Howmet Aerospace is a global leader in lightweight metals engineering and manufacturing, specializing in advanced engineered solutions for the aerospace and transportation industries. The company operates in four primary segments, offering products such as investment castings, seamless rolled rings, fastening systems, titanium and aluminum components, and aluminum wheels . These products serve critical roles in the aerospace and transportation sectors, contributing significantly to Howmet's revenue, with the aerospace sector being the largest contributor .
- Engine Products - Provides investment castings and seamless rolled rings for aircraft engines and industrial gas turbines, significantly contributing to the aerospace market .
- Fastening Systems - Produces aerospace and industrial fastening systems, essential for aircraft and commercial transportation vehicles .
- Engineered Structures - Offers titanium and aluminum components for aerospace and defense applications .
- Forged Wheels - Manufactures aluminum wheels for commercial transportation, known for their strength and lightweight properties .
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What went well
- Howmet Aerospace's aftermarket exposure has risen significantly from 11% in 2019 to 17% in 2024, and is expected to exceed 20% in the next 2 to 4 years, reducing revenue volatility and benefiting shareholders.
- Turbine blade production output has increased by over 50% across top ten turbine blades, positioning Howmet well to meet robust engine production and spares demand next year.
- The company maintains disciplined capital allocation, including strategic acquisitions and share buybacks, enhancing shareholder value.
What went wrong
- Uncertainty regarding the producibility and long-term yields of the new high-pressure turbine blade for the LEAP-1A engine, which could impact future revenues. Management stated, "I still think it's early days yet in terms of absolutely giving clarity over what the long-term yields will be in production."
- Expected increase in labor costs due to hiring and training new employees, which may negatively affect margins in 2025. Management mentioned, "we're going to have to take our increased labor next year... we're also going to have the impact of getting a lot of people trained... I don't have any margin comments regarding next year."
- Limited opportunities for significant acquisitions, with management indicating no major M&A activities planned in the near term, potentially limiting growth outside of organic expansion. "Nothing that we have currently on the stocks to go out in the next quarter or 2 that we can see."
Q&A Summary
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Aftermarket Revenue Growth
Q: How will spares revenue impact future growth?
A: Spares revenue is expected to reach $1.25 billion this year, up from $1.1 billion previously forecasted. The aftermarket exposure has increased from 11% of revenues in 2019 to 17% in 2024. Over the next 2–4 years, aftermarket content is expected to exceed 20%, reducing volatility and benefiting shareholders. -
2025 and 2026 Revenue Outlook
Q: Will aero revenue growth accelerate in 2026?
A: While 2025 is anticipated to have a 12% revenue increase, 2026 is expected to see further improvement due to easing supply chain constraints and increased aircraft production. The company is optimistic that 2026 will be a "further step up" on 2025. -
Market Share Gains and Capacity Investment
Q: How is the company planning for increased engine blade production?
A: The company is increasing investment in the engine business to meet robust demand for both current and new blades. Over the next five years, they plan to expand capacity, anticipating increased spares demand due to higher operating temperatures and pressures in modern engines, which lead to more frequent shop visits. -
Margin Expectations
Q: Can recent margin strength continue next year?
A: Management is cautious about margin guidance for next year and notes that increased labor hiring to build out capacity may impact margins. Recent productivity gains have been good, but it's too early to extrapolate current margins into the future. -
Strategic Positioning and Reduced Volatility
Q: How does increased aftermarket exposure affect volatility?
A: The shift to higher aftermarket content, expected to exceed 20% of revenues, implies less volatility due to reduced dependence on OEM production rates, which is positive for shareholders. -
Capital Allocation and M&A
Q: Are there plans for acquisitions?
A: The company is open to potential acquisitions, focusing on disciplined returns for shareholders. They completed a small but strategic acquisition last quarter to enhance engine capabilities. They also balance M&A opportunities against the benefits of share buybacks. -
Defense Sector Growth
Q: What drives mid-single-digit defense growth?
A: F-35 production is expected to increase slightly from 152 to 156 aircraft. Spares demand is anticipated to grow as the global fleet exceeds 1,000 aircraft, potentially reaching 600 in Europe by the end of the decade. -
Spares Demand Drivers
Q: Will retirements affect spares demand?
A: Legacy engine shop visits have not peaked and are now expected to peak in 2026 or 2027, delayed by continued aircraft use. New engines face time-on-wing issues, leading to earlier-than-expected shop visits, increasing spares demand. -
High-Pressure Turbine Blades
Q: Is the new LEAP-1A blade easier to produce?
A: The new blade will be used in both OE production and spares. There is optimism about producibility, and several hundred engine sets have been provided this year. It’s early to assess long-term yields, but no concerns are apparent. -
Supply Chain Constraints
Q: How are supply issues impacting production?
A: Supply chain constraints are expected to ease over time, improving aircraft and engine production rates. The company increased LEAP engine blade output by 40% and top turbine blades by over 50%. Collaboration with customers aims to further increase output.
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Given that aftermarket revenues have increased from 11% in 2019 to 17% in 2024 and are expected to exceed 20% in the next few years, what specific strategies are you implementing to sustain this growth while mitigating risks associated with potential fluctuations in spares demand?
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With the introduction of the new high-pressure turbine blade for the LEAP-1A, how do you anticipate this will impact your pricing structure and production efficiency, and what challenges might arise in scaling up production to meet both OEM and aftermarket demand?
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Considering the expected reacceleration in incremental margins in the fourth quarter, can you provide more detail on the drivers of this improvement and discuss the sustainability of these margin levels given the uncertainties and costs associated with hiring and training new employees next year?
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Despite external forecasts predicting higher aircraft production rates for 2025, you've tempered your expectations due to factors like the gradual restart of Boeing 737 assembly lines and supply chain impacts at Airbus; could you elaborate on these factors and how they might affect your growth targets?
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Even with the resumption of F-35 deliveries and expected growth in defense aerospace, your forecast for defense revenue growth remains at mid-single digits; what barriers are preventing higher growth in this segment, and are there opportunities to accelerate this growth?
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: Q4 2024 and FY 2024
- Guidance:
- Q4 2024:
- Revenue: $1.87 billion, plus or minus $20 million .
- EBITDA: $488 million, plus or minus $10 million .
- EPS: $0.71, plus or minus $0.01 .
- FY 2024:
- Revenue: $7.41 billion, plus or minus $20 million .
- EBITDA: $1.895 billion, plus or minus $10 million .
- EPS: $2.66, plus or minus $0.01 .
- Free Cash Flow: $920 million, plus $20 million, minus $30 million .
- Additional Information:
- Plans to increase the common stock dividend in 2025 by 25% from $0.08 to $0.10, subject to final Board approval .
- Q4 2024:
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024 and FY 2024
- Guidance:
- Q3 2024:
- Revenue: $1.855 billion, plus or minus $10 million .
- EBITDA: $465 million, plus or minus $5 million .
- EPS: $0.64, plus or minus $0.01 .
- FY 2024:
- Revenue: $7.44 billion, plus or minus $40 million .
- EBITDA: $1.865 billion, plus or minus $10 million .
- EPS: $2.55, plus or minus $0.02 .
- Free Cash Flow: $870 million, plus or minus $30 million .
- Additional Information:
- Capital Expenditures: Approximately 4% of revenue .
- Dividend: Increased to $0.08 per share starting August 2024, a 60% increase .
- Share Buyback Authorization: Increased by $2 billion to a total of approximately $2.5 billion .
- Q3 2024:
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q2 2024 and FY 2024
- Guidance:
- Q2 2024:
- Revenue: $1.35 billion, plus or minus $10 million .
- EBITDA: $440 million, plus or minus $5 million .
- EPS: $0.58, plus or minus $0.01 .
- FY 2024:
- Revenue: $7.3 billion, plus or minus $75 million .
- EBITDA: $1.75 billion, plus or minus $30 million .
- EPS: $2.35, plus or minus $0.04 .
- Free Cash Flow: $800 million, plus or minus $50 million .
- Q2 2024:
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: Q1 2024 and FY 2024
- Guidance:
- Q1 2024:
- Revenue: $1.74 billion, plus or minus $10 million .
- EBITDA: $400 million, plus or minus $5 million .
- EPS: $0.51, plus or minus $0.01 .
- FY 2024:
- Revenue: $7.1 billion, plus or minus $100 million .
- EBITDA: $1.635 billion, plus or minus $35 million .
- EPS: $2.15, plus or minus $0.05 .
- Free Cash Flow: $735 million, plus or minus $35 million .
- Capital Expenditures: $290 million, plus or minus $15 million .
- Interest Expense: Expected to improve to approximately $200 million .
- Operational Tax Rate: Expected to improve to a range of 21% to 22% .
- Miscellaneous Other Expenses: Expected to be in the range of $5 million of income to $15 million of expense for the year .
- Q1 2024:
Competitors mentioned in the company's latest 10K filing.
- Berkshire Hathaway Inc.: Through its acquisition of Precision Castparts Corporation, competes in titanium and titanium-based alloys, precision forgings, seamless rolled rings, investment castings, including airfoils, and aerospace fasteners .
- VSMPO (Russia): Competes in titanium and titanium-based alloys and precision forgings .
- Allegheny Technologies, Inc.: High-Performance Materials & Components segment competes in titanium and titanium-based alloys and precision forgings .
- Lisi Aerospace (France): Competes in aerospace fasteners .
- Aubert & Duval (part of Eramet Group in France): Competes in precision forgings .
- Doncasters Group Ltd. (U.K.): Competes in investment castings .
- Consolidated Precision Products Corp.: Owned by Warburg Pincus and Berkshire Partners, competes in investment castings .
- Weber Metals (part of Otto Fuchs): Competes in precision forgings .
- Forgital and Frisa (Mexico): Compete in seamless rings .
- Accuride Corporation: Competes in aluminum wheels in the commercial transportation industry .
- Speedline (member of the Ronal Group): Competes in aluminum wheels in the commercial transportation industry .
- Nippon Steel Corporation: Competes in aluminum wheels in the commercial transportation industry .
- Dicastal: Competes in aluminum wheels in the commercial transportation industry .
- Alux: Competes in aluminum wheels in the commercial transportation industry .
- Wheels India Limited: Competes in aluminum wheels in the commercial transportation industry .