-mail and a data center, that was more, let's call it, plain vanilla demand, and that was using, I'll say, standard merchant available chips. Very different to the data center demand, which is really emanating today from the likes of the software being written by OpenAI or by Anthropic and now I'd say, data centers that are built -- being built out with very advanced GPU chips, let's say, use a video or custom silicon. So you've got very much yesterday, a more standard silicon, and tomorrow, it's custom silicon. You've got air cooled versus air and liquid cooled. You've got stable power demands for yesterday's data center to highly variable power demands for the more exacting and the certain topic of the day of where data centers are. And that also influences the turbine selection and also the technologies that go into that because when you got variable power requirements, it puts very different loads on the turbine compared to, let's say, the more stable plain vanilla demand. And so not only is more power required beats the type of power that's there. So you get very different answers to what's the preferred turbines that service this market beyond the electricity from the grid, but what are you putting in there? So it's also driving the nature of let's say, not just for the use of natural gas, but also the robustness of the set of turbine blades. So the evolution from Equiax through direction solidified to single crystal, all of that is going on. And at the same time, all of the movements towards air cooled turbine blades is also going on. And the one thing about Howmet is that we provide not that pathway of technological evolution, which is rather unique in what we do. And it's a world away from the plain old, a solid Equiax buying blade of yesterday. And these things get exponentially more difficult to manufacture as you go through that technological journey towards the future. And so what do we see? First of all, going back is that very much the offering that we have goes very much the more advanced, it's a custom silicon variable power requirements of these modern variable according to how many searches are going on at 1 particular time to time. So it's important to talk about that, the technology drift for the future. And it's something I haven't really talked about much in the past. And so I think that's an important thing to get out there. And I wanted to say it in a more public forum. So I'm not advantaging anybody else in that knowledge as we go through. Second point that probably should be made is that, as you know from what I've said in the past, our market share is significant, and that market share has been growing and indeed is growing. We have, according to the last earnings call I gave, that we have now concluded agreements with all of the -- I used the word 7, but 1 of the 7 being, let's say, a aggregation of various aero derivatives, but all of the big turbine manufacturers. So I think [indiscernible], think Siemens, think Mitsubishi Heavy. And then you've got the smaller and midsized turbine manufacturers. So you think about Caterpillar solar, Baker Hughes, Doosan and so on. So we've got all of those laid out. And these contracts first of all, a multiyear. They go through the end of the decade and beyond. And in some of the cases, to the middle of the next decade. That's an important aspect as well. And also, it defines price and also supply position and share within it. And in 1 case, we actually have an exclusive arrangement, an exclusive means 100%. So that is really a good position for us to be in. And the biggest issue that we have today now is really not only facilitizing for the capital that we have been deployed, but what we going to continue to deploy over the next 2 or 3 years. But also our next decision is, do we need to have more building footprint for the capacity expansion. So this part of the market is exciting for us. And I'm going to say probably sometime in the next -- sometime in the next 2 or 3 earnings calls, maybe the one in February. I'll probably update everybody about my statement was that we would -- from the 2025, we would see a doubling of our revenues somewhere in the 3- to 5-year time period. I think I'm going to update that not today. But it will be coming at some point.

Yes, I'm about 100% exclusive with you, so I wouldn't get that.

Right. I was going to get to the second point now because I mean you want to ask a second question at some point during the meeting. But let's get the 2 big things out there and talk about it. And of course, the topic that you yesterday was the announcement that GE were buying and hopefully closing a year from now, the acquisition of CPP, which is a turbine -- sorry, I didn't address SpaceX for you, did I? So you wanted me to -- let me just go back and just cover that because the question that I think has been is the intention to become a supplier of third-party parts as a merchant supplier or just because today, whether it's maybe it's [indiscernible] 1 or 2, they're requiring a lot more power. And I think a smaller turbine company was purchase people who run turbines for living, not manufacture them or even the provision of buying old engines from aero engines and repurposing them for that. So there's a lot going on. And the question is how can they get replacement parts for some of those things. So I think you need to look at more of that part of the market than the more advanced part of the market that we've been talking about in the last 5 minutes. So I missed -- I know that before I went to the GE announcement there. So I think I've covered that. But if anybody else, I mean if you want to follow up on SpaceX, be my guest. And then the [indiscernible] was the GE and CPP, which we knew is coming up for sale. We had read [indiscernible]. But essentially, we also knew that for us, it was an impossibility in terms of antitrust, et cetera. And it does of course beg the question, well, what's the intent and you saw the intent yesterday was to look at developing it over the years. And I think we should be fine with that. I know the question is if there is additional investment in capacitization of CPP in the future, is that the detriment of -- for everybody else? Or is it 1 of our competitors? Or is it more aimed at the turbine side or the structural casting side? But I think we're pretty confident in our own abilities. In fact, the biggest issue we have now is actually provisioning for additional capacities in the aerospace market. And without getting very specific, because I don't think I should talk specifically about any 1 or 2 customers, but there's multiple customers within the aero engine market, including the name I just talked about are asking us, can we provision for increased capacities going through the end of decade and beyond. And of course, we're unlikely to do that if we're not clear on that capacitization and durability of that provision. So we're fairly confident in that. And that's born of, in fact, being asked for a special doubling of demand for 1 of the engine customers because of our extraordinary quality. And what's probably more important is a 100% on-time delivery. And so that's the biggest, I'll say, challenges that we're facing is that what -- like -- that's like an additional 1.5 manufacturing plants worth of capacity build out on top of what we're already doing. And as you know, we're expanding an extraordinary amount of capital today and building footprint. And and I'm unlikely to do that without be sure that capacity is being going to be fully utilized during the 2030s and beyond. So I feel as though we have extraordinary technology, extraordinary capabilities and we'll be showcasing that increasingly in the future.

That's great to hear. I think you've mentioned in the past you have 50% share of the turbine and blade market across both aerospace and IGT combined. And Merrick slipped in March at the Analyst Day in White Hall and said this year 2027 would be the year of highest -- the record number of new product introductions. I guess, how do you protect your IP from people like myself, SpaceX and GE to dig into the moats of your business as new entrants try to come in.

We protect ourselves in many ways, not only just in, let's say, the IT environment of the various vaults for information because we are attacked every day from certain jurisdictions in the world in trying to obtain information. We also pay extraordinary attention to CMMC compliance because of our defense industry. I would say, requirements and have, I think, tried to make sure we're at the forefront of that level of cybersecurity. But we also have physical security petitioning production into very different parts of the process. So there's only a few people in the company can ever see across the whole range of the processes that we do. And we are always making sure that you can't just go hire someone from Howmet, and let's say Okay, extreme jump from Howmet go be enticed to go to Texas somewhere because you only know like a fraction of the information. So we're trying to protect it in all of that way as well. . And it's true, we have a lot of new product introductions. You know some of them because they're very public in terms of some of the, say, upgrades of narrow-body engines, but there's a lot of others going on as well. both in commercial but also in the defense aerospace markets. And now I'll say collaborative combat aircraft and missiles, when the large cruise missiles where we're doing work for. And not just the institutional componentry of the structural parts, but I've talked about smaller turbines. And the one thing I haven't mentioned is that on every single one of our major aerospace customers we have long-term contracts, which again define share and also go beyond the end of the decade and beyond. And also we will be wanting to -- or we always consider duration of where we are. There's only one customer in the aerospace world, which is mainly in the business jet turbine market, where we haven't got a lock down, whether that's due for renewal on 1/1/'27, so they're already well past date of supply.

Got it.

So what I've been trying to do is to give you a picture of also sustained business, both technologically and by way of contract or more importantly, the way we protect information as well to try to keep stuff inside Howmet knowledge. And we also choose in most areas, not pattern things. So you're not even aware of what we're doing because if we patent it, then you become aware of what we're trying to protect.

That makes sense. Maybe the third element could be perhaps CapEx and the ability to build out greenfield facilities, which you are no stranger to, I guess, is it feasible that in a few years, we wake up and there's a fifth supplier of blades and veins out there, whether whatever spectrum that has?

Because in this slice, you never say never because that's for a future event that we know nothing about I see, it's probably very unlikely. But I'm not going to say never. Somebody with unlimited funds and maybe unlimited time. We could, but highly unlikely and it would not be an economic decision.

On that front, if we could talk about the industrial gas market, it's moved at roughly a high single-digit growth rate, and you're clearly seeing the business double now to $2 billion in annual sales. How do you -- you've talked about the business doubling? How do you think about the time line for that and just milestones in achieving that along the way?

Well, I think I said earlier, I'd probably be updating everybody...

I'm trying to get a little bit of a glimpse into...

I know and I recognize that. But I'm going to stay strong. and not -- is enticing and as nice as you are, I'm not going to weaken...