Howmet Aerospace (HWM) Q4 FY25 earnings call: guidance and Q&A

How has your thinking evolved on the relative growth across commercial aero, defense, and gas turbines for Engine Products over the next 5 years, particularly regarding planning and investments? Also, with Engine Products reaching a record 34% EBITDA margin, are you near a ceiling, and what's driving these higher margins?

Management sees robust and continuing growth in commercial aerospace, backed by record OEM backlogs. Defense demand is solid, with emerging opportunities in missiles and drones. The biggest change in thinking is for gas turbines, which is now seen as a long-term growth area driven by data center demand, prompting significant capital investments. While 34% is a good margin, predicting future increases is difficult due to ongoing investments in new plants, recruitment of 1,500 new employees, and the need for yield improvements.

“I think the biggest change to my thinking has been for the gas turbine market. And historically, if you've gone back 5, 7 years, as I said this was a more cyclical business. It has shown periods of rapid growth and rapid decline and it was one where I was quite leary about making investments in that segment.”

asked by Douglas Harned · answered by John Plant

The Q1 2026 guidance implies minimal improvement in revenue, adjusted EBITDA, and EPS for the rest of the year. Additionally, the full-year margin implies a 30 bps decline from Q1's 30.6%. Can you explain the puts and takes, and how much of this margin trend relates to start-up friction from engine capacity additions?

Management highlighted the extraordinary amount of activity, including deploying capital at a high rate, building/extending 5 new manufacturing plants, acquiring a brownfield site, recruiting labor, and integrating two acquisitions. Given these complexities, a 30 bps margin difference is not significant. The focus is on achieving the guided 40%+ incrementals and ensuring new facilities come online successfully, with caution built into the guidance due to the potential for unforeseen challenges.

“I think, Alex, the most important thing to note is that we do have an extraordinary amount going on in the company. We are deploying capital for new equipment at an extraordinary rate. We're building -- we're extending 5 new manufacturing plants.”

asked by Unknown Analyst · answered by John Plant

Do you expect the ROIC on the significant investments in the gas turbine market to be similar to what you've achieved in commercial aerospace in the past?

Management stated that the margins and embedded return on capital for gas turbines are of a similar order of magnitude to commercial and defense aerospace. While new capital deployment can initially be a drag, the final capital build and timing are still being determined as discussions with customers continue. The company is committed to ensuring healthy returns for shareholders and can afford the investments within its cash generation envelope.

“I think, first of all, if you go back and review what I've said publicly is that there essentially is no difference between the margin that we have on gas turbines and output in our commercial aerospace or defense aerospace. And so it's all a similar order of magnitude.”

asked by Robert Stallard · answered by John Plant

Given strong cash generation and record-low leverage, how are you thinking about capital deployment, specifically the balance between M&A and share buybacks? With the larger CAM deal, what is your view on the landscape for larger M&A and growth opportunities?

Management's first priority is always deploying capital to enable organic growth opportunities, which has consistently driven double-digit growth. The company measures share buybacks against M&A opportunities and balance sheet leverage. The CAM acquisition, despite its size, does not overstretch the balance sheet, allowing for continued share buybacks. Howmet is currently able to do it all: invest in the business at record levels, execute significant share buybacks, pursue M&A in known segments with healthy margins, and increase dividends.

“So I mean, so first priority, John is always the deployment of capital to enable the growth opportunities that we have, say, come to fruition. Then clearly, we measure the, I'll say, share buyback and also while taking into account the opportunity for M&A and where the leverage of the balance sheet is.”

asked by John Godyn · answered by John Plant

Given the strong demand for gas turbines and Howmet's unique value, do you foresee a future scenario where gas turbine revenue could ultimately exceed commercial jet engine revenue?

Management does not anticipate gas turbine revenue exceeding commercial jet engine revenue, as commercial aerospace and defense aerospace are also growing rapidly. However, there is a significant product mix change occurring in gas turbines, with aerospace technologies being deployed, leading to increased content and more complex turbine blades, which plays to Howmet's strengths and capabilities.

“That takes me too far out there. I don't think so because I think our commercial aerospace and our defense aerospace business is also growing rapidly, has grown. And I don't see that at this point in time.”

asked by Scott Deuschle · answered by John Plant

With the CAM and Brunner acquisitions, which mark more M&A activity than in the past, can you provide more detail on the new markets opened, product offerings, and how you think about returns for these investments versus building internally?

The CAM acquisition expands Howmet into the fittings and couplings area of the wider fastener market, bringing a powerful force with capital backing. Brunner Inc. provides a ready-made solution for longer length and wider diameter bolts, a segment Howmet previously didn't serve due to capital and certification constraints. Brunner offers immediate profitability and a platform for certification into aerospace and wider industrial markets, leveraging Howmet's commercial position and capital deployment capabilities.

“In terms of Brunner, what we saw so far, if I take just bolts as an example, we've been in the market producing, I'll say, the smaller range of bolts, which threaded bolts in particular, plus obviously nuts, but I'm really concentrated in this discussion on bolts. But we've never really had the ability nor the size of capital to manage long lengths of bolts nor diameters in excess of an inch diameter.”

asked by Sheila Kahyaoglu · answered by John Plant

Could you provide additional color on how spares performed in Q4 and full-year 2025, specifically between commercial and defense/IGT, and your thoughts for 2026?

Aggregate spares business grew over 30%, reaching approximately 33% for the year, exceeding the target of 20% of total revenue by reaching 21% in 2025. Commercial aero spares contributed 40% of this growth. Spares now represent about 40% of the Engines business. Management expects this growth to continue into 2026, aiming for it to remain a larger portion of Howmet's overall revenue.

“In actual fact, we exceeded that. We were at 21% for the 2025 year. So again, the overall growth rate helped us get to that level and hopefully, that we don't stop at 21%.”

asked by Louis Raffetto · answered by John Plant

Automation has been a significant beneficiary for engine margins. Can you elaborate on your current position in the automation journey for engines and other opportunities for automation across the business?

Significant investments in automation were made in 2023-2024, benefiting the company and supporting employee recruitment. All new capital deployed features a high level of automation, including a new manufacturing plant in Whitehall with advanced digital thread and machine learning capabilities. However, engineering bandwidth has been absorbed by new markets and customer requirements in 2025-2026, causing automation of existing processes to take a back seat. Opportunities for further automation in existing facilities are expected in 2027-2029.

“We spent quite a bit of money over, I'd say, '23, '24 in automation. And that's obviously been very beneficial for us and has helped our need for additional employees, there you can see we've been hiring at a significant rate.”

asked by Peter Arment · answered by John Plant