Q3 2026 Howmet Aerospace Earnings Conference Call - HOWMET AEROSPACE INC

Financial Performance:

• Q3 2026 revenue reached $2.7 billion, a 29% year-over-year (YoY) increase with 25% organic growth, marking the strongest quarterly growth rate on record.
• EBITDA rose 43% YoY to $879 million, achieving a margin of 32.5% (a 310 basis point YoY improvement).
• Adjusted EPS was $1.46, up 54% YoY; free cash flow was $562 million after $147 million in capital expenditures.
• Net debt to EBITDA improved to 1.3x; the company repurchased $1.1 billion of shares YTD (average price $251) and increased the quarterly dividend by 17% to $0.14.
• Total spares revenue grew 30% YoY to ~$570 million, representing 21% of total revenue.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance raised to $10.3 billion, EBITDA to $3.33 billion, EPS to $5.50, and free cash flow to $2 billion.
• Q4 2026 guidance: Revenue $2.75 billion, EBITDA $900 million, EPS $1.50.
• Initial 2027 outlook projects 12% ±0.5% revenue growth, targeting approximately $11.5 billion in revenue.
• Industrial Gas Turbine (IGT) sales growth expectation accelerated to doubling by 2028 (previously 3-5 years), potentially reaching $2.5 billion by the end of the decade.
• 2027 and 2028 capacity for IGT turbines is largely sold out, with 2031 orders expected to fill soon; 2032 capacity projected to be sold out within 1-2 quarters.
• Share buyback authorization increased by an additional $5 billion.

Business Segments and Product Lines:

• Engine Products: Revenue up 33% to $1.45 billion; EBITDA up 57% to $567 million with a 39.1% margin; driven by strong commercial aerospace (up 39%) and gas turbines (up 44%).
• Fastening Systems: Revenue up 41% to $630 million (including acquisitions); EBITDA up 34% to $185 million; organic growth was 10%.
• Engineered Structures: Revenue declined 4% to $295 million due to divestiture of Savannah facility; ex-divestiture growth was 8%; EBITDA margin expanded to 23.7%.
• Forged Wheels: Revenue up 32% to $86 million EBITDA; growth driven by volume and aluminum cost pass-through.
• Spares & MRO: Robust demand across all segments driven by legacy and next-gen engine programs; significant investment in MRO shop capabilities by OEMs.
• New Developments: Building significant capacity for LEAP-1B and GTF engines; "Blue First Blade" (2030s) discussions ongoing.

Market and Competitive Landscape:

• Commercial Aerospace: Strong demand for OE and spares; flight schedules healthy despite geopolitical tensions in the Middle East; backlog for narrow-bodies (737, A320, 787, A350) ensures production increases through 2027.
• Defense: F-35 spares demand healthy; missile parts production expected to increase significantly pending final contract agreements and 2027 budget approval post-midterms.
• Industrial Gas Turbines: Demand driven by data centers (e.g., SpaceX's Colossus projects), oil & gas (LNG compression), and power grid stability; major customers (Solar, Siemens, GE) expanding capacity.
• Competition: Management noted competitors (Pratt & Whitney, NGE/CPP) pursuing vertical integration but emphasizes HAMET's unique technological yields, scale, and decades-long reputation make replication difficult.

Risks and Challenges:

• Geopolitics: Iran conflict affecting Middle East travel (ticket prices, load factors) and defense inventory depletion; defense replenishment timing depends on US budget legislation.
• Input Costs: Sharp increases in aluminum costs impacting margins in the forged wheels segment despite cost pass-through.
• Capacity Constraints: Extreme demand may lead to over-capacitization if not carefully managed; significant capital expenditure required ($1.1 billion planned for 2027+) to meet 2030s demand.
• Regulatory: 2027 NOx emissions regulations in commercial transportation impacting truck OEM belt slots.

Management Commentary and Tone:

• Tone is highly confident, citing a "perfect storm" of demand across commercial aerospace, defense, and IGT sectors.
• Management emphasized that spares demand will remain robust through 2027 regardless of OE production fluctuations due to engine underbuilding and shop visit backlogs.
• Leadership expressed cautious optimism about IGT growth, acknowledging the need to balance high capital investment with long-term customer relationships to avoid price erosion.
• CEO John Plant noted the company feels "lucky" regarding current market conditions but emphasized disciplined capital deployment and risk assessment with the board.

Analyst Questions and Answers:

• Vertical Integration (CPP/NPR): Management downplayed competitive threat from competitors' vertical integration, stating spares demand from future IGT fleets (e.g., 2031) would exceed the value of lost narrow-body blade business; structural castings (CPP's strength) remain a differentiator where HAMET continues to grow.
• SpaceX/Data Centers: SpaceX's data center expansion requires massive power (1.2GW currently, targeting 20GW); HAMET supplies blades for the underlying gas turbines (Titan, Solar); if SpaceX accelerates, they may need to source blades from third parties or accept reduced durability, but HAMET expects to maintain core supply relationships.
• Technology Edge: Growth driven by both volume and technology upgrades (higher thermal performance) for fuel efficiency; new blade launches for LEAP-1B expected Q1 2027.
• Defense Visibility: Replenishment of inventory from recent conflicts is expected to be a major tailwind in 2027, contingent on budget clarity post-midterms; multi-year contracts are being negotiated.
• IGT Margins: IGT margins expected to remain similar to aerospace margins; management avoids maximizing short-term gains to maintain long-term customer partnerships; capex levels will remain elevated through 2028 to secure future volume.

Other Key Points:

• Diluted share count dropped to 399.5 million; total reduction over eight years exceeds 100 million shares.
• The company acquired Brunner Fastener (Feb 2026) and CAM (April 2026), significantly boosting fastening system growth and providing revenue scale, though CAM diluted fastening margins temporarily.
• Total acquisitions in 2026 valued at ~$2 billion; $500 million spent on CapEx and $1.1 billion on buybacks, yet leverage remains controlled.
• New product introductions for sophisticated IGT blades are being planned for 2031 deliveries, indicating long-term order pipeline visibility.
• Management recruited 520 net new employees in Q3 and plans similar engineering hiring increases in 2027.