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    HWM
    Earnings call· Mar 2025(Q1 FY25)

    Howmet Aerospace Q1 FY25 earnings call HWM

    May 1, 2025 Source

    Executive summary

    Howmet Aerospace Q1 FY25 — Record Revenue and Strong Margin Expansion

    Howmet Aerospace delivered a strong Q1 FY25 with record revenue and significant margin expansion across most segments, driven by robust demand in Commercial Aerospace spares, Defense, and IGT. The company raised its full-year guidance for EBITDA, EPS, and free cash flow, reflecting operational efficiencies and increased 737 MAX build rate assumptions, despite near-term market uncertainties and tariff-related drag. Management is focused on strengthening the balance sheet and continuing strategic capital deployment.

    Highlights

    5

    • Record revenue, up 6% year-over-year.

    • EBITDA margin of 28.8%, up 480 basis points year-over-year.

    • Operating margin of 25.3%, up 500 basis points year-over-year.

    • Record Q1 free cash flow of $134 million.

    • Adjusted EPS of $0.86, up 51% year-over-year.

    Concerns

    4

    • Commercial Transportation revenue down 14% year-over-year in Q1 FY25.

    • Uncertainty in North American economic conditions and road freight concerns impacting H2 Commercial Truck build assumptions.

    • Net tariff costs expected to be less than $15 million in FY25, primarily due to drag impact in Q2.

    • LEAP engine LPT parts and structural casting destocking effects still present due to lower-than-expected Q1 production.

    Guidance & targets

    12
    CategoryTargetConfidence
    Q2 FY25 Revenue
    $1.99 billion +/- $10 million
    high materiality
    High
    Q2 FY25 EBITDA
    $560 million +/- $5 million
    high materiality
    High
    Q2 FY25 EPS
    $0.86 +/- $0.01
    high materiality
    High
    Full-Year FY25 Revenue
    $8.03 billion +/- $150 million
    high materiality
    Medium
    Full-Year FY25 EBITDA
    $2.25 billion +/- $25 million
    high materiality
    High
    Full-Year FY25 EPS
    $3.40 +/- $0.04
    high materiality
    High
    Full-Year FY25 Free Cash Flow
    $1.15 billion +/- $50 million
    high materiality
    High
    Full-Year FY25 Capital Expenditure
    increased by ~$15 million vs prior guidance
    medium materiality
    High
    Net Debt to EBITDA
    1.1x
    high materiality
    High
    LEAP-1B Certification
    by end of calendar year
    medium materiality
    Medium
    Boeing 737 MAX Build Rate Assumption
    28 per month
    high materiality
    High
    Hiring for new facilities
    additional 1,000 employees
    medium materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Engines
    Delivered a record quarter for revenue, EBITDA, and EBITDA margin, driven by strong demand across all engine markets, particularly record Engine Spares volume. Absorbed 500 net new employees while expanding margins.
    EBITDA: $325 millionEBITDA growth YoY: 31%EBITDA margin change YoY: 450 bpsCommercial Aerospace growth: 12%Defense Aerospace growth: 16%Oil and Gas growth: 21%IGT growth: 12%Net new employees absorbed: 500
    		$996 million13%—32.6% EBITDA margin
    Fastening Systems
    Achieved record revenue, EBITDA, and EBITDA margin, outpacing revenue growth despite lower-than-expected wide-body recovery. Margin expansion driven by commercial and operational performance.
    EBITDA: $127 millionEBITDA growth YoY: 38%EBITDA margin change YoY: 710 bpsCommercial Aerospace growth: 13%Defense Aerospace growth: 8%General Industrial growth: 5%Commercial Transportation growth: -20%Commercial Transportation as % of segment revenue: 13%
    		$412 million6%—30.8% EBITDA margin
    Engineered Structures
    Performance continues to improve with strong revenue and EBITDA growth, primarily driven by the F-35 program. Margin expansion achieved through optimizing manufacturing footprint and rationalizing product mix.
    EBITDA: $60 millionEBITDA growth YoY: 62%EBITDA margin change YoY: 720 bpsCommercial Aerospace growth: flatDefense Aerospace growth: 36% (primarily F-35 program)
    		$282 million8%—21.3% EBITDA margin
    Forged Wheels
    Revenue was down year-over-year but showed sequential improvement. Despite challenging market conditions, the team maintained a healthy EBITDA margin by flexing costs and reducing headcount.
    EBITDA growth YoY: -17%
    		—-13%4%27% EBITDA margin

    Operational metrics

    19
    Adjusted Operating Margin
    25.3%up 500 bps YoY
    Q1 FY25
    Adjusted EBITDA Margin
    28.8%up 480 bps YoY
    Q1 FY25
    Adjusted EPS
    $0.86up 51% YoY
    Q1 FY25
    Capital Expenditures
    $120 millionup 45% YoY
    Q1 FY25
    Net Debt to Trailing EBITDA
    1.4xrecord low
    Q1 FY25
    Cash Balance
    $537 million
    Q1 FY25
    Undrawn Revolver Capacity
    $1 billion
    Q1 FY25
    Commercial Paper Program
    $1 billion
    Q1 FY25
    Cash Deployed to Shareholders
    $167 million
    Q1 FY25
    Share Repurchases
    $125 million16th consecutive quarter
    Q1 FY25
    Share Repurchases
    $100 million
    April 2025
    Remaining Share Repurchase Authorization
    $2 billion
    end of April 2025
    Quarterly Dividend
    $0.10up 25% YoY; double Q1 2024
    Q1 FY25
    Spares Revenue as % of Total Revenue
    20%year ahead of schedule
    Q1 FY25

    Spares revenue includes Commercial Aerospace, Defense Aerospace, IGT, and Oil & Gas.

    Spares Revenue Growth
    33%
    Q1 FY25
    Diluted Share Count
    407 millionrecord low
    Q1 FY25 exit rate
    PCC Fire Related Orders Booked
    $20-30 million
    Q1 FY25

    Related to SPS-related issues following the PCC fire. Hundreds of parts still to quote.

    Implied H1 FY25 EBITDA Margin
    28.5%
    H1 FY25

    Implied from full-year guidance and Q1 results.

    Implied H2 FY25 EBITDA Margin
    27.5%down 100 bps from H1
    H2 FY25

    Implied from full-year guidance and Q1 results, with ~15 bps impact from net tariffs and expected step-down in Commercial Truck production.

    Industry KPIs

    4
    MetricValueDetails
    Total company backlogvery large
    Aftermarket services split20%%
    Unit deliveries by program314engines
    Production rates by program28aircraft per month

    Capital programs

    4
    Engine Products Investment (2020)completed$0.25 billion
    Start: 2020

    Reference to a past significant investment in the Engines business.

    Aerospace Turbine Airfoil Production Increaseunderwaymore than $0.25 billion

    Current investment exceeding the 2020 Engine Products investment, excluding IGT-specific capacity.

    IGT Capacity Expansionunderway

    Benefit: additional building footprint

    Building capacity in Japan and Europe for IGT, backed by solid customer agreements for many years.

    US Aerospace Footprint Build-outunderway

    Hiring for this footprint, with 500 net new employees recruited in Q1, mainly for the Engine segment, and an additional 1,000 expected by year-end FY25.

    Risks & headwinds

    6
    Tariff UncertaintyFY25, with Q2 FY25 experiencing 'drag impact'

    Gross impact (worst case, after mitigation): ~$80 million. Net impact in FY25: <$15 million.

    Mitigation: Minimizing impact through trade programs (USMCA, drawback, bonded warehouses, free trade zones, 9801/2/3 exemptions, inward processing relief). Issuing force majeure letters to customers. Securing individual customer agreements covering >90% of revenue in one BU, ~50% in another.

    Commercial Transportation Market WeaknessH2 FY25

    Revenue down 14% YoY in Q1 FY25. H2 FY25 build assumptions less certain.

    Mitigation: Flexing costs and reducing headcount to maintain healthy EBITDA margins (27% in Q1 FY25). Watching container shipment bookings closely.

    North American Economic UncertaintiesNear-term

    Unquantified impact on passenger traffic and road freight concerns.

    Mitigation: Strengthening balance sheet to 1.1x net debt to EBITDA by year-end to create a 'fortress' position.

    Inflation Assumptions

    Unclear at this point.

    Mitigation: Successful pass-through of costs (dollar for dollar) to avoid margin flattening.

    Rare Earth Material SupplyGadolinium supply <1 year

    Yttrium: ~10 years of inventory. Gadolinium: <1 year of inventory. Erbium: affects titanium shell.

    Mitigation: Possibility of working around Gadolinium supply issues. Yttrium inventory held in Europe provides good shape.

    LEAP Engine DestockingExpected to be beyond Q3/Q4 FY25 if LEAP production reaches >400 engines/quarter.

    LPT parts and structural casting overhang still exists.

    Mitigation: Monitoring LEAP production rates; higher rates would alleviate destocking effects.

    What to watch in Q2 FY25

    5

    Net Tariff Impact

    Q3 FY25
    Current<$15 million in FY25, with Q2 drag
    TargetNormal invoicing and reduced drag impact

    Why it matters

    Tariffs introduce uncertainty and can impact margins if not effectively passed through or mitigated, affecting full-year profitability.

    The majority of that $15 million, but not all of it, but the majority of it is what I call the drag impact. That is when you incur costs, we'll be having to fund certain importers because they haven't got the working capital to pay the duties. Until we have all of that, and we see it as a drag in -- we'll be paying out, but then invoicing either supplements to existing invoices or surcharges. And obviously, that affects you in the quarter. That's why we see -- you'll see in Q2, we assumed a lower margin rate than we had in Q1, essentially because of tariff drag and then it just goes on for a period of time, but hopefully💬, by -- we get into the second half of the year and into the fourth quarter, then it will be just normal course of business in terms of invoicing recovery, but we'll still have that drag in 2025.

    Q&A highlights

    5

    Given moderated air traffic growth, how much does it truly matter for Howmet, especially with strong backlogs and OEM demand?

    Management acknowledges air traffic growth is important for long-term investment decisions (2026-2027) but notes protection from high OEM backlogs and demand for fuel-efficient aircraft. While some airline cancellations are possible, strength in defense, data centers, and increasing spares demand provide offsets. The company is proactively strengthening its balance sheet to a 'fortress' level due to current uncertainties.

    “I think it's important for when you look forward into the future of having strong underlying fundamentals for demand that start with confidence in the traveling public, the confidence in freight moving around the world. But at the same time, do we have other areas with strength? Yes, we have strength in defense. We have strength coming from the continued build-out of data centers, which is giving us quite an extraordinary opportunity of demand.”

    asked by Seth Seifman · answered by John Plant

    2 min read5 chapters

    Detailed Narrative

    01

    Market Dynamics and Resilience

    Despite increased uncertainty from tariffs and North American economic policies, Howmet's Commercial Aerospace customers show resilience due to significant backlogs, an aging global fleet, and the need for more fuel-efficient aircraft. The company notes a more optimistic mood around Boeing and the 737 MAX builds, with an increased average build rate assumption for the year. Demand in Defense Aerospace remains steady and increasing, particularly for spares, notably for the F-35 program.

    02

    Data Center Demand Driving IGT Growth

    The build-out of data centers globally is driving solid and accelerating demand for Industrial Gas Turbine (IGT) products, both for spares and new turbine builds. Howmet anticipates this growth trend to remain intact for the next few years, covering a full spectrum of turbines from aeroderivative to larger gas turbines. The company is expanding capacity in Japan and Europe to meet this global demand, backed by solid customer agreements.

    03

    Operational Excellence and Margin Expansion

    Howmet has achieved significant margin expansion, particularly in Fastening Systems and Engineered Structures, through a concerted effort on improved process control and productivity. Examples include irregular detailed reviews and enhanced control of manufacturing parameters in aircraft wheels, leading to 10-15% production increases and extraordinary scrap reduction. The company also benefited from exiting underperforming businesses in the Structures segment in the prior year, contributing to positive mix effects.

    04

    Capital Deployment Strategy

    Howmet maintains a strong track record of returning cash to shareholders, with a 5-year average of 100% net income to free cash flow conversion. The company increased its quarterly dividend by 25% and expects share buybacks in FY25 to exceed FY24 levels. While currently slightly underlevered at 1.4x net debt to EBITDA, management aims to further strengthen the balance sheet to 1.1x by year-end, viewing this as appropriate given current market uncertainties.

    05

    Wide-Body and Narrow-Body Production Updates

    The 787 production ramp has been delayed by three months, now expected in the second half of the year, while the A350 rate is adjusted to 5.5 from 6 due to component supply issues from Spirit AeroSystems. Despite these short-term perturbations, management expresses absolute confidence in long-term demand for wide-body aircraft through 2026 and 2027. For narrow-body, the Boeing 737 MAX build rate assumption has been raised to an average of 28 per month for the year, implying higher production in the second half, following Q1 inventory adjustments by Boeing.

    AI-generated summary of the company’s earnings call. Not investment advice.