Prepared remarks
Good day, and welcome to the Howmet Aerospace Second Quarter 2026 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.
Thank you, Chloe. Good morning, and welcome to the Howmet Aerospace Second 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 stated, all comparisons are on a year-over-year basis. With that, I'd like to turn the call over to John.
Thank you, PT, and good morning, everyone, and welcome to the Howmet Q2 earnings call. Let's start with the highlights on Slide 4. Howmet completed a successful second quarter. Headline revenues were up 24% year-over-year with strong incremental margins of 46%, and that was after some impact from the CAM acquisition. Excluding all the M&A activity this year, organic growth was very healthy at 21% for the quarter and 20% for the first half. EBITDA margin in Q2 was 32.1%, an increase of 340 basis points year-over-year, including the absorption of CAM starting in April. 2027 is a focus year for our CAM optimization plan to begin to drive noticeable synergies. Operating margin was 28.8%. Second quarter free cash flow was just under $0.5 billion and free cash flow totaled approximately $840 million for the first half. Earnings per share were $1.33, an increase of 46% year-over-year. A total of $600 million in shares were repurchased in the first half of the year with $300 million being made in the second quarter. We continue to repurchase shares in July for a further $200 million, which resulted in repurchases in 2026 already greater than in 2025. In addition, a further $186 million of debt was retired. I'll now pass the call to Patrick, who will set out the end market growth percentages and provide some segment commentary.
Thank you, John. Good morning, everyone. Please move to Slide 5. It was another strong quarter for Howmet with all end markets growing. We are well positioned for the future and continue to invest for growth. Total revenue was up 24% in the second quarter. Excluding the net impact of the three transactions we completed this year, revenue was up 21% year-over-year, an acceleration from the 19% organic growth rate in the first quarter. Commercial aerospace growth was strong at 28% with organic growth of 26%, driven by demand for both new builds and spares. We continue to see higher spares demand on both legacy and next-generation engines. Defense aerospace growth continued to be solid at 11%, with organic growth of 7%, reflecting healthy spares activity as well as higher legacy fighter demand. Commercial transportation revenue was up 12%, driven by the pass-through of higher aluminum costs. On a volume basis, wheels was down 8%. However, on a sequential basis, wheels volumes were up 7% as the North American market began to recover. Gas turbine growth remained very strong with revenue up 38%. Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers. Growth in other market of 39% was largely driven by the Brunner fastener acquisition completed in February. Within Howmet's markets, spares growth remained robust. Total spares revenue across the commercial aerospace, defense aerospace and gas turbine markets was up 37% to approximately $460 million. Spares represents a greater portion of our total revenue than historically, now at approximately 22% through the first half of 2026. In summary, continued strong performance in commercial aerospace, defense aerospace and gas turbines with the commercial transportation market recovery underway. Moving to Slide 6, starting with the P&L. Second 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 24% and 21% organically, the strongest quarterly growth rate for the company since the first quarter of 2023. EBITDA continued to outpace revenue growth, up 39%, the strongest growth in EBITDA since the third quarter of 2021. EBITDA margin increased 340 basis points to 32.1% despite a modest headwind from the CAM acquisition. Incremental flow-through of revenue to EBITDA was healthy at 46% year-over-year. Earnings per share were $1.33, up 46% year-over-year. Now let's cover the balance sheet and cash flow. The balance sheet remains strong with a quarter end cash balance of $564 million. Free cash flow in the quarter was excellent at $479 million. Net debt to trailing EBITDA finished the quarter at 1.4x following the completion of the CAM acquisition. During the quarter, we paid down our $186 million Japanese Yen term loan due November 2026. In addition, during the quarter, we entered into a cross-currency swap to synthetically convert our $300 million note due 2028 into a Japanese Yen liability. The combined effect of these two actions saves approximately $12 million in annualized interest expense. Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program, $450 million of which was drawn to support the CAM acquisition. Turning to capital deployment. CapEx was $104 million in the quarter. The majority of our capital spend continues to be in the Engine Products segment as we continue to invest for growth in both the aerospace and gas turbines markets. Investments are backed by customer contracts. In the quarter, we repurchased $300 million of common stock at an average price of $251 per share. We repurchased an additional $200 million in July at an average price of $277 per share. This brings year-to-date repurchases to $800 million at an average price of $248 per share. As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $700 million. We continue to be confident in strong future free cash flow. We announced an increase in the Q3 quarterly stock dividend of 17% from $0.12 per share to $0.14 per share, payable this August. Finally, turning to M&A. We completed the previously announced CAM fastener acquisition on April 6 for approximately $1.8 billion, and the integration is on track. Now let's move to Slide 7 to cover the segment results for the second quarter. The Engine Products team delivered another excellent quarter for revenue growth, EBITDA and EBITDA margin. Revenue increased 32% to $1.37 billion. Commercial aerospace was up 37% and Defense aerospace was up 17%. The gas turbines market was up 38%. Demand continues to be strong for both original equipment and spares. EBITDA outpaced revenue growth with an increase of 51% to $517 million. EBITDA margin increased 470 basis points to 37.7%, while absorbing approximately 485 net new employees in the quarter, positioning us well for future growth. Please move to Slide 8. Fastening Systems had another solid quarter. Revenue increased 37% to $589 million, including the impact of the CAM and Brunner acquisitions. Commercial aerospace was up 39% and Defense aerospace was up 45%. Commercial transport was flat year-over-year. Excluding the impact from acquisitions, total fasteners growth was double digits. EBITDA outpaced revenue growth with an increase of 40% to $177 million. EBITDA margin increased 90 basis points to 30.1%, reflecting continued operational execution. As expected, margins declined sequentially, driven by the addition of the CAM business in the second quarter. Moving to Slide 9. The Engineered Structures team continues to drive improvement in the business. Revenue declined 13% to $269 million due to the divestiture of the Savannah disk forging facility on March 31. Excluding the impact of Savannah, revenue growth was approximately flat. We continue to focus on higher margin and stronger return opportunities in the business. EBITDA margin increased 170 basis points to 23.8% as we continue to optimize the Structures segment to maximize profitability. Finally, please turn to Slide 10. Forged Wheels delivered another healthy quarter. Revenue was up 14% as an 8% decrease in volume was more than offset by higher aluminum pass-through. Volumes rose 7% from the first quarter as the North American market began to recover. EBITDA was $88 million, an increase of 16% despite lower volume. EBITDA margin increased 30 basis points year-over-year, but declined 270 basis points sequentially, reflecting the dilutive effect of sharply higher aluminum cost pass-through. Higher metal pass-through diluted margins by approximately 360 basis points year-over-year, but had no material impact on EBITDA dollars. This dilutive impact on margin percentage is likely to continue at least for the next couple of quarters. EBITDA dollars were largely unchanged sequentially. We continue to outgrow the market, driven by our premium products. Now let me turn the call back to John.
Thank you, Patrick, and please move to Slide 11. Let me turn to the outlook. First, as you can see, the first half target outcomes have been achieved while also facing a turbulent economic and political backdrop. The tailwinds experienced have reflected more robust build rates for commercial aircraft and also for the positive order intake for commercial truck builds. In addition, IGT demand has been extraordinary. Moving specifically to commercial aerospace. The ongoing conflict in the Middle East has resulted in increased volatility of jet fuel and gasoline prices, and has impacted recent commercial air traffic activity. Howmet has not experienced any changes in customer demand. Throughout the conflict to date, air freight volumes have continued to strengthen. At the same time, interest rates have climbed, reflecting higher inflationary signals and the outlook for near-term rate cuts has dimmed. Despite the issues in the Middle East, orders for new aircraft have continued to grow and the overall backlog has increased. This bodes well for future aircraft build rates with increases being seen for the balance of 2026 into 2027 and beyond. The business jet segment also continues to be strong with increases both in new aircraft build and spares. Defense sales also continue to be strong, especially for spares and legacy aircraft with the F-35 OE build continuing to be solid. The near-term outlook for our missile business continues to strengthen, with demand increases being either seen or signaled for the PAC-3, THAAD, Tomahawk and some classified programs. The focus on engines for large missiles, drones and collaborative combat aircraft continues with growth expected in the medium term. Turning to gas turbines. We have completed negotiations with the last of our seven major customers, though the overall picture continues to expand with some customers already wanting to revisit and add to their demand outlooks. This gas turbine demand growth, both for large, small and medium-sized turbines, is further supported by new gas turbine blade applications and increased new product technology introductions, and these will help Howmet to outgrow its current market share. Our capital expenditure requirements continue to increase. And while this year we are now likely to exceed $500 million in capital spend, we are already seeing the need to further increase this in 2027. This increased level of capital expenditure provides support to our future organic growth expectations. The outlook for free cash flow conversion and net income is maintained at our 90% target conversion throughout the period. The resultant cash flows to date have enabled us to deploy capital for organic growth, execute share buybacks and support dividend growth while also absorbing a significant acquisition. Continued healthy cash generation should allow us to return our leverage level back to approximately 1x net debt-to-EBITDA by year-end, the same level that we exited 2025. Given the high level of our capital expenditure, plus our acquisitions of almost $2 billion and the share buybacks of an amount already exceeding 2025, our leverage level is very comfortable and allows us to consider all paths of optionality going forward. Moving now to the commercial truck wheels business. The results are strong even after coping with extraordinary increases in the aluminum LME and Midwest premiums. Growth into the second quarter accelerated and the outlook for the balance of the year looks healthy with external forecasters now envisaging an even stronger 2027. Moving to specific numbers for the guide and reflecting the typical third quarter seasonality, including European vacations, our numbers are: revenue in the third quarter of $2.575 billion, plus or minus $10 million; EBITDA of $830 million, plus or minus $5 million; earnings per share of $1.35, plus or minus $0.01. For the full year guide, this has increased again to revenue of $10.05 billion, plus or minus $50 million, EBITDA of $3.23 billion, plus or minus $20 million, earnings per share of $5.27, plus or minus $0.04. Free cash flow is seen to be $1.9 billion, plus or minus $50 million. These guide increases are across the board given our growing confidence in the year. In closing, the Howmet team delivered a solid first half performance with prospects for further growth and a robust second half as outlined. In November, at our Q3 earnings call, we expect to provide our first sighting of the 2027 revenue, which we expect will be an increase over 2026. And with that, we'll now move to the Q&A session.
Questions and answers
The first question today comes from Sheila Kahyaoglu with Jefferies.
John, you noted IGT customers continue to revise upwards their demand outlook, and I don't blame them, who wouldn't want more. You're talking about higher CapEx for the foreseeable future. What are you seeing in the competitive dynamics at play in the IGT market in terms of the technology advantage you have, the scale which you could produce? And how are you thinking about your own ability to support these ramps as a few of your peers also seek new business there?
Thanks, Sheila. Let's deal with scale first. It's important to note that Howmet has a market share in excess of 50% globally for turbine blades in the IGT market. Therefore, the growth of that market is dependent upon our willingness to invest, which we're doing. We've already commented in previous calls about the new plant we built in Japan, the major expansion in Europe, and also building out the capital in our existing footprint in Virginia in the U.S. In addition to facilitating that with substantial investments in new capital equipment, we have created additional space in our Virginia plant by moving some nickel alloy work such that we can either make additional IGT componentry or additional titanium castings. We'll deploy that space on a first come first serve basis and see expansion. Bonding capacity is going to be sold out very quickly. We're also seeing several new applications for existing technology and several new product introductions that we have to make over the next two or three years. That leads us to believe that our market share will further increase. To date, the market is roughly split equally for turbine blades between equiaxed and directionally solidified parts with single crystal still being a fairly minor part of the overall turbine blade topology at less than 5%. So as we move through turbine blade applications, we see the opportunity to move from equiaxed to directionally solidified and then to single crystal, albeit at the moment customers want whatever we can make. For the next couple of years, I expect the demand increase to be roughly split between equiaxed and directionally solidified. In the future we'll see increased use of cored blades to allow airflow through them, and that plays to Howmet's strength and our capabilities in very large cored blade manufacturing. We'll see that increasingly deployed toward 2030 and beyond. So given the new applications, the technology movement and the capacity investments, we are in a good position, and CapEx is being significantly deployed in 2026. I have commented that we will see another significant step up in 2027, both for the industrial gas turbine market and for commercial aerospace. I also want to emphasize commercial aerospace; just last week I approved building a new plant in that area as well. My expectation is we will continue to meet market demand, grow with the market, and grow beyond the market with new product introductions. I'll digress briefly on a topical point about the threat of data centers in space. Conceptually, getting more direct access to solar arrays is possible and could solve permitting issues, but there are many technical challenges: lifting the mass for gigawatts of capacity requires an enormous number of launches, maintenance and replacement of GPUs every couple of years is a challenge, and the scale of solar arrays and space debris concerns are significant. Using current rocket technology, it could require hundreds or thousands of launches. Those are big things to overcome. I think this is more of a 2040s or 2050s consideration rather than near term. I wanted to give that perspective while discussing the current market.
The next question comes from Doug Harned with Bernstein.
Just, John, continuing on the IGT path here, as you've talked about, the demand is extraordinary. And you've talked about a number, six or seven new agreements that you've signed. What I'm trying to understand is how quickly can one respond to demand in terms of signing a deal and then actually delivering products on that. I say it because your reference to SpaceX — this week they talked about adding at least 15 gigawatts of terrestrial capacity over the next 18 months. Is it possible to respond to this kind of growth since you're the leading player on blades?
I'll start with 2026, Doug. Our approximately 35% increase in revenue has exceeded what I thought possible, mainly from achieving yield improvements on the existing asset base, although we did make investments in IGT capacity that became meaningful in this period. We have delivered our first new large casting machine into Japan and another will follow in the second half. That new plant is essentially fully spoken for. We have one casting pit left but that capacity is going to be gone. We have a progressive build-out of what we've already committed to. For the new gigawatts of capacity coming on, the timelines point to 2028, 2029 and into 2030. So we will see growth over the next four to five years. Some capacity is already committed for 2027, with another major step into 2028 and 2029. I suspect there's more demand to come which we haven't built into our plans yet because we wait for more certainty before committing. If we were to start a new commitment now, say in August 2026, the earliest realistic delivery for major new machine equipment would be around August 2028. We've had to book capacity at some machine tool suppliers on the expectation of demand just to ensure we can be responsive to customers.
The next question comes from Robert Stallard with Vertical Research.
John, I was wondering if you could give us an update on what you're seeing on aerospace OEM and the wide-body market, how those rates are progressing and whether you think Howmet has enough capacity in place for the targeted rates or even beyond that?
By way of capacity, the majority of our manufacturing equipment does not distinguish between narrow-body and wide-body parts. We use similar casting machines, transfer presses and heat treatment furnaces. So for us it's more a question of overall market rather than wide-body per se. We do feel wide-body will increase over the next couple of years. There are demand increases signaled at Boeing for the 787 up to Rate 10 until the South Carolina plant is further expanded and maybe opportunities to go significantly higher after that expansion. Airbus has struggled on the A350 over recent years and now seems to be entering a period of improvement with rates moving higher. We are increasingly confident that freighter demand plus additional A350 demand will move up significantly. We expect large percentage increases in wide-body build rates over the next two to three years, and we expect increases in narrow-body rates as well for the 737 and A320. We are poised with additional capacities we've already prepared. I referenced a new plant commitment last week and expanded some of our existing sites to create opportunity for further expansion. Overall, we believe we can support rising aircraft build rates, while continuing to monitor the aggregate of all platforms and spares demand.
The next question comes from Scott Deuschle with Deutsche Bank.
John, is today's commercial aerospace growth in Engine Products seeing any benefit from shipping these newer, higher-value multi-chemistry coatings? Or is that transition to multi-chemistry coatings still largely in front of you? And then I was wondering if you could help contextualize the scope of the growth opportunity that that provides.
We have been increasing our coating capacity over the last two to three years and we coat both our own turbine blades and those of others. That expansion has continued with new coating guns and pits. We have just completed the last available space in our Whitehall facility, pending a decision about further expansion. That facility is set up for multi-chemistry deposition and for the opportunity to deposit multiple coatings in a single process. Today we already deposit more than one type of coating, but for some exotic coating capabilities we can deposit the different chemistries simultaneously on both external and internal blade surfaces. There are very small orifices requiring nanoparticle-level deposition with high consistency to avoid blocking airflow passages. In short, yes, we are building capacity and capability to do multiple depositions in one run. We are facing the decision to expand the plant and are likely to invest in advanced equipment, which has lead times of around three years for some exotic systems.
The next question comes from Seth Seifman with JPMorgan.
I wanted to ask about the ramp on commercial aero sales in the engine business. It was about a 10% sequential growth in the quarter, assuming that that's driven in large part by new capacity that you've added. In terms of that new capacity that started coming online at the end of last year, how far are you towards the utilization of that new capacity? And how do we think about that continued sequential trajectory from here?
We still have some machines installed that are coming up to full rate, and we've been building out the employee base necessary across all shifts. Some equipment will flow in during the second half of 2026. It's not a one-and-done event; it's additional equipment that we have to install from what we've already committed and contracted, whether from external machine tool manufacturers or our own in-house machines. We have an active program over the next two to three years for both commercial aerospace and IGT. We will need to make further investments beyond what we have today to achieve customer target rates. The main question is the aggregate size of the narrow-body and wide-body markets plus spares demand. Spares growth has been substantial and we expect that to continue, including transitions like LEAP-1B and the GTFA for Pratt & Whitney, which should see large increases into and through 2027.
The next question comes from Ken Herbert with RBC Capital Markets.
I wanted to follow up on the aerospace capacity theme for a minute. Boeing and Airbus are talking about getting to production rates that are 25% to 30% higher than where they peaked pre-pandemic. You've got a lot of moving pieces on the engine side in particular. But where do you think you and the industry are in terms of supporting those rates three to four years from now? And ultimately, what's the interest to put capacity in to support those rates when you're going to be hitting those rates, especially if you're talking about new narrow-body clean-sheet aircraft?
It's difficult to predict the entry into service date of a new narrow-body and the engine choices for such aircraft because options can be mutually exclusive. The more pertinent question is the true demand pattern over the next three to five years and its sustainability. We don't want to invest for a singular year peak and then face demand destruction. We continuously monitor aircraft backlogs and the degree of order certainty, cancellations, and options versus firm orders. Looking at narrow-body previous highs and today's mix including the A220, the question is whether combined peaks are modestly above prior highs or substantially higher. The supply base's ability to support those levels and the weakest link in the chain matter. We'll make more capacity as needed, but the degree depends on the aggregate, sustained demand and the industry's ability to march in step. Inventory can manage short-term spikes while we recruit and prepare workforce capacity within our envelope. It's a live topic and we must consider the whole supply chain, not just Howmet.
The next question comes from Myles Walton with Wolfe Research.
I was wondering if you could touch on fastener operations below the surface of the acquisition. In particular, are you starting to see the pull on the wide-body yet? Or is this commentary more positive at this point?
We are beginning to see the pull. If you ask whether we anticipate getting to Rate 9 or Rate 10 for the 787 toward the back end of 2027, we do begin to see demand fill in for increased rates above the levels of six or seven last year. Production may now be around eight. We're beginning to see that, but it's still well short of the prior peak in 2019 of 13 per month. Achieving much higher levels requires capacity expansion in South Carolina. We're seeing increased demand across commercial aerospace platforms, defense platforms, larger drones, and from some of the newer defense technology companies where we're seeing initial orders. Our issue now is coping with those increases and investing in the legacy fasteners business while providing additional capital to integrate and grow the CAM acquisition.
Can you update us where you are in the cutovers of the LEAP-1A/1B and GTF Advantage?
The LEAP-1A/1B cutover to the new technology blade has not yet occurred. We have pulled a lot of the new blade, though not all, and we'll see increased builds during the second half of 2026. I expect the cutover to be more likely in the first quarter of 2027, though the date is not fixed; we will be in a good supply situation for that cutover. There will be demand for OE builds and for refitting some of the existing fleet with the more robust solution. For GTFA, we are building and lifting output each month, though it's not yet at the rate that will ultimately be required. This applies to both turbine blades and vanes. The back half of this year we'll probably be supplying the full volume of the legacy blade, with a very large aftermarket demand because that's the only fully available upgrade suite today. We will continue building increased production each quarter for GTFA ready for fitting to engines arriving at customers, plus the retrofit program which I think will be even larger than the 1B retrofit activity.
The next question comes from Scott Mikus with Melius Research.
Turning to the defense side, the F-35 fleet has seen heavy utilization in Israel. Just curious about how you're thinking about the uplift to defense spares in the second half of this year and in 2027 as well beyond what you're initially expecting? And is that also driving the need for incremental CapEx at Engine Products?
That question needs to be widened beyond just the F-35 because other aircraft are being heavily flown and missiles are being used as well. Are we seeing a current demand increase from all the additional missions and missile stocks used? The answer at this moment is no, not yet. But in discussions with our engine customers, we expect to see a significant increase in spares demand coming from additional missions. I think we'll see it for F-18s, F-22s, F-35s, and other aircraft, as well as parts for some stealth bombers. There's anticipation of a demand bubble, but I don't necessarily think it will arrive in Q3 2026; it is more likely a 2027 phenomenon, anticipated but not assured because we don't have specific orders in hand. On the missile side, activity is very high and we're being asked to consider various rate increase proposals across a few customers for programs I previously mentioned. We need to work through durability of that demand and competing space in our Virginia facility. At the moment, we have no formal increased orders that would be required should missile programs actually be built out.
The next question comes from Peter Arment with Baird.
Nice results. John, if I look at Fastening margins and if we backed out the CAM contribution or at least our estimate, it looks like you had, again, another kind of almost record margin for Fastening. What's the best way to think about the timeline for synergies for the CAM acquisition?
The first three months of the acquisition have been focused on integrating IT systems and improving cybersecurity capabilities, as well as harmonizing employee benefit programs and assessing the asset base. The original thesis about margin improvement is intact and we have clear line of sight to operating synergies such as supply base consolidation. We'll begin to see some of that in the second half of the year, but the majority will come in 2027. It will take time to renegotiate or burn down prior commitments in the supply base and customer arena and to build out additional distribution programs that shift some volume from third-party distributors to our own channels. Those initiatives will progressively come on board during 2027. The acquisition looks as expected and beneficial. For this year, the margin dilution from integrating a lower-margin CAM business is offset by margin improvements in our legacy business, so we were roughly neutral on EPS this year. We expect to start seeing a positive EPS effect in 2027 and beyond.
The next question comes from John Godyn with Citigroup.
John, I just wanted to follow up on free cash flow deployment and opportunities. Obviously, you guys are executing a balanced approach. We saw the dividend go up. The buyback is going up. But just given the top-tier operational execution of the company, there seems to be an argument to continue leaning into M&A. I wanted to take your temperature there and maybe plug into your vision and world view.
As you've seen, we executed a couple of acquisitions this year and expanded the top line and bottom line of the company. Even with that and using cash flow to buy back stock and increase the dividend, we see ourselves returning close to the same leverage level as the end of last year, which gives us optionality going forward. Looking into 2027 and 2028, I doubt we'll change the dividend in the next 12 months given the recent 17% increase. Going into 2027, my expectation is we'll probably buy back more stock than in 2026, and we're willing to examine further M&A opportunities. We remain predisposed to doing bolt-on, high-quality acquisitions where a combination with Howmet can produce synergistic benefits. We spent a couple of billion on CAM and Brunner; I'm not envisioning anything mega-large at this point, though we could change our view if the right opportunity arose. The approach is to continue building out a company with high growth, high margin, and strong cash flow, while staying opportunistic on M&A.
This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.