Howmet Aerospace Inc. 2026 Q2 Earnings Call

Good morning, 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, good morning, everyone, welcome to the Howmet Q2 earnings call. Let's start with the highlights on Slide four. Howmet completed a successful second quarter. Headline revenues were up 24% year-over-year, with strong incremental margins of 46%, 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 the 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 half a billion dollars, 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 continued to repurchase shares in July for a further $200 million, which resulted in repurchases in 2026 already greater than in 2025. 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 first 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%. 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 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 $560 million. Spares represents a greater portion of our total revenue than historically, now at approximately 22% through the first half of 2026. Continued strong performance in commercial aerospace, defense aerospace, and gas turbines, with the commercial transportation market recovery underway. Moving to slide six, starting with the P&L.

Second quarter revenue, 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. Let's cover the balance sheet and cash flow. The balance sheet remained 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 1.4 times following the completion of the CAM acquisition.

During the quarter, we paid down our $186 million JPY 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 JPY 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 product 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 6th for approximately $1.8 billion, and the integration is on track. Now let's move to slide seven 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 of 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 eight. 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 nine. The Engineered Structures team continues to drive improvement in the business. Revenue declined 13% to $269 million due to the divestiture of the Savannah Disc forging facility on March 31st. 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. 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 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.