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

Good day, and welcome to the Q3 2026 Howmet Aerospace Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Thank you, and over to you, Paul.

Thank you, Danish. Good morning, and welcome to the Howmet Aerospace Third 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 noted, all comparisons are on a year-over-year basis. With that, I'd like to turn the call over to John.

Good morning, everybody, and welcome to Howmet's Q3 earnings call. Let's start with the highlights on Slide 4. Howmet performance in Q3 was solid in all dimensions. Revenues at $2.7 billion were up 29% year-over-year and up 25% through organic growth. EBITDA was $879 million and was up 43% with a margin rate of 32.5%. Margins were up 40 basis points from the second quarter and year-over incrementals were 43% after the dampening effect of the CAM acquisition. Free cash flow in the quarter was $562 million after capital expenditure of $147 million which was a quarterly record. A strong cash flow supported by share buybacks of $500 million. And in addition, gross debt was reduced by $60 million in the quarter and we ended with approximately 1.3x net debt to EBITDA. We have repurchased $1.1 billion of shares to date, of which is $400 million more than the total repurchases in 2025. I would like to note that our diluted share count fell to just below 400 million outstanding shares, at 399.5 million at the end of Q3. Over the last 8 years, the share count has been reduced by in excess of 100 million shares. Earnings per share were $1.46, a 54% increase year-over-year, and this sets us up well to achieve the remainder of our 2026 objectives. Good progress was made on several fronts with new business being booked in line with our outlook expectations in Commercial Aerospace, Defense Aerospace and Industrial Gas Turbines. Of particular note in the quarter was the 45% Gas Turbine revenue growth, which demonstrates both the extraordinary addition to output and even more importantly, the increased market share. Further commentary will be provided during the outlook section of the call. I'll now turn the call over to Patrick, who will provide further commentary on end market growth and segment performance.

Thank you, John. Good morning, everyone. Please move to Slide 5. Howmet delivered another strong quarter with all end markets growing. We are well positioned for the future and continue to invest for growth. Total revenue was up 29% in the third quarter. Excluding the net impact of the 3 transactions we completed this year, revenue was up 25% year-over-year an acceleration from the 21% organic growth rate in the second quarter and 19% in the first quarter. Commercial Aerospace growth was very healthy at 32%, and with organic growth of 27%, driven by demand for both OE and spares. Commercial Aerospace spares demand continues to increase significantly driven by both legacy and next-generation engine programs. Defense Aerospace growth was 10% with organic growth of 3% driven by spares demand, particularly on legacy [indiscernible] platforms. Commercial Transport revenue was up 28%, reflecting both volume increases as the North America market recovery continued and the pass-through of higher aluminum costs. Gas Turbine growth was very strong at 45% and as end market demand remains robust. Growth in Other markets of 48% was largely driven by the Brunner Fastener acquisition completed in February. Spares growth remained robust across Howmet markets. Total spares revenue was up 30% to approximately $570 million and represented approximately 21% of total revenue in the quarter. In summary, continued strong performance in Commercial Aerospace, Defense Aerospace, Gas Turbines and Commercial Transportation. Moving to Slide 6, starting with the P&L. Third 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 29% and 25% organically, the strongest quarterly growth rate on record for Howmet. EBITDA continued to outpace revenue growth of 43%, EBITDA margin increased 310 basis points to 32.5%. The incremental flow-through of revenue to EBITDA was solid at 43% year-over-year. Earnings per share were $1.46, up 54% compared to Q3 2025. Now let's cover the balance sheet and cash flow. The balance sheet remains a source of strength for Howmet. The quarter end cash balance was $508 million, with quarterly free cash flow of $562 million. Net debt to trailing EBITDA improved to 1.3x. During the quarter, we paid down $60 million of commercial paper. Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program with $390 million outstanding from the $450 million that was drawn to support the CAM acquisition. Turning to capital deployment, CapEx was $147 million. The majority of our capital spend continues to be in the Engine Products segment as we continue to invest for growth in both Aerospace and Gas Turbines markets. Investments are backed by long-term customer contracts. In the quarter, we repurchased $500 million of common stock at an average price of $265 per share. This brings year-to-date repurchases to $1.1 billion at an average price of $251 per share. We continue to be confident in strong future free cash flow. We increased the quarterly stock dividend in Q3 by 17% from $0.12 per share to $0.14 per share. Now let's move to Slide 7 to cover the segment results for the third quarter. The engine products team delivered exceptional performance again across revenue, EBITDA and EBITDA margin. Revenue grew 33% to $1.45 billion. Commercial Aerospace was up 39% and Gas Turbines was up 44%. Demand continues to be strong across both original equipment and spares. EBITDA outpaced revenue growth with an increase of 57% to $567 million. EBITDA margin increased 580 basis points to 39.1% while absorbing approximately 520 net new employees in the quarter, positioning us well for future growth. Please move to Slide 8. Fastening Systems delivered another solid quarter. Revenue increased 41% to $630 million, including the impact from the CAM and Brunner acquisitions. Commercial Aerospace was up 42% and Defense Aerospace was up 56%. Commercial Transportation was up 6% year-over-year. Excluding the impact from acquisitions, total Fastening's growth was up 10%. EBITDA increased 34% to $185 million. EBITDA margin declined 140 basis points year-over-year and 70 points sequentially, reflecting the increased revenues from CAM, which we acquired in April. Moving to Slide 9. The Engineered Structures team continues to drive improvement in the business. Revenue declined 4% to $295 million due to the divestiture of the Savannah disc forging facility. Excluding the impact of Savannah, revenue growth was 8%. We continue to focus on higher margin and stronger return opportunities in the business. Sequentially, revenue was up 10% from the second quarter, driven by increased Commercial Aerospace OE demand. EBITDA increased 9% year-over-year despite the revenue decline and EBITDA margin expanded 290 basis points to 23.7% as we continue to focus and optimize the Structures segment to maximize profitability. Please turn to Slide 10. Forged Wheels delivered another solid quarter. Revenue was up 32%, driven by higher volumes in addition to increased aluminum cost pass-through. Volumes also increased sequentially from Q2 as the North American market recovery continued. EBITDA was $86 million, an 18% increase year-over-year. EBITDA margin declined year-over-year and sequentially, reflecting the significant dilutive effect of sharply higher aluminum cost pass-through. We continue to outperform the market driven by our premium products. Now let me turn the call back to John.

Thanks, Patrick, and let's move to Slide 11 and turn the calls of the outlook. Firstly, of course, we provided guidance for Q4. Our glide path continues towards the conclusion of another good year for Howmet. The specific numbers will be commented upon in a few moments, plus our initial [indiscernible] chart of 2027. Regarding Commercial Aerospace, the flight schedules and load factors held up well during the summer months both for domestic and international travel. Naturally, the Middle East was lower given the Iran conflict and its fallout. Oil prices, notably jet fuel and diesel, are especially high and with the resultant effect on ticket prices, overall travel will potentially impact some schedules as we go through the winter into 2027. Having said that, we do not expect there to be any impact on our spares deliveries during this period and indeed throughout 2027. In fact, we expect solid demand given the timeline ring issues experienced by the new generation of narrowbody engines and also the backlog of aircraft engines, which are scheduled for shop visits and the ongoing underbuild of aircraft compared to plans. And also, this means that spares demand will continue to be very robust. The current extraordinary aircraft OE order backlog will ensure that new aircraft production continues and increases throughout 2027 and beyond. We expect volume increases for the 737, the A320, the 787 and the A350 to be healthy, and they help to underpin our Commercial Aerospace business outlook. Defense sales continue to be strong with further increases likely in legacy aircraft build and spares. Notably, F-35 spares continues to be healthy with an expanding fleet of aircraft. We have not yet assumed in our forward look, the replenishment of inventories, which have been depleted as a result of the Iran conflict. The most important growth factor as a percent of sales is up to one sector of defense sales is that of missile parts. We are being asked to increase production significantly, albeit final agreements have yet to be concluded. We believe that how much technological and operational leadership position in the industry, coupled with our ability to develop the most sophisticated turbine blades at scale in both Commercial and the Defense Aerospace sectors will ensure that Howmet's market position and strong financial performance will continue well into the middle of the next decade and beyond. Industrial Gas Turbines growth and the growth as we continue to look forward to with customers will strengthen, and we look forward to further increase these volumes into the future beyond the previous expectations. This impact is likely to be felt in the outer years beyond 2028 since the new capacity currently being installed is totally sold out. More recently, we've seen major gas turbine customers state that 2031 is now also sold out. And indeed, 2032, we're likely to sold out in the next 1 or 2 quarters. This growing level of demand continues into the 2030s and combined with the need for significant increases in future gas turbine spares provides us with even greater confidence. Further capacity is likely to be considered for addition, albeit within the framework of maintaining a high level of free cash flow conversion. Most importantly, the whole of the IGT growth serving broad-based demand across the industrial, oil and gas as well as data centers will be completed without adding any depth to the company. Indeed, this year, we'll have completed 2 acquisitions for approximately $2 billion, spent $0.5 billion on CapEx and bought back shares in excess of $1 billion. And yes, our leverage level at the end of 2026 is expected to be similar to the exit level of 2025. The Commercial Transportation sector continues to experience North American market recovery. Production volumes continue to climb after the Q1 low point with truck OEM build slots largely fall in the second half and now into the first part of 2027. The more gradual phase-in of the 2027 NOx emissions regulations should also be supportive of the industry volumes going into 2027. While I will comment on specific Q4 numbers in a moment, the new guide has been raised from the prior outlook. But perhaps the most important view is the initial growth outlook for 2027 which is seen at 12% plus or minus 0.5%, resulting in revenues of approximately $11.5 billion. Further refinement and underlying aircraft volume build assumptions will be provided during our February 2027 earnings call. Finally, the share buyback authorization has also been addressed by the Board and has been increased by a further $5 billion. Now moving to specific numbers for Q4. We envisage revenues to be approximately $2.75 billion, plus or minus $10 million, EBITDA of $900 million, plus or minus $5 million. Earnings per share at $1.50, plus or minus $0.01. For the full year, the guidance increased again across the board to revenues of $10.3 billion, plus or so minus $10 million. EBITDA $3.33 billion, plus or minus $5 billion; and earnings per share of $5.50, plus or minus $0.01. And free cash flow has been increased to $2 billion, plus or minus $50 million. In terms of the full year commentary, we're pleased with our sales growth of 25%, including a 22% organic growth so far this year and an earnings per share growth of over 45%. We note that free cash flow of around $2 billion represents a very healthy cash flow to revenue and the margin -- a cash margin of over 19%, which is at a very high level. We can now move to Q&A.

[Operator Instructions] The first question comes from Kristine Liwag with Morgan Stanley.

I guess blades and veins remain a critical bottleneck in aerospace supply chain, which seems to be driving OEMs to take greater control of their manufacturing capabilities. We saw this with Pratt when they invested in the Asheville facility, NG announced its acquisition of CPP. John, you've previously highlighted the difficulty of replicating how much technology, your manufacturing yields and scale, but how do you view these vertical integration initiatives reshaping the competitive dynamics in this aerospace blades and veins market? And what implications could they have for how its future market share? And how do you think about pricing power?

I think the first comment I would like to make is that we have excellent relationships with all of our engine customers. So namely GE, Safran, Pratt & Whitney, Rolls-Royce to name just a few. Our investments in technology, quality and ability to invest in capacity have been fundamental to the increase in volume of modern jet engines and indeed support of the airline fleets worldwide. This capability has taken years, if not decades to achieve. And right now, we're actually poised to further increase capacity for GE, which will take 2 years to install and then there will be a multiyear runway after that. In fact, regarding this particular capacity for GE, I was reviewing yesterday for one of our sites and it is a significant investment. We are also in dialogue with what's been called the Blue First Blade and its future industrialization in the 2030s. I know that this audience though likes to have quantification and numbers rather than just words. And of course, it's difficult to give dollar values since I also recognize that competitors are listening. So I thought I tried to provide some views on scale and quantification of the central thrust of your question, which was the GE acquisition of CPP. And I think -- I was thinking about sort of how do we move into the 2030s and beyond, especially given the investments I've talked about in commercial aerospace, but also, you've seen us make a lot of investments in this year and already talked to the planned increase in investment in 2027 and beyond in the IGT space. And so I thought maybe I can give some quantification of this by just think about the fleet of turbines that we are enabling to be built from like 2025 through 2030 and the large increase in the fleet of turbines, which will produce for us spares demand into the 2030s. And when we have done our modeling, we think about that increase in spares demand, they just pick, let's say, one year, I just picked it around an like 2031 and what our expectations are in our planning assumptions is that we see the sales value increase in spares revenues from IGT in that one year. That would exceed the total value of the sales of the first blade of our largest narrow-body [indiscernible] blade to any of our customers. So -- and if you think about it, we don't expect to lose any of that business anyway, but just to quite provide [indiscernible] context, should we lose a first blade to a narrow-body engine is that that would be more than compensated by just one thing, which would be the spares increases in our IGT segment in one year. And then, of course, we're expecting similar values of increases in 2032, 2033, 2034 and beyond, given the continued build-out that we envisage.

So let me just turn back from a quantification to back to some more, I'll say, stores around CPP and -- and when we consider their capabilities, we seem to be probably the higher order in structural castings and that's probably augmented recently by the acquisition of Precicast from Switzerland that they closed in the last month or so. And when I think about the industry, we've heard a lot about forgings and castings, which seems to be the word that people reach for immediately. And in fact, structural castings have probably been the main pain point of the industry that commercial aerospace has suffered in recent years. And therefore, I consider the capabilities that maybe CPP has in structural castings to be possibly of an more important relevance. And when I think about it, even though Howmet has been increasing our market share, and we're actually currently considering a further buildout of another manufacturing plant in this area. Maybe it will affect the scale of the plant that we're considering and indeed, where we place that investment. But -- so we expect that we'll continue to grow even in this segment with [indiscernible] strength that CPP may have in the future. And then I think just turning the call into like a broader perspective for what Howmet's going to do over the next few years. I think I'd just like to return to that IGT theme. And I think it may be worthy of updating our guide regarding growth that I provided, I think, during last year, especially in the light of our growth in 2026. And as you know, it's been above expectations. In fact, growth accelerated in the third quarter from the 30% plus revenue increases in the first and second quarter to a 45% level. And as I commented earlier, that level of growth is clearly well in excess of the loan based gas turbine industry and a result of further market share agreements that we've achieved during the course of the negotiations that I referred to in recent calls. So what I see now is that whereas our prior commentary had been around a doubling of IGT sales from 2025 as the base year within a 3- to 5-year period, we now see this as being achieved in 3 years so 2 years at the front end of that. And maybe [indiscernible] to 2.5x inside 5 years, which would take those sales to about $2.5 billion by the end of the decade. So hopefully, I've covered the perspective of the investments we're making in Commercial Aero, the investments that we're anticipating making right now for GE and the way that those investments will bring additional capacities on towards the end of this decade and into the 2030s. And also, the impact should something like the first blade have a different destination, albeit we don't think it does. And we see growth in both Commercial Aero and IGT as we go into the next decade.

Our next question comes from the line of Seth Seifman of JPMorgan.

Maybe just to round that out, and this might be kind of a quick one in light of your prior comments, but it might be a good time to round out. You kind of addressed fairly directly potential impact from CPP and on your plans in Aero. When you think about the IGT plant, how do you think about the role of potentially in-sourcing at SpaceX and what that might mean for the IGT market?

First, maybe the comment I should make is that SpaceX is indeed an extraordinary company, which has almost limitless access to capital. And I guess, fundamental to their current plans as the company indeed is to build out sort of the data center business, I think referred to as Colossus 1 and 2. And if you study that part of SpaceX in detail, then it's clear that they sold capacity of those, let's say, ultra modern data centers with the latest, let's say, custom silicon in them to other frontier AI companies such as Google and Anthropic to name a couple. I think it's important again to note that for those cutting-edge data centers, the gross margins on the tokens that you use like AI token is exceptional. And I'm sure you're aware of how high those are. And hence, the uptime and keeping those data centers going is fundamental and indeed, you can't have interruption of service to that really important revenue stream with that level of margin. And I'm sure it's in that contract with those front AI companies. Specific to that is on their recent earnings call at SpaceX, they talked about power and specifically behind the meter power and its acquisition, which is so fundamental to achieving that compute increase and switching the compute capabilities are. So to solve those power issues and to get to today's level of compute power, which is using about approximately 1 gigawatt than [indiscernible], the APR company and its fleet of mobile gas turbines to solve the problem. And so these 69 mobile gas turbines were installed and are situated just across the state line to support Colossus. And that power is needed in addition to what power was available from the grid. And then I guess you know that by the middle of next year, those mobile turbines have to be relocated. And therefore, replacement is required and I think currently to approximately 1.2 gigawatts of parallel to support the Colossus center. And so my understanding from scarring of the Internet and knowing a little bit about the inside of the industry. There are some 33, I'll say, fully fledged titan turbines from [indiscernible] or Caterpillar being installed and the further [indiscernible] 10 Pro Energy 6000 series turbines and you're probably not surprised when I say that Howmet supply those turbine blades to both Titan and to the LM6000 series of aeroderivative turbines. Getting a bit deeper into it then, on the recent call, Elon Musk talked about his plans going forward for 2027 and he talked about the plans to get to 20 gigawatts of power capabilities to provide you -- to turn on further compute capabilities. And this is by various means, obviously, IGT, wind, solar, the grid, et cetera, et cetera. So it's not coming from one singular source, but part of this was that gas turbines were fundamental to it. And if it's not 20 gigawatts than maybe the thought was at least 10 gigawatts of power could be achieved on top of getting to a 3 gigawatt capability by the mid-year and to be able to turn on that additional compute capacity and then earn that -- those high profits. And he did comment that to do this, new turbines were required but even like the problem is that the availability of those turbines was restricted in the industry by the availability of turbine blades. And it was commented on the call by SpaceX that these might take another 18 months to 2 years to achieve and therefore, maybe that SpaceX could accelerate the ability of power by providing the blades to those turbines, which turbine could be built, but the availability of the blades wasn't there. And my understanding is that, one Asian turbine manufacturing company has agreed to supply turbines without the blades. And I assume that those are central to the capability of casting that SpaceX talks about with their special casting capabilities. So I think the SpaceX that can take that step. And maybe even if those blades are not quite at the level that would have been for the original equipment, they can operate at a power rating maybe below the full power rating of the turbine, and it's full durability. But the important thing, it gets power. And if you think about -- this is all about our acquisition, and what we see generally both for SpaceX and across the industry, the data centers are and constructors are reaching out to get power from any source and -- whether it's by generations of turbines, I think going back to like an E-Series turbine, not today's F-Series or are the more modern 8 -- Series. Just got a Series-E and in addition to that, you've probably read about several start-ups, venture companies, they're looking to get into this segment and launch new companies to provide power using aero derivative engines, which are really at the end of life or aero engines and repurpose them of, let's say, old 737s, as an example. And our thought is that [indiscernible] those companies will exist and they will start, but maybe they'll become less necessary when additional turbine capacity is brought on stream towards the end of the decade and into next decade. So I'm trying to give like a specific SpaceX answer to your question and then broad it out into the needs of [indiscernible] to achieve the compute levels, which are being planned. And then I took note and you probably took note from the [indiscernible] call yesterday, their earnings call, they said that now they see that their 2032 order book is largely filled and that obviously, if you think about it, we've talked about being good through '28, good through 2030. Now it's looking at 2031. 2032 looks to be pretty booked. And so views are now turning towards the middle of the next decade for this level of capacity. And my thought is as we see each of those then today's level of investment that we're [indiscernible] is probably not enough. So I don't know whether that covers your specific question, Seth, and then broaden it out into [indiscernible] the data centers.

[Operator Instructions] Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

John, you mentioned the Blue Blade coming in the 2030s. It's the first time you've talked about that. Obviously, your technology edge is what provides you additional content on the LEAP and GTF and I'm sure you're first in line for the next-gen LEAP blade. Maybe can you quantify for folks how much of your growth is coming from that technology edge content increases versus just volume and price? And perhaps to that kind of question, as you think about industry players perhaps starting from a more square one, how do you think about what supply/demand looks like today versus 2030 and 2035 and 2040?

Okay. So I guess thematically, what we've been trying to do is step up to the needs for fuel efficiency in the industry and providing a level of capabilities, particularly at the front end of the hot section of the turbine, which could achieve performances at considerably higher [indiscernible] upgrade those turbines to provide that increased fuel efficiency, given the -- especially today, given the cost of jet fuel and maybe what it will cost thematically, it's just the same. What we envisage is that OE -- further OE production will be required over the next few years with the increases envisaged by the airframe manufacturers and the engines to be supplied to them whether it is for Boeing or Airbus. And if you think about it those things are not going to stand still. There's going to be further content increases. And so I expect that we'll see during the next decade the further capacity that's began to require for OE for the capacity that's going to be required to service these new, I'll say, new fleet of engines on the improvements. And I also think that fundamentally, when you put higher temperatures, higher pressure into engines is that the replacement cycles actually become more frequent. And so we do envisage a very healthy space demand over that same period of time. And you can see that by the build-out of further MRO shop capabilities in fact, by all of the engine manufacturers, you can look at GE, Safran in particular, and also Pratt & Whitney. Everybody is building that capacity for further [indiscernible] and just keep the same thing going continue to develop our technology and here we are again, having already recruited in the last 5 years, probably several hundred engineers. We're going to increase our engineering staffing again in 2027 by a similar number that we did in 2025 and 2026, as an example, to keep ourselves at the forefront of all the developments.