Q3 2026 Howmet Aerospace Earnings Conference Call - HOWMET AEROSPACE INC

Explicit Guidance:

• Q4 2026: Revenue of $2.75 billion (±$10 million); EBITDA of $900 million (±$5 billion); Adjusted EPS of $1.50 (±$0.01).
• Full Year 2026: Revenue of $10.3 billion (±$1.0 billion); EBITDA of $3.33 billion (±$50 million); Adjusted EPS of $5.50 (±$0.01); Free Cash Flow of $2.0 billion (±$50 million).
• FY2027: Initial revenue growth outlook of 12% ±0.5%, resulting in revenue of approximately $11.5 billion; guidance refinement to follow in February 2027.
• Dividends: Quarterly dividend increased by 17% in Q3 2026 from $0.12 to $0.14 per share.
• Capital Deployment: Board increased share buyback authorization by $5 billion.

Business-Segment Outlook:

• Commercial Aerospace: Expect healthy volume increases for 737, A320, 787, and A350 platforms throughout 2027 and beyond. Spares demand remains robust through 2027 driven by time monitoring issues on new narrow-body engines, shop visit backlogs, and current underbuild of aircraft. OE order backlog is extraordinary, underpinning production increases.
• Defense Aerospace: Sales expected to grow in 2027 due to increased legacy aircraft build and spares, particularly F-35 spares. Inventory replenishment from Iran conflict is not currently assumed in the forecast but may drive upside post-midterms. Missile parts demand is significant, with customers requesting production increases, though final agreements remain pending.
• Industrial Gas Turbines (IGT): Demand expected to strengthen significantly. Current capacity fully sold out; customer orders extend to 2031, with 2032 expected to be sold out within 1–2 quarters. Growth in spares and new units projected into the 2030s. Prior guidance for IGT sales doubling from 2025 base in 3–5 years accelerated to achieving doubling in 2 years, with potential to reach 2.5x sales ($2.5 billion) by end of decade.
• Fastening Systems: Excluding acquisitions, growth remains positive (10% organic growth in Q3).
• Commercial Transportation: North American market recovery continuing; truck OEM production volumes climbing through 2027. 2027 NOx emissions regulations expected to support industry volumes.
• Workforce: Continued hiring; net addition of ~520 employees in Q3. Further engineering staffing increases planned for 2027 to match 2025–2026 levels.

Market and Competitive Outlook:

• Competitive Dynamics: Management views vertical integration by OEMs (e.g., Pratt & Whitney, NGE/CPP) as manageable; Hammett believes its technology, yield, and scale are difficult to replicate. Spares revenue growth in IGT (e.g., $2.5B in 2031 alone) is expected to far exceed potential losses of first-blade business.
• Supply Chain: Turbine blades remain a critical bottleneck industry-wide, creating opportunities for Hammett.
• Pricing: Premium products continue to outperform market; aluminum cost pass-through expected to continue.
• Market Share: Continuing to gain market share in gas turbines and aerospace segments through technological leadership and capacity additions.
• Technology: Focus on fuel efficiency upgrades for existing engines (LEAP-1A, LEAP-1B, GTF) to increase thermal performance; new LEAP-1B volumes building with launch expected Q1 2027. "Blue First Blade" industrialization expected in the 2030s.

Macro / Industry Outlook:

• Geopolitics: Middle East travel (Iran conflict) temporarily impacted flight schedules and load factors in Q3, potentially affecting winter/2027 schedules, but no impact expected on spares deliveries.
• Energy & Data Centers: Massive demand surge driven by AI data centers (e.g., SpaceX Colossus centers) requiring ~1–2 GW power initially, scaling to 10–20 GW by 2027. This drives demand for gas turbines and blades (Titan, ProEnergy series).
• Economy/Regulation: 2027 NOx emissions regulations expected to be gradual and supportive for commercial transport. Defense budget clarity expected post-2026 midterms to drive contract definitization.
• Oil/Commodities: High jet fuel and diesel prices impact ticket prices but not spares demand; aluminum costs remain elevated with pass-through mechanisms.
• Climate/Infrastructure: Long-term demand drivers include LNG liquefaction needs, air conditioning demand due to hotter summers, and general energy security.

Strategic Initiatives:

• Capacity Expansion: Investing in new capacity for GE commercial aerospace engines (2-year installation + multi-year runway). Considering additional manufacturing plant for structural castings.
• IGT Capacity: New capacity fully subscribed; further capacity additions likely considered while maintaining high FCF conversion.
• M&A: Two acquisitions completed in 2026 (~$2 billion total spend). Future capacity considerations may be adjusted based on competitor moves (e.g., CPP structural casting).
• Share Repurchases: $1.1 billion repurchased YTD 2026; average purchase price $251; authorization increased by $5 billion. Share count reduced to ~399.5 million (down >100 million over 8 years).
• CapEx: Elevated CapEx levels expected to continue through 2028 to support growth; current year spent $0.5 billion, with higher investment planned for 2027.

Risks and Headwinds to Outlook:

• Geopolitical Impact: Iran conflict fallout could further impact commercial travel schedules into 2027.
• Defense Uncertainty: Replenishment of inventory and missile contract volumes depend on final government budget agreements and bipartisan consensus post-midterms; not assumed in current base case.
• Competition: Vertical integration by engine OEMs (e.g., First Blade, CPP) could theoretically erode specific OE opportunities, though management believes spares growth and scale will offset this.
• Execution Risk: Significant capital investments (IGT, aerospace capacity) rely on the persistence of demand through the 2030s; over-capacitization risk if demand stutters.
• Cost Pressures: Sharp increases in aluminum costs (dilutive to margins in forged wheels) and jet fuel prices impacting travel volumes.

Management Tone on the Future:

• Confidence: Highly confident in "robust" and "extraordinary" demand, particularly in IGT and commercial spares.
• Strategic Shift: Acknowledges "good luck" in simultaneous booms across Aero, Defense, and IGT, but emphasizes disciplined, data-driven capital allocation to avoid over-capacitization.
• Long-Term View: Outlook extends confidently into the 2030s (2031–2032 bookings confirmed); expects to double IGT sales from 2025 levels in two years (accelerated timeline).
• Financial Discipline: Commitment to maintaining net debt/EBITDA leverage similar to 2025 exit levels (~1.3x) despite high growth and CapEx.

Miscellaneous:

• Spares Growth: Total spares revenue up 30% to $570 million in Q3 (21% of total revenue); expected to remain robust through 2027.
• Cash Flow: Q3 Free Cash Flow $562 million; Q3 Cash Balance $508 million.
• Q&A Specifics: SpaceX and other AI data centers are primary demand drivers for IGT, utilizing aero-derivative turbines (Titan, ProEnergy) which Hammett supplies blades for.