Howmet Aerospace Inc. Q3 FY2024 earnings call

Q3 was a strong quarter with 11% year-over-year revenue growth. EBITDA stood at a record $487 million with a 26.5% margin. Operating income was $419 million, up 33% year-over-year with a 22.8% margin. Commercial aerospace contributed 17% growth, Defense Aerospace 15%, and Industrial/other markets 17%, while Commercial transportation declined 12%. Wheels revenue was impacted by European market declines but maintained a 26% EBITDA margin. Earnings per share were $0.71, a 54% year-over-year increase. Free cash flow was $162 million, with year-to-date free cash flow around $600 million. Cash balance was $475 million, with $282 million used for debt paydown, $100 million for share buybacks, and $34 million for dividends. In September, aerospace parts supply to Boeing was restricted due to the strike, which has since been resolved. A favorable $44 million R&D tax credit was recorded in Q3.

In the third quarter, Engine Products achieved revenue of $945 million, marking an 18% year-over-year increase. Fastening Systems had revenue of $392 million, up 13% year-over-year. Engineered Structures saw revenue rise 11% to $253 million. Forged Wheels revenue declined 14% year-over-year. Commercial aerospace grew by 17%, Defense Aerospace by 15%, Industrial and other markets by 17%, while Commercial transportation decreased by 12%. EBITDA reached a record $487 million with a margin of 26.5%, and operating income was $419 million with a margin of 22.8%. Wheels revenue was down due to market declines, especially in Europe, but maintained an EBITDA margin of 26%.

For 2025, commercial aerospace is expected to grow ~12%, with total company revenue growth around 7.5% +/-1%. Q4 guidance: revenue $1.87 billion +/-$20 million, EBITDA $488 million +/-$10 million, EPS $0.71 +/-$0.01. Full-year 2024: revenue $7.41 billion +/-$20 million, EBITDA $1.895 billion +/-$10 million, EPS $2.66 +/-$0.01, free cash flow $920 million +/-$50 million. Plan to increase common stock dividend in 2025 by 25% from $0.08 to $0.10, subject to Board approval.

Risks include market declines, particularly in the European wheels market. Uncertainty remains regarding Boeing production build rates and potential future disruptions. There is also exposure to fluctuations in aircraft production volumes affecting revenue projections.

Q: Sheila Kahyaoglu with Jefferies asked about 2025 commercial build rates.

A: John Plant stated it's difficult to determine specific build rates currently, noting external forecasts may be overly optimistic and expecting a more realistic 12% growth for commercial aerospace in 2025, with more details to be provided in the February call.

Q: Robert Stallard with Vertical Research Partners inquired about aerospace aftermarket revenues.

A: John Plant mentioned aftermarket exposure rose to 17% in 2024 from 11% in 2019 and is expected to exceed 20% in the next few years. Spares output for LEAP engines and top 10 turbine blades has increased, with production ramped up to meet demand.

Q: Doug Harned with Bernstein questioned production capacity for turbine blades.

A: John Plant said the company is increasing investment in the engine business, anticipating robust demand for engines and spares, with production scaled to meet future requirements.

Q: Scott Deuschle with Deutsche Bank asked about the reacceleration in incremental margins.

A: John Plant attributed the margin improvement to productivity gains and volume leverage, but noted hiring for future production needs to be considered, with no specific margin projections for 2025 provided.

Q: David Strauss of Barclays asked about potential aero revenue growth acceleration in 2026.

A: John Plant suggested 2025 may be a transitional year, but 2026 is expected to see improved aircraft production with rising demand for new aircraft and the IGT business.

Q: Myles Walton with Wolfe Research inquired about defense growth and spares split.

A: John Plant indicated mid-single-digit growth for defense is appropriate currently. Spares revenue was ~$1.25 billion, with commercial aerospace growing faster, roughly 55%-60% from non-commercial aero segments.

Q: Seth Seifman with JPMorgan asked about spares demand and aircraft retirements.

A: John Plant stated legacy engine spares demand will peak later, and new engine spares have higher requirements due to time-on-wing issues, with sustained growth expected.

Q: Ronald Epstein with Bank of America asked about M&A activity.

A: John Plant said the company is open to M&A, focusing on technology-driven acquisitions, but remains disciplined, with recent small acquisitions and comparing opportunities to stock buybacks.

Q: Gautam Khanna with TD Cowen asked about high-pressure turbine blades.

A: John Plant explained new turbine blades will be used for both OE production and spares, with optimism about producibility though it's still early days, awaiting FAA and EASA approvals for full implementation.