Q3 2024 Earnings Summary
- 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.
- 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."
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +11% | Higher commercial aerospace volumes and favorable pricing drove revenue to $1,835 million, partially offset by inflationary cost pass-through. |
Engine Products | +18% | Strong demand in the commercial and defense aerospace markets boosted revenue to $948 million, aided by OE build rates and spares growth. |
Fastening Systems | +13% | Increased build rates in commercial aerospace, along with productivity improvements, lifted sales to $392 million, though labor costs and inflation tempered margin benefits. |
Engineered Structures | +13% | Growth in both commercial and defense aerospace supported a jump to $256 million, offset by some restructuring costs though overall volumes remained strong. |
Forged Wheels | -14% | A drop to $245 million due to softness in commercial transportation volumes and lower aluminum prices, partially mitigated by cost controls. |
Operating Income (EBIT) | +37% | Operational efficiencies, volume gains, and price improvements pushed EBIT to $421 million, despite inflationary pressures. |
Net Income | +77% | Net income reached $332 million, driven by higher sales, reduced interest expense, and strong sector performance, with partial offset from inflation-related expenses. |
Diluted EPS | +76% | Improved EPS of $0.81 largely reflects net income growth and fewer shares outstanding following share repurchases, indicating strong bottom-line performance. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2024 | $7.44B ± $40M | $7.41B ± $20M | lowered |
EBITDA | FY 2024 | $1.865B ± $10M | $1.895B ± $10M | raised |
EPS | FY 2024 | $2.55 ± $0.02 | $2.66 ± $0.01 | raised |
Free Cash Flow | FY 2024 | $870M ± $30M | $920M (+$20M / -$30M) | raised |
Revenue | Q4 2024 | no prior guidance | $1.87B ± $20M | no prior guidance |
EBITDA | Q4 2024 | no prior guidance | $488M ± $10M | no prior guidance |
EPS | Q4 2024 | no prior guidance | $0.71 ± $0.01 | no prior guidance |
Total revenue growth | FY 2025 | no prior guidance | ~7.5% ± 1% | no prior guidance |
Commercial aerospace | FY 2025 | no prior guidance | ~12% (plus or minus) | no prior guidance |
Dividend increase | FY 2025 | no prior guidance | Planned increase of 25% (from $0.08 to $0.10) | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2024 | $1.855 billion ± $10 million | $1.835 billion | Missed |
EBITDA | Q3 2024 | $465 million ± $5 million | $489 million (calculated from $421M EBIT+ $68M D&A) | Beat |
EPS (Basic) | Q3 2024 | $0.64 ± $0.01 | $0.82 | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Consistent emphasis on increasing aftermarket exposure and spares demand as a major revenue driver | Previously stressed spares growth in Q2 (17% YTD sales growth) , Q1 (25% YoY increase) , and Q4 (spares nearing $1B). | Spare parts revenue raised to $1.25B; aftermarket share rose from 11% in 2019 to 17% now, aiming for 20%+ soon. | Consistent focus; central revenue driver |
Recurring attention to Boeing production rate uncertainty and potential limitations from other OEM customers, including Lockheed | Cited Boeing rate concerns in Q2 (737/787 underbuild risks) , Q1 (MAX and 787 below targets) , and Q4 (737 rate guided at 34 vs. Boeing’s 38). | Cautious on Boeing’s 2025-2026 ramp; Lockheed’s F-35 production modest but spares rising. | Ongoing caution; tempered outlook |
Ongoing focus on capacity expansion through advanced manufacturing, automation, and AI to meet growing engine product demand | Q2 highlighted major investments in automation for engine upgrades , Q1 noted higher capex for engines but no specific AI mention , Q4 had no details on this [—]. | Increased capacity and automation to support 40%-50% YoY turbine blade output; AI mentioned in manufacturing. | Continues as major investment area |
Long-standing discussion of margin evolution, constrained by labor costs, inflation, and limited ability to pass costs under long-term agreements | Q2 had only indirect references to cost dynamics (e.g., Wheels challenges) ; Q1 none [—]; Q4 noted labor/price constraints under LTAs, with ~75%-85% revenue tied to LTAs. | No specific mention in Q3. | Not discussed this quarter; previously recognized constraint |
Emergence of uncertainty around manufacturing yields of new turbine blades for LEAP engines | No mention in Q2 [—], Q1 [—], or Q4 [—]. | Discussed early-stage yields for new LEAP blades; no major concerns but watching performance. | New topic in Q3 |
Discontinued mentions of commercial truck build reductions, last highlighted in Q2, absent in later periods | Q2 mentioned a 10% build reduction in Europe ; Q1 expected a 10% Class 8 truck drop ; Q4 signaled caution but without referencing prior exact cuts. | Q3 noted muted outlook for truck wheels in Q4 and early 2025; revenue down 12% in commercial transportation. | Still noted in Q3 but less emphasis on reductions |
Shift in margin sentiment from strong incremental margins in earlier quarters to caution about margin pressure in future periods | Q2 saw strong 50% flow-through but warned of rising depreciation , Q1 had record 24% EBITDA yet flagged 2H risk , Q4 guided incremental margins down to ~28%. | John Plant highlighted caution on future margins due to hiring and uncertain volumes. | Growing caution on sustaining margins |
Expansion of capital expenditures and potential impact on free cash flow, consistently mentioned as a significant investment area | Q2 raised capex to ~$320M but also lifted FCF outlook ; Q1 targeted ~$300M capex with $800M FCF guidance ; Q4 indicated capex > depreciation but maintaining ~90% net income conversion. | Capex remains elevated for engine products; still achieved ~$162M FCF in Q3 and guiding ~$920M FY. | Remains a core spending priority with solid FCF |
Potential large-scale impact from spares growth, increased engine production, and higher aftermarket share on long-term revenue and profitability | Q2 emphasized spares + engine upgrades for LEAP/GTF , Q1 highlighted $1.1B+ spares and more F-35 demand , Q4 underscored structural spares growth (engines needing more replacements). | Higher spares projected, robust engine demand, aiming to push aftermarket >20% of revenue. | Key long-term growth driver |
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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.