Howmet Aerospace Inc Aktie

I'm Doug Harned, Bernstein's Global Aerospace and Defense analyst. And I'm thrilled to have back with us today John Plant, Chairman and CEO of Howmet. And with that, we're going to get started here.

So John, I think to start off here, maybe you can just give us a little bit of overview of where Howmet stands right now and what some of the opportunities and challenges you're facing are?

Okay. So first of all, good morning, everybody. Look forward to chatting with Doug today and giving you some insights to Howmet. We seem to be at, I would say, a point where the opportunities do outweigh the challenges at the moment. Having said that, I mean sometimes the opportunities themselves bring challenge in being able to step up to them. We're at this moment in time where in our commercial aerospace side of the business, the backlogs for commercial aircraft are extraordinary highs, and that gives us some feeling of security of improved volumes for the future and with aircraft manufacturers predicting increasing rates.

So that's good and helpful to us in terms of the growth vector for the company. Also in aerospace, the defense budget seemed to be solid. And given the use of aircraft, especially recently, then there appears to be the opportunity for additional spares coming up in the next 2 or 3 years. And then at the same time, given also the use of missiles and the potential for investment in the Golden Dome, then that also is producing another, say, growth opportunity for us. So the aerospace part of our business seems to be well set. And it then turns to the gas turbine part of the business where it seems to be a particularly hot topic these days, given the build-out of data centers and the required improvements in electricity supply to power them.

And I think as everybody knows, is that our position in supplying the turbine blades for the gas turbines as part of electricity supply is very significant. And in fact, our market share is well over 50% globally. And therefore, again, another significant opportunity for growth for us. So those are the, I'll say, the longer-run opportunities facing the company. And we probably have the more, I would say, tactical short-run opportunity of some improvements or maybe bouncing off the bottom this year in terms of our commercial wheel business for commercial trucks both in North America and to some degree, Europe.

So in terms of challenge, the growth of the company presents its challenge in terms of our ability to deploy all of the capital required to step up to these challenges. And at the same time, making sure that we not only deploy the capital, we do it in a very efficient way, introduce the products on time and achieve the volume increases and at the same time, produce a very healthy cash flow. And there's always a little bit of strain between I'm going to say the commitment we have to deliver the cash flow conversion of the company with a long-term metric of 90% of net income while meeting these growth challenges.

Well, let's -- I'd like to continue a little bit on that hot topic of IGT and Power. Your revenues were up 39% in Q1. And if I go back 2 years ago, we weren't even talking about this topic. I mean -- and we've got GE Vernova down the hall here, and I'm trying to get a picture of how you see this growth rate going forward for Howmet because you've talked about going from $1 billion in revenues, up to, say, $2 billion in 3 to 5 years. But if I start to look at what some of the companies involved in gas turbines are talking about, the growth rate looks higher than that. And if you add on pricing, and you add on, I think, maybe more market share, the $2 billion seems like a low number. How should I think about that?

Well, I think you have to break the current revenue down between that's required for OE build and that's required for spares. And just at the moment, both are, I'll say firing on all cylinders in the fact that the existing fleet of turbines is working much harder than expected and, therefore, driving a very significant spares market for us. At the same time, you say everybody wants more in terms of gas turbine production. And so I think it's fair to assume there's a little bit of caution in the way we're thinking about things because this is much more required than just our turbine blades to produce the whole power generation setup.

And so beyond the turbine, you have to have the power gen side of the, I'd say, the equipment, the generation side of it. So I want to be cautious that, to some degree, we ultimately move at the weakest link in that whole supply chain -- and but at the same time, remaining hopeful that maybe the growth could be higher.

Well, I remember when we were here last year, at that point in time, you were talking about basically negotiations underway with 4 companies. And now you've talked about now you're up to like, I think, 6 and maybe a 7. So it seems like you're -- I'm trying to understand your sort of all of those individual companies are expecting a lot of growth, and you seem to be expanding your presence across them as well.

It's been an extraordinary time in the gas turbine business. So maybe sometimes in life, you get a little bit lucky. And to some degree, this feels a little bit of good fortune because while we had expected an increase in our gas turbine business, if you went back maybe 18 months, 2 years ago, we were thinking more like going from a fairly cyclical business to maybe something growing in the mid-single digits to high single digits area, at the best.

For the power side?

For the power side. And obviously, that's not the case today. We're thinking much more boldly about the increases that are coming. And then as we began to think through where we were in terms of the customer set that we have, our anticipation was that we'd see a significant increase in requirements from the large gas turbine manufacturers. So think of that as GE Vernova, think of Siemens, think of Mitsubishi Heavy. And that's where we see the most fundamental part of the demand. As it turns out, we now see that it's also the small and midsized gas turbine manufacturers as well that are requiring a very significant increases in capacity. Some of it driven because they can't get the large gas turbines as a supply shortage. And that's generating the opportunity for banks of the smaller midsized turbines, but also parts of the build-out of the liquid natural gas is also producing a significant demand there for, let's say, gas compression liquefaction and driving of gas towards the LNG terminals.

And so we're actually having, again, demand not just from data centers, but across the board. And because of that lack of capacity being brought to the market by the larger gas turbine manufacturers, it's given the opportunity for us to supply to the likes of the solar sub of Caterpillar or was it Baker Hughes? Or is it even Doosan in Korea and so on. So there's a lot more opportunity, which we hadn't originally thought about when we were conceiving of the demand pattern for the next 2 or 3 years. So it's a long way of saying we've -- because again, we are probably the most significant supplier to each of these customers, then it's giving us a level of further opportunity we haven't planned on.

Well, and you're talking about the signal -- demand signal for the next 2 to 3 years. But when you look at the investments that you need to make to do this, I imagine you have to think about what are we looking at in 5 years? Is this something that will plateau? Or is this something where we can -- you see headlines that almost imply infinite growth here, which I would always be skeptical of. How do you think about structuring deals so that you don't end up over investing in capacity?

That's been the, I'll say, item, which has been most forefront of mind for me in terms of determining to what degree should we capacitize for this opportunity? And first of all, what's the duration of the growth part of the cycle. And so what do we see by way of requirements for utilities, stand-alone data centers, data center clusters and also into the oil and gas sector going forward or even the derivatives for provision of turbines for ships, for example, in the defense industry, and you've seen some of those announcements recently where, again, we supply the parts for turbines for that.

So there's a lot going on. And then the question is, to what degree should we invest and we also have to, as you know, be very cognizant of protecting shareholders' returns and therefore, not overinvesting. So we've also tried to think of it in terms of how do we structure the commercial arrangements with our customers such that we are confident in making those investments. Then also what will be the demand pattern as we get to 2030 and beyond and what's the growth rate looking like both for data center clusters? Or is it now in the provision of electricity to industrial complexes and therefore, the requirements for micro grids, et cetera, et cetera. So there's a lot of thought which has gone into how much we should invest, how should we protect ourselves.

And indeed, since the part that we supply is the wearing part of the turbine so there is a replacement requirement. So I always think of turbine blade just like the brake pads of the turbine industry. So assume that in the next 5 years, the fleet of turbines that are out there in the market, let's assume it's going to be a very significant increase in quantity, maybe almost doubling the existing fleet. And therefore, all of those turbines were producing requirements for spare parts at the turn of the decade into the 2030s. And so in the scenario where maybe OE growth slows or maybe we don't have any growth at all, then my thought is that Howmet should be able to continue to see growth because all of the fleet of turbines, the existing fleet and all the build-out over the next few years are all going to require replacement parts, which will give us another vector of growth, which will either compound what we have or a substitute and therefore, we should see continued growth and therefore, giving some comfort to the level of investment that we're considering.

I want to jump over to the aero part of engine products. But just in thinking about this, when you look at the growth, can you give us a sense of how large you expect the power portion of Engine Products to be as a percentage of your engine business in 5 years? I know that's hard because the aero side is growing rapidly as well.

Yes. It's a bit like predicting how big our spares business will be relative to OE. And because in recent times, you've actually seen the percentage increase in spares revenues increase at a higher rate than the OE production. And the question is, how will that continue. And the answer is it really depends upon the OE growth as well as the -- so the build of aircraft required for engines, the natural recycler replacement parts, plus also what I call the bubble, which is the fitment of the fleet of engines which have been seeing early life failure for some of those parts. And then you compare and contrast that to the growth in gas turbines, the large gas turbines, which again is going to be dictated by the weakest link in the chain, but then the requirement for spare parts. So it's really difficult to handicap each of these individual segments to say what's the percentage increase in spares in gas turbines versus OE versus spares in commercial aero, defense aero and also the OE build.

And so it may not sound the most sophisticated responses to you. But the answer is, maybe I don't sweat it too much because the only thing I know is it's more and do I really care which -- where the growth comes from? I feel as though it's parsing out, am I going to about 20% in there or 25% of that light. I don't need to work it out just now.

Well, on the OE Aero side, I mean if I go back a couple of years and talked about this a number of times, but this -- Howmet used to be viewed primarily as an OE supplier on engines. But obviously, the aftermarket became much more important. But now Boeing is now looking at going up to 47 a month on the MAX this summer. We'll hear from Kelly later. Where do you stand relative to Boeing in terms of, say, a burn down in inventory and ultimately aligning with the rate of growth. Obviously, that funnels through GE as well, but...

Yes. So right now, there's not a lot of inventory that's lying around either in completed engines nor in parts availability. So pretty much our customers will take everything that we can make in the support of their ramp. And if not, then there's the sufficient backlog through the MRO shops for spares requirements at the moment, again, that the thing which is not forefront of mind at all, is there a demand issue. So with the assumption there's little inventory in the spares chains, little inventory in the OE chain, then there's nothing to worry about on engine parts for that on that side.

And that's true for both Boeing and Airbus for like LEAP-1A and LEAP-1B.

Yes. I mean, where we are at the moment is widebody we expect to show signs of growth coming up hopefully this year, which has been a long time coming and maybe into next year, but again, as you see, narrowbody is also requiring inputs of parts because Boeing want to produce more, and that would be great. Airbus also want to produce more, but have struggled a little bit recently. And as a well-publicized information regarding the supply of one of the engine manufacturers into Airbus. Again, part supply. And we all know that we're in this changeover period. So last year, we changed over on the LEAP range of engines to the improved, I'll say, generation improvement on the LEAP-1A. We have yet to make that change and to see that changes coming through on the LEAP-1B.

And of course, to date on the GTF Advantage, again, we are producing parts now, but none have yet made it to the outside market. And so again, a lot of change and a lot of throughput is required as we bring those changes into being in '26 and '27.

Now on these new plane designs. So how do you manage the timing of the ramp. As you said, sort of the next one that's right in play now is on the GTF advantage. And so that ramp, I mean they just got certification for the engine on the aircraft. And so like when do you ramp up and how do you manage the changeover from the prior blades to the new ones?

Yes. It's difficult for us to give precise dates about when changeovers will occur. We saw on the 1A that we were prepared -- I think you saw me quote in at the end of '24, we had put in place 500 engine sets of parts on the 1A changeover. And so if I start with 1B, we're in that build phase. We're producing tools for capacity. We're looking at the changeover dates for production, while also knowing that we're going to continue to provide and manufacture the existing technology. And just for your information, we're also still manufacturing the existing technology on the 1A as well. And as I think you know, when an engine comes in for overhaul, if all the blades are changed, and you can go to a new generation, but if only certain of them are, then you can't mix and match on the same disk and therefore, we supply both new generation and old generation and the older generation is into the service market.

We're going to go through that on the 1B this year. And then for the advantage, we're going to be increasing production every quarter during the course of this year. When it actually makes its way to the market and where will the market see first in the OE area or the aftermarket area. That's not for us to determine. There won't be enough I will say, provision of parts to do both at the same time is our view. And so I think we're actually going to see a far higher production in 2027 of the advantage level of parts. And so -- and reaching much higher volumes in the second half of '27, while still providing all of the existing current GTF advantage parts all the way through.

Because this would also involve -- I mean, they have this whole hot section plus program too, to do upgrades. So you've sort of got normal MRO, that program and OE right, all.

That is going to be a very significant increase in requirements for us as we go through this next, let's say, 18 months.

Is it fair to say that on each of these, when you go to the new generation blade that you would have higher pricing, better margins and more share.

I never really comment on...

I know you don't want to comment on that.

I just loosely refer to it as a higher content because of increased sophistication. So if we're going to produce turbine blades that can exist at fundamentally higher temperatures. So think -- these are not extra 100 or 200 Degrees Fahrenheit. We're talking about hundreds of degrees of improvement in thermal capabilities. And so to produce that level of part, it's another generation of sophistication. And the way I'd like to think of it in the advantage areas that some aspects of the technologies that we developed for the engines for the F-35 as an example. Some of those technologies are being deployed for the advantage level of turbine. So again, to make sure that there is a significant buffer between we know what the temperature of the engine may see because, again, it's obviously a lot of testing has been done, but then there's the real-world application.

I have heard some frustration from your customer universe that maybe because you guys are too good, but that you're sort of the main source here and that they would love to have more options. And we've seen Pratt, they have this whole effort in Asheville, where they're working on doing some of their own blades. How do you view the potential threat of new entrants in this market or people in-sourcing like Pratt's trying to do? What is that -- what impact, if any, does that have on your thinking?

Well, obviously, we need to always think of what the competitor? Or is it customer -- a competitor might do. We do keep a fairly close eye on what the capabilities might be in those new areas of potential source. And with that, displaying the full level of knowledge about the situation is these things are not easy to make because if they were. And I guess that we have a lot of people doing them. So I suspect that we could be sitting here a decade from now and still finding that people might be struggling to produce the economics of the turbine blade essentially go to the question of yield. And the difference between, let's say, getting a 70% yield and a 40% yield is all of the pricing and all the profit that exists in a turbine blade application.

Now you've had very strong margin growth. I mean your EBITDA margins. You've been taking them up close to 300 basis points each year for the past couple of years in engine products, what's enabling those increases, I think you were at 36% in Q1. Where can you go from here? Because it does seem like you have opportunities you've described that you're very well positioned for.

It's always difficult to talk about where you're going to go because it's -- it would be a forecast for the future. And as you know, I've always been very reluctant to comment on what the future might hold by the way of margins because to some degree, to a large degree, things are outside of your direct control. We don't know what inflation rates will be in the second half of this year yet and therefore, the degree of recovery and therefore, dampening effect that might have on margins, et cetera, or margin growth. So I never want to assume a level of knowledge or prescience that could predict the future that accurately. And so -- and you can say, well, some of it because I don't feel like I need to do it.

And secondly, I think it's a little bit foolish to do that. But I think the most important part of it is, as we continue to strive for the improvements in our manufacturing space and improve our yields and drive through these improvements in technology, which are very significant in either improving the robustness of engines or if not producing the opportunity for further fuel efficiency, then those are very valuable to the industry. And we just want to play our part in that and gain the appropriate value for that.

Well, also still within engine products. So defense has also been quite good for you. And our assumption is F-35 is the biggest single driver there. If we look at F-35, the aftermarkets, I mean the cycles on the F-35 drive a pretty strong aftermarket. Is it fair to think of growth there, in some sense, proportional to the fleet size in F-35 if we're trying to predict that.

I actually think it's more than proportional to the fleet size. I hate to use the word exponential. But to some degree, it does apply. So if you went back and looked at the size of the fleet, let's say, in 2021 and then looked at the spares level, I don't mean spares packages provided with the OE sets to, let's say to foreign governments, which that's a feature of it. But spares, driven by usage. Then our, I'll say, loose prediction had been by 2025 that we would see the production of spares for the turbine to exceed the OE production, which is actually what did occur during 2025. And then when we look forward to, let's say, 2030 so you put another 5 years of production of 150, 160 F-35s into the market.

And so, you're looking at, let's say, another 800-plus aircraft. And then all of those obviously are going to require spares and the existing fleet, which is being built from, let's say, the last 5 years are going to require spares and so my thought at the moment is the -- without going through what -- exactly what our models predict because there's also numbers are flying hours, which is something which we don't control. And there's been a lot of flying hours recently, given the conflicts that are there. Then the thought is may be the spares demand will double again by 2030. And assuming this aircraft is in production through the 2030. So I think at the moment through is it 2038 or '39 another 10 years of 150 if it's flat production or who knows exactly what it will be by 2035 because we will be hopefully doing the F-47 and whatever the Navy plane requirements are. So all of that will be feeding in as well. So my thought is the spares demand is going to continue to grow and will be very significant as we go through the 2030s. 2040s, 2050s, 2060s.

I don't -- we don't model the 2060.

Yes, I thought you might, but things that might be beyond you and I talking on this stage together.

You don't plan to be here on the 2060 conference.

I haven't thought about it recently, let's say, but it's possible that it might not be the case.

Okay. Well, me too. So we'll see. So switching over to fastening systems. So you've had some really strong revenue growth. But we've sort of been waiting for this wide-body ramp to occur. And it seems like you've had this growth before we've seen the 787 and A350 growth really move up. What's driving your fasteners growth.

There's been multiple strands to that growth. I mean, first of all, we've probably incremented our share in various areas. It's been a little bit because of the SPS fire, which occurred with a lot of competitors, there's been a little bit because when we renewed our contract with Airbus this year, we took a little bit of share. And we are also trying to develop, I would say, new products that we bring through and look to put those on additional things on the aircraft. So when we put a level of technology, which may surprise you if you took us, let's say, naming the platform exactly where we've put a new range of fasteners are, let's say, the front part, let's call it the nose area of the aircraft. And then we're marching down each part of the fuselage, then that again is content and value increase to us. So we've been trying to do that a lot in our fastener business and seeking to do more of it, and we actually got many things in development right now.

So has that expansion you're talking about, has that been primarily on narrow-bodies?

I will say more narrowbody than widebody. We have some developments for new things in the composite area where we're looking at widebodies today, but in particular, for the next-generation aircraft as well. So we're trying to position ourselves and doing this year and the next couple of years, such that to be the selections aren't anything that might occur in any form of narrow-body, I'll say, changes to come or new aircraft to come.

We should see widebody production rates because we're seeing at Boeing right now, those production rates are starting to go up. A350, it's been a little slow recently, but that should go up rapidly if you look at what Airbus is projecting. That seems like given that those are more -- those are higher-value fasteners for you. And the volumes are high. I mean, should we expect to see a kind of break upward as we see the ramps take off?

I've been thinking for like 2 or 3 years that we might see, I'll say, the widebody begin to start and therefore, there might be a mix effect. But here we are in '26, and it hasn't happened to date. And I'm not thinking particularly great things for '26 either. And we've seen recent announcement that maybe the A350 might not increase so much as we thought because of some additional production problems. So it's best not to get ahead of yourself, but come the day where Airbus is producing 12 A350s a month or maybe come the day where Boeing is making in the teens again for the 787, then that will be positive for us. Now how that growth is going to compare to narrow-body ultimately, who knows.

But should they get there. And so whenever you decide what the narrow-body production is 100, 120, 140 aircraft a month or whatever number you choose, the percentage increase theoretically on widebody should be higher, but it's a long time coming.

Yes. But Boeing, I mean, they intend to be 10 a month by the end of this year on the 787. So that one seems -- that growth path seems pretty real right now.

That's not our underlying assumption that we've given for our embedded revenues for this year. So should Boeing produce 10 a month. That will be absolutely great. Look forward to it. But I think when we gave a guide for the end of this year, we were thinking maybe we get to or they get to more like 8 a month by the end of the year, but again not something, which we have anything, we're just able to respond and support them as they need so there won't be a problem in terms of rate or production coming from Howmet for those fasteners.

It does. But should they be successful in getting there, you're able to support those higher rates?

Yes. And I would like to.

Okay. That's good. And again, on your margins in Fastening Systems, they were 31.8% in Q1. Again, these have gone steadily up. I know we don't want to predict inflation or anything like that. But what's been helping you take the margins up in Fastening Systems? And what are the things you're looking at that potentially could add to that?

Yes. I think that one of the things I was most pleased with over the last year. So if you looked at 2025 was if you look at the revenue increase and the volume increase that underpin that, then we were able to essentially do all of that without adding any people whatsoever to the business. And so the level of throughput that we've been able to achieve has been extraordinary. And some of it is down to automation. Some of it's down to introducing newer equipment that can say, collapse these numbers of stages of production into, let's say, going from maybe 8 stages down to 4 stages of production as an example, and therefore, making the whole production system more efficient.

So between again some content, some production efficiency and some price has been beneficial. Now in terms of how the margin develops in the future course, as you know, we are bringing on an acquisition which we closed on the 6th of April. And so when we blend those 2 together, then obviously, we're taking some an entity, which is more like in that, let's say, 20% margin range to add that together. So that will obviously dampen those margins. But then our plan is, obviously, to bring that up and hopefully continue the improvement. So that's what we're seeking to do over the next, let's say, 18 months, 2 years.

So on the CAM acquisition, can you talk a little bit about what attracted you to that and how you expect to integrate it and improve it?

So we've had the opportunity of looking at 2 or 3 fastener acquisitions in the last year. And one we looked at and decided not to proceed. One, we decided it was not of great interest to us. But CAM felt to us as though it was a better property altogether. It gave us the opportunity of not only further increasing and improving our fastener business, but also the adjacencies of fittings and couplings and the things which we wanted to increase our revenues significantly in. So part of it, we also thought on the -- when we looked at inside that manufacturing operations that compared to what else we've seen, it seemed to be have a better order and so a base that we could further improve from with some of the manufacturing techniques and investments that Howmet does. And so that was an opportunity.

Secondly, we wanted to also see what I believe to be the holy grail of doing an acquisition, which is to gain some revenue synergy. And so we thought that given the scale of the Howmet's sales force and contact points in the industry, which is way beyond commercial aerospace, that would give us the opportunity of pulling through some of the CAM products to the customers for more than they were able to. And so we're optimistic about doing that. We're also optimistic that some of the CAM product that we'll be able to take through our distribution network that we've built. So if you go back to something that we did in 2021, which used to create a separate distribution arm for Howmet is that we've taken that from like $50 million to $350 million over that period of time.

And the thought is that we'll be able to feed some of those CAM products through that distributing capability, whereby we have both the manufacturing and also the distribution side of it. So that's what we think of that we can gain the opportunity of selling more through our network and also through our distribution capabilities, plus obviously, again, can we make further improvements in productivity in the CAM operations.

Now switching over to Engineered Structures. This is one where I remember a couple of years ago, it was one we talked about, that wasn't really your main focus of investment. The returns look better on the other engine products, fastening systems. But the performance there has steadily improved over the last couple of years. Can you take us through the most important growth drivers for that business?

Yes. I think, first of all, I'd like to comment on the margin before I go to growth. So let's call it, from 2019 where there's been an oversupply situation for some of the structural parts into the Lockheed F-35 program plus post COVID, some of the declining widebody in international travel, and it was a tough scenario for that business. And I felt that we were doing reasonably well in that scenario demand structure to hold on to 14% margins. I was quite bold in that I normally don't talk about, as you know, future margin, but I said I think this is conceptually a high-teens business. And as you saw, we broke through and achieved 2 at the front of the margin profile of that business in 2025. And I said our mission was to try to hold that -- hold on to it. And you've seen we've been able to do that in '26 and in fact slightly so we're just holding on to it. And feel in a good situation.

So thematically, I've been more interested in driving the margin and at the expense of revenue. And so there's been thrifting of product withdrawal from certain segments, sale of a couple of entities. You've seen sale of company we did in the U.K. called [ Vallin ], one in the U.S. in March, which was Savannah, and also, we've chosen selectively to move out of certain contracts. In the growing industry, my thought was, we can still grow, and you have seen growth, but not at a pace that you would have thought, but it's been a margin focus. And so now I feel as though we've done a lot of the heavy lifting towards that. And so we have a business which has a better underlying situation in that I think the growth rate has the opportunity to increase the margin rate hold or further improve.

And so we've taken this, let's say, 2 or 3 years to reprofile where that business sits in the grand scheme of things. And so having the business now in the 20% margin profile and a better future growth pattern to it is one that I increasingly begin to like but it's been heavy lifting and taking some tough choices along the way.

We don't have a lot of time left here, but I wanted to touch on something you mentioned earlier and also on the earnings call. And that is opportunities in the missiles area, which is clearly an area of high growth. And where do those fit into your thinking?

Previously, missiles have not been the highest focus area for us. We were probably more interested in, I'll say, the structural fastener part of drones. But more recently, we've seen, I'll say, the long run opportunity where some of the larger missile systems are requiring small turbines now. And certainly, for the -- I'll say, collaborative combat aircraft, the unmanned aircraft that would fly alongside an F-35 or an F-47. I think clearly those are turbine based and so we've spent time developing the parts for many of these small turbines that you've heard some engine manufacturers refer to and trying to make sure that we have the ability to support the ones we choose to support.

And so far, the 3 base engines that we understand which have been selected by the Department of Defense or Department of War, then I think those are all future Howmet parts on them. And so it's not revenue for 2026 per se, I mean, some development prototypes, but positioning the company for to support that segment. And I think it will show significant growth in the next, let's say, 3, 5, 10 years. And so I think it's an important thing that we do. More immediately, in the missile area, of course, a lot of missiles have been used recently and so whether it be -- where it's now that we see an increased demand to replenish some of those or whether it's for Golden Dome applications. So if you think about missiles like the PAC-3 or the Patriot missile or whether it's the THAAD system, then each of those are -- we are looking at significantly increased volume requirements and working that through at the moment.

And so that's going to also produce a level of revenue improvement in -- not necessarily that much this year, but '27, '28, '29 to produce say replenish stocks and also say, for Golden Dome.

Well, kind of to wrap up here. When you put all this together and you think of your guidance as to cash -- free cash flow of $1.75 billion this year. How should we think about what could take that higher, what might be a risk on that? And how you plan to deploy it?

I think the first order and first priority for us has been to make sure that we can invest for the future growth opportunities. And you've seen us take CapEx up from the $300 million level through $400 million, $500 million we're talking about this year. And I think '27 is going to be a higher number, still. And so that really is -- has been the most important thing we've been thinking about in terms of supporting that future organic growth of the company. And then beyond that, we've looked at how much we should use by way for share buyback, how much for acquisition? And how do those interplay with each other? What's the relative returns for shareholders of them and at the moment, we feel as though we're able to take the opportunity because when an acquisition comes up, you don't get to choose when they come up.

It's what the sellers are willing to sell and we've made two, as you know, the CAM acquisition, the Brunner acquisition said we'll do those. At the same time, at this point of the year, we're still buying shares back at a higher rate than we did the previous year. So we're able to do that as well. So far, we've not had to face any buying choice as one or the other, we're able to do both and both to an increasing extent. So we're kicking up CapEx. We've been able to complete acquisitions. We are kicking up the share buyback opportunities and still supporting a dividend. And so all of those things are being done. So at the moment, we're not trading one off against the other, it could have some -- the margin, but it's all good.

Okay. Well, John, thank you very much. We'll end it here, but really great to see you.

Nice to see you, too. Thank you.

Good day, and thank you for standing by, and welcome to the Howmet Aerospace Earnings First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that today's 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, Chris. Good morning, and welcome to the Howmet Aerospace First 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. As noted in today's materials, we have removed the term excluding special items from the titles of non-GAAP financial measures as well as simplify the definitions of adjusted EBITDA and adjusted EBIT.

While the titles and definitions have been simplified, current and prior period calculations have not changed. 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.

Thanks, PT, and good morning, everyone. Welcome to the Howmet first quarter earnings call. Let's move to the highlights on Slide 4. Howmet had a very strong start to 2026. We delivered in many ways. Sales were $2.31 billion, EBITDA of $740 million and earnings per share of $1.22. The EBITDA margin rate was 32%, and this margin was an increase of 320 basis points over the equivalent quarter last year. Cash generation was $359 million, reflecting strong earnings and continued improvement in working capital efficiency. This enabled share buyback of $300 million during the quarter and a further $150 million in April.

Capital expenditure continued at a high rate, supporting the future organic growth rate of the company. Brunner acquisition was completed in February from cash on hand. The CAM acquisition closed on the 6th of April using $1.65 billion of new debt and part of the proceeds of the disposal of the Savannah U.S. disk operation at the end of March. The sale of Savannah tidied up another part of the Structures portfolio, which was an isolated U.S. disk operation for which there were no plans of expansion given its market position. The acquisition of CAM expands our reach and our portfolio of offerings to the nontraditional fasteners, such as fluid fittings, couplings, heat shields and additional latches. This acquisition investment in the Fasteners business reflects our strong philosophy of allocating capital to the better performing areas of our business.

Excluding the $1.8 billion used to fund the CAM acquisition, we entered the second quarter with just over $600 million of cash on hand, having completed these portfolio moves and with a resulting net leverage of 1.6x. This leverage, we expect to bring down significantly as we move through the balance of 2026.

Patrick will provide further color on markets and the individual business segments in the following -- this part of the discussion. Meanwhile, the comment I would make is that margin performance of each business unit showed progress sequentially from the fourth quarter of 2025. I'll now pass across to Patrick.

Thank you, John. Good morning, everyone. Please move to Slide 5. Another solid quarter for Howmet with most end markets continuing to be healthy. We are well positioned for the future and continue to invest for growth. Revenue was up 19% in the first quarter, an acceleration from the 15% growth rate in the fourth quarter. Commercial Aerospace growth was strong at 20%, driven by accelerating demand for engine spares and underpinned by the record backlog for new, more fuel-efficient aircraft with reduced carbon emissions.

Commercial Aerospace engine spares were up 48% in the first quarter with both legacy and next-generation engine spares contributing. Defense Aerospace growth continued at 10%, including healthy spares activity. Commercial Transportation revenue was up 13%, driven by the pass-through of higher aluminum costs and tariffs. On a volume basis, wheels was down 11% as the market down cycle continued into the quarter.

We continue to outperform the market with Howmet's premium products. Gas Turbine growth remained very strong with revenue up 39%. Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers. Within Howmet's markets, we had a robust spares growth. The combination of Commercial Aerospace, Defense Aerospace and Gas Turbine spares was up 36% to approximately $520 million in the first quarter. Spares revenue continues to grow and represents a larger portion of our overall revenue now at 23% in the first quarter of 2026 versus 21% in the full year 2025 and 11% in the full year 2019.

In summary, continued strong performance in Commercial Aerospace, Defense Aerospace and Gas Turbines with all markets up double digits and the Commercial Transportation market beginning to improve. Moving to Slide 6, starting with the P&L. First quarter revenue, EBITDA, EBITDA margin and earnings per share were all above the high end of guidance. On a year-over-year basis, revenue was up 19%, the strongest quarterly growth rate for the company since the first quarter of 2023.

EBITDA continued to outpace revenue growth, up 32%. EBITDA margin increased 320 basis points to a record 32%. Incremental flow-through of revenue to EBITDA was solid at 49% year-over-year. Earnings per share were $1.22, up a robust 42% compared to the first quarter of 2025. Now let's cover the balance sheet and cash flow. Our strong balance sheet provided the foundation for the CAM and Brunner acquisitions that we closed during the first half of the year.

The quarter end cash balance was $2.4 billion. This included $1.65 billion added through debt issuance to fund the CAM acquisition as well as proceeds from the $230 million sale of the Savannah Disk Forging Facility. I will speak more about these transactions momentarily. Free cash flow was $359 million, a record for a first quarter. Net debt to trailing EBITDA continued to improve to 0.9x prior to the CAM acquisition that we closed on April 6.

Howmet's improved leverage and strong free cash flow profile were reflected in Fitch's Q1 upgrade from BBB+ to A-, now 4 notches into investment grade. Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program. The commercial paper program was utilized for the first time in the first quarter of 2026 to support the CAM acquisition with $450 million being drawn as of March 31.

Turning to capital deployment. CapEx was $94 million. The majority of CapEx was in the Engine Products segment as we continue to invest for growth in the aerospace and gas turbine markets. Investments are backed by customer contracts. In the quarter, we repurchased $300 million of common stock at an average price of $230 per share. We repurchased an additional $150 million in April at an average price of $246 per share. Q1 was the 20th consecutive quarter of common stock repurchases. As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $1.05 billion.

We continue to be confident in strong future free cash flow. We paid a first quarter dividend of $0.12 per share. We expect the dollar value of dividend distributions in 2026 will be higher than 2025. Finally, turning to M&A. We completed 2 transactions in the first quarter and 1 early in the second quarter. First, we acquired Brunner, a Fastener business based in Wisconsin for approximately $120 million in cash on February 6. The integration process is on track.

Second, we sold our Disk Forging operation in Savannah, Georgia for $230 million in cash on March 31. We expect this divestiture to be margin accretive to the Structures segment. Third, we closed the previously announced CAM Fastener acquisition on April 6 for approximately $1.8 billion. To finance the CAM acquisition on March 3, we issued $1.2 billion of new notes in addition to $450 million in borrowings from our commercial paper program.

The proceeds from the Savannah divestiture also supported the CAM purchase. The weighted average cost of debt for the CAM transaction is approximately [indiscernible] now let's move to Slide 7 to cover the segment results for the first quarter. The Engine Products team delivered another excellent quarter for revenue, EBITDA and EBITDA margin. Revenue increased 29% to $1.25 billion. Commercial Aerospace was up 31% and Defense Aerospace was up 13%.

The gas turbines market was up 39%. Demand continues to be strong across all our engines markets with very healthy engine spares volume. EBITDA outpaced revenue growth with an increase of 44% to $458 million. EBITDA margin increased 400 basis points to 36.6%, while absorbing approximately 235 net new employees in the quarter, positioning us well for continued growth.

Please move to Slide 8. Fastening Systems had another strong quarter. Revenue increased 14% to $471 million. Commercial Aerospace was up 17% and Defense Aerospace up 21%. Commercial Transport which represents approximately 11% of revenue was down 4%. EBITDA continues to outpace revenue growth with an increase of 18% to $150 million despite the modest recovery of wide-body aircraft builds, along with the weakness in Commercial Transportation. EBITDA margin increased 100 basis points to 31.8% as the teams continued to drive commercial and operational performance.

Moving to Slide 9. Engineered Structures operational performance continues to improve. Revenue decreased 3% to $294 million as we continue to rationalize products and focus on higher margin and stronger return opportunities. Segment EBITDA was flat at $66 million. EBITDA margin increased 40 basis points to 22.4% as we continue to optimize the structures manufacturing footprint and product mix to maximize profitability.

Finally, Slide 10. Forged Wheels delivered another solid quarter. Revenue was up 17% as an 11% decrease in volume was more than offset by higher aluminum cost and tariff pass-through and favorable foreign currency impacts. EBITDA was strong at $90 million, an increase of 32% despite a challenging market. EBITDA margin increased 350 basis points to 30.5%. The unfavorable margin impact of lower volumes and dilutive higher pass-through was more than offset by flexing costs, a strong product mix driven by premium products and favorable foreign currency.

Lastly, before turning it back to John, I want to highlight a couple of items. One, in the first quarter, we moved the titanium alloy production operation from the Engine Products segment to the Engineered Structures segment for better operational alignment. The comparable periods for Engine Products and Engineered Structures have been recast to reflect the new alignment. You can find these figures on Slides 20 and 21. Two, in April, we issued our annual environmental, social and governance report, highlighting the meaningful progress we made in 2025 sustainability. The full report is available in the Investors section on our website. Now let me turn the call back to John.

Thanks, Patrick, and let's move to Slide 11. Let me turn to the outlook for the company and firstly note that we have ongoing uncertainty in relation to the situation in Iran. The outcome and consequences have yet to be fully determined. Having said that, the oil price shock is rippling around the world, along with other fossil fuel impacts.

The case for higher inflation is set, although its rise and forward trajectory is yet to be determined, along with the effects on global interest rates and currency exchange rates. While acknowledging all of this, we do see a clear path to an improved economic outcome in 2026 for Howmet and future growth of revenues into 2027. The details of our updated 2026 guide will be set out momentarily. First, let's discuss Commercial Aerospace. Both narrow-body and wide-body aircraft build rates are planned to increase. And this is expected to be the case throughout the year, although the trajectory going into 2027 is yet to be determined.

Airline traffic has held up well through April, although some airlines have drawn up lower volume contingency plans. The large aircraft backlog should help to underpin current build rates. The outlook for spares continues to be strong as MRO slots are also backlogged, though again, there may be an effect to be felt from the Iranian conflict. Aircraft retirements, unused serviceable material and the longer-term effects are being considered, but the outlook remains for continued strong growth and that persists into the future.

Defense sales continue to be healthy for both new aircraft and spares, especially given the recent escalation of aerial operations in the Middle East as well as the part supplies to missiles. At the same time, we're expanding efforts on new programs, most notably in the drone and collaborative combat aircraft programs. Naturally, this does not really affect much by way of revenue in 2026, but it's very important for the future years. The gas turbines market is also very active. Sales are expected to grow both in 2026 and into the future.

We provided a sales demand outlook during the last earnings call for a doubling of demand in the 3- to 5-year period. We are not updating this currently, although the picture continues to look very bright. The update today relates to customer contract provisions where the negotiations regarding demand and capital investment have now been finalized for 6 out of 7 customers, which is an increase from the 4 I commented on in the last earnings call.

At the same time, further new orders and increased projected volumes are possible, dependent upon all of the other componentry that's required for a full IGT installation, and this is for both small, medium and indeed large IGT builds. Starting in the second quarter, the commercial truck market has begun to strengthen despite the diesel price increases, albeit our outlook remains cautious until we see an improved and more stable macroeconomic outlook.

Moving to specific numbers. Commercial aircraft build rates are seen to be increasing, but we remain slightly behind projected rates. We have the rate for the 737 at an average of 42 per month for the year, on the 787 currently 7 per month, rising to 8 per month by the fourth quarter. On the Airbus A320, 62 per month and the Airbus A350 at 6 per month. The past few months were very active regarding the Howmet portfolio and the guide we provided reflects these changes.

We closed 2 transactions in the Fastener segment, namely CAM and Brunner, and we also divested the U.S. Disk business in Savannah, which is part of the Structures segment. These transactions followed our stated strategy of allocating capital to the businesses that demonstrate higher growth potential and higher margin potential. The net effect of these transactions will add approximately $275 million of revenue to the remainder of 2026 and about $60 million of EBITDA.

The EPS effect in 2026 is insignificant due to the increased interest expense. There is expected to be a positive earnings per share impact starting in 2027. Our Q2 guide numbers are revenue of $2.4 billion, plus or minus $10 million; EBITDA of $765 million, plus or minus $5 million; earnings per share of $1.23, plus or minus $0.01, and these are incrementals of just about 51%. Our full year guide numbers are revenue of $9.65 billion, plus or minus $75 million; EBITDA of $3.06 billion, plus or minus $35 million; earnings per share of $4.94, plus or minus $0.06 and free cash flow of $1.75 billion, plus or minus $50 million, and that's after increasing our capital expenditure once again.

It's noteworthy that our full year economic -- sorry, our full year revenue growth guide, excluding the impact of M&A, rises from 10% to 14%. So again, an increase over and above that, which we said in February. In summary, we started 2026 in a very healthy fashion, and the guidance numbers reflect that increase in confidence for the year. And at the same time, we do recognize the increased uncertainties around the macroeconomic outlook. I'll stop now and turn the meeting over to questions.

[Operator Instructions] And today's first question comes from Scott Deuschle with Deutsche Bank.

John, can you walk through in a bit more detail as to what factors drove the step function change in the Commercial Aerospace growth at Engine Products in the quarter? And then related to that, is Engine Products currently seeing much growth benefit from GTF Advantage/Hot Section Plus or LEAP-1B Maverick shipments? Or is that all still largely in front of you?

Okay. So first of all, the Engine revenue increase is above aircraft build in the first quarter for sure. Some of it clearly reflects that we need to be ahead of future volume increases. And as you know, that the aircraft manufacturers want to raise rates during the course of the year. So there's some anticipation of that.

I think the second point would be there's been very little [ by way of available ] inventory in engine build. I think everything was thrown out increasing both LEAP and GTF production in 2025 and so there was very little. And so for us, then again, seeing strong demand to some degree, catch up. In addition to that, I'd point to there is some share increase. I'd point to the fact that there is some price increase. And then finally, it shouldn't be underestimated that the Spares business was very strong.

So whereas the overall spares increase for the company was 35% plus, it was actually 45%, more like 48%, in fact, in the first quarter. So if you put strong spares along with the aircraft build, the anticipated build, the share, the price, there's a lot of very positive things happening for us in the Engine business. In terms of the question or the part of the question you asked regarding GTF and then the changeover for the LEAP from Turkey to Maverick, let me deal with, say, the GTF first. In the first quarter, there was a fairly small amount of GTF production.

I think during last year, I commented that we're running at about 6 engine sets a month in the second half. That's increased during the first quarter, but it's going to increase again significantly as we go through the balance of this year. So my expectation is that we'll be providing a full production of the legacy GTF product and then increasing GTF Advantage products as we go through this year.

And I think as you know, Scott, those will have a higher content and then therefore, higher value. That production rate increase will actually continue into 2027. So 2027 is going to be a much bigger year, I think, for the GTF Advantage than 2026. But you are going to see a steady climb throughout this year as we bring further [ rate tooling ] to bear. And as you know, the GTF Advantage has now had both certifications at the customer and from the regulatory agencies.

In terms of the Maverick, that production is just starting for the LEAP-1B. So it's underway. Again, volumes will be increasing during the second quarter and then more in Q3 and Q4, but it won't be changed over until the second half of the year with, again, a date to be determined for the exact month of changeover. But we do see, say, the LEAP-1B changing in the back end of the year and certainly, I think before the turn of the year into 2027. So for the first part, we'll be doing the existing turbine blades and then increasingly make that changeover such that by, let's say, Q3 and certainly by Q4, we'll be fully changed over is my expectation.

And the next question is from Ron Epstein with Bank of America.

So John, a big picture question for you. How should we think about -- how IGT is going to go for you all over time, kind of given the contracts that you're signing, the CapEx that is being invested, the hyperscaler spend? And then ultimately, how does that compete with your Aerospace business? Because it seems like the hyperscalers are competing against the engine guys for similar assets and supply chains. How are you thinking about that?

Okay. IGT is a big subject at the moment, a big subject for us for sure and trying to, I'm going to say, feel our way through to the right outcome for the company. It's clearly an opportunity to deploy capital for increased organic growth. At the same time, we just want to make sure that we're not getting ahead of ourselves. And we do see a continuing bright future for it such that we don't end up with a period of overinvestment and over-capacitization because that would not be a good outcome for us.

So what we've been doing is to truly understand as best we can the market dynamics of what the hyperscalers are really needing and paying close attention to build-out of data centers and just the underlying growth anyway, excluding AI, which is just a function of just fundamentally a huge increase in data and data storage required around the world. And then on top of that, the increased use and use cases for the application of artificial intelligence, which is you know there's a huge amount of money, maybe $700 billion being invested this year.

I am trying to assess when all of that is required and what capacities will need to be brought online. And indeed, what are the alternatives for electricity production as we go through the next few years. Our assessment is that natural gas is fundamental to that build-up because of the, I'll say, ability to have fast acting and to underpin any form of renewable energy and also as a baseload provision as well. So we're confident that for the next 3 years, 5 years that, that growth is clearly there.

The tick up of investments by the hyperscalers. I mean you see numbers, let's say, going from maybe Microsoft saying they're going to go from $125 billion to $185 billion or then Google matches it, then Amazon talks about $200 billion. And so clearly, the amount of investment is enormous and probably still not yet reflected in the current demand pattern that we're seeing through our IGT customers. At the same time, for us, we have to consider what happens to 2030 through the balance of this decade into the following decade and having really detailed meetings with those large IGT customers of what turbines that they expect to make and that -- which they want to invest in new products compared to making more of the same, which is a very live topic at the moment.

And indeed, what their own capacities are and what the demand pattern looks like through, let's say, 2032, 2034, et cetera. And so -- and while we're evaluating all that, we're also looking at the smaller and midsized turbines, which are also required because sometimes data center installations cannot get electricity sufficiently from utilities or indeed from their own large-scale gas turbine availability. So banks of smaller and midsized turbines are required. And so evaluating all of that and then also the fact that it's probably likely that insufficient electricity production will be provided in the, let's say, the decade as we see it beyond 2030.

So for major industrial complexes, we see stand-alone microgrids being required for, say, small- and medium-sized turbines. So again, a very healthy demand pattern. And everybody, basically the word of the -- I was going to say, month, quarter, you could call it year, the answer is more.

And so we are trying to meet that demand, not necessarily trying to add everybody's demand together and say because everybody expecting all of it to result in those market shares but also to invest at a rate that makes sense to us and also underpin that with commercial agreements, again, which makes sense and trying to provide, I'll say, corridors of security for the Howmet investors.

So there's a lot going on. You've seen the kickup in capital expenditures. I mean, if we were, I don't know, $450 million, plus or minus last year. We've talked about, I think, the last earnings call, a midpoint of $470 million, but trending towards the top end. We're seeing more like now this year, $500 million of CapEx, and those increases really do reflect the increased investments that we're making in the gas turbine market.

And my current expectation is that 2027 is going to go higher. But at the same time, we're not spending this money and trashing our cash flow at all is that we have already guided to a higher CapEx and a higher cash flow number and still maintaining our long-term commitment to that 90% conversion of net income. So we're trying to do everything. And I think I maybe said something quite bold on the last call, which is we're trying to do it all. And at the moment, I say we do have the cash flows to largely do it all between maintaining really a great leverage position, increasing our CapEx and also meeting the -- some of the exciting parts of the market demand picture of which gas turbines is particularly active at the moment.

And you heard me say on the call earlier in my remarks that we've now reached agreements with 6 of 7 major customers and -- with one more to go, which is a very significant customer to -- so hopefully complete during the balance of the second quarter. So it's interesting, exciting, but at the same time, we're not trying to get carried away and do something which would not put us in a good position. And we've been very clear on that in the discussions with our customers.

The next question is from Robert Stallard with Vertical Research.

John, you've given a pretty interesting growth outlook here for several of your end markets. But I'm wondering how you feel about the ability of your supply chain to deliver sufficient material, especially on, say, things like rare earths and also the outlook for staffing, whether you're getting enough quality people.

Okay. Let me deal with input materials broadly and then rare earth specifically before moving on to human capital. For the most part, we -- the metals that we use in our Turbine-blade business and Structural-casting business and the Structure segments, we get the base metal. So we're buying from smelters and traders so that we will buy the base nickel or cobalt or whatever. And so we feel fairly secure of that and have a pretty good view of country of origin and security stocks around all base metals. So I feel quite comfortable there.

During last year, I gave a picture about -- I think I called out 3 rare earths and tried to describe the fact we had a year supply of 2 of them plus inventory held outside of -- producing territories outside of China. So we had inventory both in the U.S. and Europe to provide us with security. And I think they called out the third rare earth, which is about a 10-year secure supply.

It's something that I've returned to again in the first quarter of 2026 and being really focused and have our procurement operations focused on gaining increased security. So right now, we have in hand and despite an improved inventory efficiency, we actually have increased the inventory of rare earths such that we're fully covered through '26 and I think we're like 90% of 2027 and some products now well through the end of the decade.

So it's been a major push to increase security around rare earths such that with, again, some uncertainties around the geopolitical situation, even though we recognize there's a major political summit coming up between America and China, we want to make sure that we're able to be secure and supply our customers for a very extended period of time with the product we've got, which is essential, particularly for some of our defense applications to provide that supply security.

If you take the Savannah disposition, then that was 1 of the 2 operations where we buy alloy metal from somebody else, which is, let's say, was about 5% input of metals into the company. So let's assume now we have -- that 5% is down to 3.5% [indiscernible] 40% is supplied from our in-house operations in Europe. And so we're down to like a very tiny percentage of, I'll say, of metals that we rely on the alloy third-party suppliers and have very solid security stocks around rare earth. So I think we try to protect the company in a very significant way.

I think the second part of your question was around human capital. We've continued to recruit, I think, about 230, 250 people net in the first quarter of this year. We're still anticipating well over 1,000 people of adds during the course of this year. So similar, maybe slightly higher number than we had in 2025. And I've also spent a lot of time trying to improve all the, I'll say, methods that we have by way of recruitment and training and trying to reduce our employee turnover.

So we did make major strides during 2025 and the trajectory during the course of the year. So far in 2026, employee turnover has been pretty stable with the fourth quarter of 2025, but with, again, plans to, again, provide additional efforts to provide, I'll say, the training that we provide employees showing the people the workplace, looking at spans of control within our plants, looking at the basic recruitment practices itself and obviously, pay rate benefit programs and all the rest of it as well. So trying to provide a good work environment and at the same time, also automate.

And in fact, when I was in Japan last week looking at our new manufacturing plant there, which was mainly focused on the Gas Turbine business, again, spent a lot of time talking about the recruitment of people in Japan, which is actually more difficult than, say, the U.S. or Europe and also the importance of trying to find additional areas of automation such that we can put it more in our control than it is in something which is difficult to control, which is can you get sufficiently qualified and good people into your production operations. So a lot of efforts going in, Rob. And at the moment, I'm pretty convinced that we'll execute 2026 in a satisfactory way and still show further improvements in our employee retention.

And our next question comes from Kristine Liwag with Morgan Stanley.

So John, you've done a few deals lately with buying the Fastener businesses and then also divesting the Disk Forging business. When you look at the portfolio today, where are there additional areas that you want to expand? Or are there areas that you want to prune, especially as we start seeing more industrial gas turbine demand come through?

We pretty much have the same stance today on the portfolio as we've had for the last few years. So we examine acquisition opportunities as they arise. Obviously, it takes a willing seller as well as a willing buyer to transact. And we've also been very selective on those that we wanted to proceed with or potentially proceed with. So if you go back to the, let's say, the CAM acquisition, it wasn't the only one that had come up, but it was the only one that we ever got beyond expressing an interest in to actually showing the willingness to move quickly through to execution and signed the share purchase agreement.

So we want to be very selective in deploying that capital and be convinced that it adds something to us that passes all of the gates that we want to have with revenue synergy, which is always possibly most difficult to get, but we're convinced we will have revenue synergy as well as cost synergies and a good solid business where we can improve margins. And so it passed all of those. And I could say, likewise, obviously, a much smaller acquisition in Brunner but solid operations, which we've got very clear plans again through those types of synergy, including the opportunity of improving its top line.

So I can say we'd be discerning. At the same time, we always do look at our leverage to make sure that we're in a good zone and excluding CAM, we got ourselves to below 1 in terms of net leverage. Now it's 1.6, but it's going to decay rapidly to -- back towards the 1 level during the course of this year. So we are still very open to considering further acquisitive steps. And we're positive about it, but again, be very discerning. So if something comes up that doesn't stretch ourselves too far and maintains our ratings and our debt ratings is that we'll certainly give it a good look, but without getting what I call deal fever.

And at the same time, we think that we'll be able to maintain our share buyback program and also relook at the dividend. So we're in a good zone where we are deploying a lot of cash for capital expenditure for organic growth, which is always the best source of returns for us, both for margin and for return on capital. Then obviously, we have the opportunity of buying back our shares, and you've seen another, I'll say, great execution buying in the first quarter at $230 per share. I think today, we're well ahead of that. So again, a very accretive position for shareholders. And I think that beyond that, acquisitions are also something that we should give very active consideration to where we can see both revenue improvement and margin improvement as we go through and still able to continue with both buyback and improve our dividend payout. So I think it's all good at the moment, Kristine.

And the next question is from Myles Walton with Wolfe Research.

John, could you comment on where you are relative to capacity on the gas side? I think the first half of this year, I think you're pretty capacity constrained. And so is the growth we're seeing purely price related? And then at the whole portfolio level, I know you won't give us the specifics on price anymore, but how would you compare it to last year? And do you see a year when price -- year-on-year price increases don't grow?

Okay. So the increase in revenue in the first quarter was, I'm going to say, very good. I mean maybe it's more for you to say than me, but I thought 39% was outstanding. And as you know, we invested at a higher rate in gas turbines in 2024, but it's very modest, like maybe $30 million more than normal. We kicked that up in 2025 and so saw some modest increase in capacity. But essentially, for the first half of this year, it was going to be more -- that which we could obtain from yield improvement. Bear in mind, we've also improved our yields and so we're able to increase our total revenue from the Gas Turbine segment in the second half of last year. So the outcome for this year, which was a lot of volume, but some price in that 39% was great.

And in fact, again, if I just refer to what we saw in Japan was to see our new manufacturing plant and the first piece of equipment arriving there. And those are now being assembled into like working casting furnaces, which will be, I'd say, ready by the, I'd say, July-August time frame and starting to have their first production by the fourth quarter. So capacity is coming on, and that will help as we go towards the back end of the year.

But between now and then, it's -- again, it's going to come mainly from that yield focus that we have. The other thing which is happening and it will happen progressively and it is already happening as the volumes have been increasing, it's also given us the opportunity to consider moving -- increasingly move from batch production to flow production and with takt time. And so with that increase of repeatability and flow production, then that in itself is an opportunity where with the application of a lot of engineering effort, again, our yields are increasing. And in our guide, we've just been a little bit cautious about when exactly the capacity will come on, what yields we can really drive further in the next few months because the comps get harder given the production increases we achieved in the second half of last year.

So we're a bit cautious about it. But at the same time, positive that our total gas turbine production will increase progressively during each quarter during 2026. And then again, we'll see increases in '27. And we and -- in fact, both we and our customers are highly focused on '27 and '28 for further production increases because that capacity is really -- I mean we were almost desperately needed.

And then with another wave of investment that we're doing now, which will really only begin to affect the back end of '28 and going into 2029. So that's the shape of the, I'll say, what we're doing by way of yield, flow production, takt time, capacities that we committed to an investment last year flowing into this year and then what we've been investing in this year and continue to invest in 2027 which will come in to benefit our production in the back end of '28 to 2029.

So there's a lot going on, and that's what has given me confidence when I think about all those bricks in the wall that we're placing to bring those capacities and therefore, future revenue on. That's why I talked about us doubling or even more than doubling our revenue from this particular segment.

And the next question is from David Strauss with Wells Fargo.

John, within the 14% organic growth for this year, could you kind of break that out what's baked into that for aero, defense and IGT and I guess, transportation wheels, kind of what builds up to that? And as we think about '27 with the incremental additional capacity coming online, GTF Advantage, LEAP -- full year of LEAP-1B, IGT, is it possible that organic growth accelerates in '27 relative to the 14% you're now calling for in '26?

That's a big one. I think I'm happier talking about 2026 than 2027 at the moment and essentially down to, I'd say, the conviction over the aircraft manufacturers now truly poised to increase their production to the rates they want and also the macroeconomic outlook and probably the effects of inflation on the consumer. So there's a lot to be determined before you can be precise about a 2027 growth rate. I'm pretty clear that it's going to be positive for us.

The exact angle of growth yet, I don't think I want to go there until we know more, and I guess we'll know more as we go through the balance of this year and as you -- I'm sure, you probably more than most appreciate, we're all subject to that daily news cycle of global agreements or not or maybe it's 2 or 3 times a day versus new cycle currently rather than a daily news cycle, and that seems to weigh heavily on our lives. But dealing with this year, if I look at the guide we've given, I think we're going to see commercial aero in that 20% range, maybe defense in the 10% range, gas turbines somewhere 25%-ish, 30% not that it's a fundamental deceleration, but more just the year-on-year comps.

And I want to be cautious on how much we can get by way of yield in the next, let's say, 5 to 6 months before that capacity comes on stream. And then with a very cautious assumption around Commercial Transportation at the moment regarding that business because, I mean, freight rates have increased and that's good. On the other hand, diesel fuel has gone up a lot, and we're all subject to what will happen to GDP and growth rates for the economy and therefore, the amount of transportation required, both in North America and Europe in the back end of the year.

So while I could believe that commercial truck customers are scheduling more and they are without doubt. And there is evidence of some prebuy from the 2027 regs change in North America. At this point, we've taken a very modest below 5% assumption on the commercial transportation market, even though our customer schedules are significantly ahead of that. And we just want to see that play out, David.

And the next question is from Seth Seifman with JPMorgan.

I wanted to ask, in terms of the legacy aftermarket and the potential exposure there to the macro environment, I think -- and correct me if I'm wrong, I don't want to put words in your mouth, but I think, John, you've kind of talked before about the expected endurance of the legacy fleet. And I assume that it's early to be making any judgment about that, but wondering if you can comment a bit further and talk about some of the things that you're looking for there. And also what proportion of the spares is that kind of legacy fleet?

Yes. The essential picture is pretty similar to what I've talked about in the past, where we see -- if you take the CFM range of engines starting off with the CFM56, we expect that production will increase during 2026 and 2027. So I have no concerns about that. And should it peak in 2028 or is it 2029, it's all going to depend upon a new aircraft build. It seems as though any decay will be very modest. So it's going to be a really good program going forward for many years.

So we're clear that that's going to be a growth program for us. The -- if you can now go to the LEAP range of engines that we also see that the Spares business for that is going to grow continuously every year for the next probably 8, 10 years, and I don't want to call it beyond that. And initially, it's probably higher level due to durability issues. And then on the GTF, I think that is exactly the same is that we will be supplying full production level of the existing GTF throughout '26 and a lot into '27, while also preparing for the GTF Advantage.

And so we're going to be raising rate and a lot of that is going to be destined for the MRO market well beyond the total engine sets that I expect that we will be producing, for example, in 2027 at full rate. My expectation is that the majority of those are actually going to go into the MRO network on a refit compared to OE build, even though there will be increased OE build as well. So it's a pretty healthy picture overall for spares.

And my expectation for commercial aero is that we're going to see growth every year for the balance of this decade and then beyond. The only thing we're going to be debating is what's the angle of growth. I think we're going to see more in the first 2 or 3 years or the first couple of years now than we will see in the latter 2 years of the decade. but still growing every year. So it's a really positive part of the portfolio. And I think -- I mean, Patrick already gave you the numbers for the total company, it's risen again from 21% of revenues, which was again higher than we said to you last year. We said getting it to about 20%. We were at 21% and first quarter was at 23%.

And we don't know yet, but I mean, it wouldn't surprise me that we sustained 23% through this year. And then depending on OE build, I suspect it could even go higher next year while also seeing a higher OE build. So -- but again, you've got to bake in -- is there, I'll say, any macroeconomic upsets. But at this point, it looks okay for us. And certainly, the guide we've given you is -- I don't believe it's going to be blown off course by any agreement or lack of agreement in -- with the Iran situation that we have in terms of what spares are going to be required for this year because of the enormous backlogs that we have.

And this concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect.

Thank you all for coming. It's a real honor today to have John Plant here with us. For those of you who don't know John, John is the Executive Chairman and CEO of Howmet Aerospace. So John, thank you for taking the time out. I know it's a crazy busy time in the industry and the world and everything, so thanks for making time to come over.

Thank you.

Maybe we start with just timely, last week, you all hosted an investor event in Whitehall. Is there any like high-level highlights that you'd like to mention? I know you guys talked about digital thread and some of the automation you do and some of the various things in the process.

We don't make a regular sort of thing of showcasing our manufacturing. But we thought given the recent, I'll say, significant investments we've made and seeing, let's say, the generational improvements from what we had done for, let's say, 2015 and that level of, I'll say, build-out and the amount of automation that we showcased of, let's say, improving those facilities and expanding in the investments that we had made in building a new plant out on the same campus in 2020, then that was a worthwhile event and thing to do.

And then more recently, for the build-out that we did in 2025 and still building out in terms of placement of new equipment, it was worthy of showing how we had produced and introduced the very latest technologies into that site that we have done elsewhere in Howmet and also how we're trying to bring together the thread of machine learning and use of artificial intelligence to improve the quality and yield of our parts and how we're providing an extraordinary level of traceability and capabilities in that plant.

So we thought it was something that was worthwhile doing, especially given the change of an improvement in manufacturing process while at the same time producing extraordinary increases in the technical performance of the parts all at the same time. So that's what we're really trying to get across and convey last week of how we're moving the goalpost once again in terms of increasing the moat around the Howmet business.

And when you think about the business, maybe that's a good transition to pretty much every end market you're exposed to now is on fire. Commercial aerospace is very, very strong. Defense is very, very strong. Industrial gas turbine is very, very strong. How do you think about deploying capital to those various markets when they're all very robust?

Well, of course, building capacity out is always -- I'll say, first of all, it's a pleasure compared to the opposite of shrinking one's business, so I guess that's very positive. But at the same time, when you're building out an enterprise, then you have a lot of considerations to take into consideration there, which is how much capital expenditure you should deploy, what's the going to be ability to get people, what's the counter to that in terms of automation?

And so the principle is exciting, but you have to be cautious and careful because there, you're building costs into your business, which you have to have a return on today and also in particular, over the coming years. So that's an interesting part of the equation. And then also, you have to consider the end markets that you're serving, not just your direct customer, but indeed what's happening to those end markets.

And there are different, I will say, risk indicators for us when we look at all of those different end markets and the considerations we take into account when we want to capacitize for, so we'll have slightly different flavors, for example, between our commercial aerospace customers to our defense aerospace customers and to, let's say, land-based gas turbine customers. So they have different characteristics, different levels of, I will say, historical cyclicality and say, security around them and also the volume and a variety of considerations.

So you're trying to take all of those factors into account when making those investment decisions. And you have different levels of knowledge also. For example, you have backlog numbers that you'll have for your commercial aerospace clients, which you don't have that -- quite that same level of clarity that you have in the industrial gas turbine markets.

And so I mean, maybe I'll change gears a little bit because usually, we jump right in commercial. Why don't I start with industrial gas turbine? How are you thinking about that? I mean it does seem like maybe 4 or 5 years ago, at least in the investment community, we weren't really thinking that, wow, we'd see this boom in industrial gas turbine. How are you thinking about that for your business?

I guess I've also evolved my own thinking around those markets because previously, it wasn't the biggest end market for us to spend a lot of time thinking about. And maybe historically, I'd been maybe too dismissive of the preparedness to invest. I consider it to be a much more volatile, short cycle part of the business and one plagued by many new product introductions, which led to, I would say, increasingly small batch sizes and continual product development, which was the antithesis of getting good yields for your parts.

And so it didn't seem to be the most profitable, the most secure and therefore, relatively uninvestable by comparison. And it was more on a maintenance basis of that capacity. But things began to change in 2024, I felt. First of all, some of our customers were more interested in repeatability of their own turbine builds and therefore, far less volatility around NPIs. So you had that aspect. Then you began to appreciate that the move to renewables probably wasn't the best solution for all of the customer set and having that base level of demand uncertainty and the ability to respond to, let's say, underlying energy requirements meant the gas turbines really were a good place to be, and it was probably going to give us at least a consistent demand level of maybe single-digit growth for the balance of the decade and beyond, and so it was one where it was worthwhile to replace and repair capacity and maybe increase slightly.

So we began to tick up the investment a little bit in '24, then it seemed to change again in 2025. And I do remember just after the last presidential election in the U.S., also, it seemed to change again due to the emphasis on fossil fuels versus renewables and that caused us to again rethink the amount of capacity that would be required in terms of the natural gas turbine. And it could be whether it was from natural gas or indeed hydrogen and dual use, it was more investable.

And then bit by bit, you began to get convinced that the electricity demand was going to increase with the data center buildout, which has been going on for some time. And so every aspect of what we were looking at, whether it was the base load looking at European, I'll say, energy requirements, particularly for the next decade, those things which have been uninvestable, for example, in the defense industry in Europe became so and the same for, I'll say, natural gas in terms of an energy provision and the ability of the U.S. to provide LNG tankers across to Europe, again, commensurate with energy security, it became far more interesting for us.

And then, of course, you had not just the underlying data center buildout, but then you had the increasing emphasis on data centers and what's been an extraordinary level of capital investment, which seems to change almost every 6 months now. So even that which we had looked at in the second half of last year by way of an investment program for the next few years through '26, '27 and '28 by February of this year, it changed again. And you saw certain of, I'll say, the hyperscalers announcing, I'll say, investment increase like from $135 million (sic) [ $135 billion ] to $185 million (sic) [ $185 billion ], I think that was maybe Microsoft, and then you had Amazon coming out, so they're going to spend $200 billion.

And so none of those levels of increases of investment are currently in our capacity numbers. We just have not yet even considered them. So those very immediate customer being the gas turbine manufacturers, those that we had, let's say, executed agreements with to build additional capacities for them over the next few years, those are already changing once again. So it's quite fascinating.

And you also have to consider not just the next 3 years, but you're looking through to the end of the decade and increasingly now, like what's going to happen by 2032, 2035 and the -- not just for large utilities, but also for mini and micro grids, which are providing electricity sources for other industrial complexes where maybe the fundamental electricity supply won't be sufficient. So it's -- there's a lot of things to think about, both in the U.S., but for other markets in the world and also what the choices of energy source is going to be.

So I mean maybe when you look out to 2030, 2035, how do you think that end market compares to commercial aero?

I don't think I know enough yet to be able to have absolute clarity over what the requirements will be. I can see the aircraft backlogs. I can see what's been ordered or options on aircraft. And therefore, that level of, let's say, security, obviously, you could always have cancellations, but without that build rate increases in commercial aero, then if you were to order a, let's say, a Boeing 787 today, you probably wouldn't get it before 2040, absent rate increases.

And so you have that increased visibility. You don't yet have that for the large and small to midsized gas turbines. You have a level of demand and then you have to take into account lots of other energy policy and macroeconomic factors to give you the conviction to be willing to invest to a certain degree. And then you have to consider where do we fit in with that market, which for us, of course, it's not just building out the OE level of capacity because those turbines, which we supply over the next 5 years, which will be a lot higher quantity than the last 5 years, then that's going to give us the replacement market in the 2030s.

So we're also trying to evaluate if turbine build were to, let's say, stop growing, then does that mean we would stop growing? Well, the answer to that is no. We would continue with the OE build, but then we'd have all the spares for all the turbines that we produce over the next 5 years. So it gives us a level of repeatability, which is quite different for Howmet compared to just the basic consideration of the OE level of demand. And so you've got all of those considerations to build into it as well.

And then also how does the mini and, I'll say -- let's say, average smaller land-based gas turbine, how does that play into the demand pattern over the decade to 2040. So a lot of things to think about, but the conviction that it's a good space to be, it's going to be a significant increase in business for us. It's going to give us significant replacement demand. But then how do we protect ourselves on those investments with the contracts that we were willing to enter into with our direct customer and how does that occur as well. So again, lots of things to think about, which is the propensity to invest with what risk profile and security do we want.

Got you. And maybe transitioning to commercial aero, you mentioned the big backlogs. And for example, on 787, you mentioned if rates didn't go up, it would take a very long time to get your airplanes. How are you thinking about the OE delivery rates? We see the big backlog, but how are you thinking about where deliveries could go and how that impacts your business? And I would say, let me frame it this way, historically, you guys have taken a little bit more conservative view on that and been rewarded for it, you've been right. How are you thinking about that going forward?

Well, I'm convinced that the airframe manufacturers and the engine manufacturers are going to make more. And so that's a good starting point. More is better. And so we are prepared and capacitized to -- and will invest to be able to produce more. But at the same time, we've always maintained a fairly cautious stance over where should we guide in terms of the Howmet, let's say -- let's call it, more of a promise of what we're going to deliver by way of profitability for our shareholders. And so where we guide to and where we can produce to may be different.

So should an aircraft manufacturer to be able to produce more, I'm convinced that we will be able to match rate. At the same time, we want to make sure that we don't get caught out. And an example of that might be if you took the aspirations that airframe manufacturers had for 2025, I think every one of them was convinced that, as an example, they would make more wide-body aircraft. You can think of whether it's an Airbus A350 or 787, the thought was production will be higher.

Now in the final reckoning, it wasn't as high as people had imagined. And therefore, there's always going to be the drawdown of inventories for parts they'd ordered last year. And so you can see that as an example, you can just take the titanium purchases by Airbus in 2026. They will actually be reduced compared to previous thoughts because of what had already been previously purchased. The same where other manufacturers promised, let's say, a rate 38-or-something and struggled and eventually gets there, but -- so you have to take account of all of those inventory cycles of overordering, reductions of inventories or not increasing because they allow those inventories to be used up when rates do begin to increase.

So you have a lot of those things rippling through the industry as well. So in the last few years, it's been beneficial to be cautious over what will actually get done while thinking positively and wanting to say if customers achieve those rates, then of course, we'll be able to support them. So I know that we have, in one sense, wasted money. We've recruited people and trained them. And sometimes they have not been made productive at the same rate as expected. But at the same time, where, I'll say, other shortages have come or our peers have not been able to keep up, we've been able to supply in those things. It's been a good equation for us because of the quality and delivery that Howmet has been able to produce has stood us in really good stead in our arrangements with the customer. We've been -- the company has been able to achieve output.

And do you have the capacity in place to meet where OEM demand potentially could go?

Again, it's never the simple binary yes or no. It's always that, well, maybe. And so if you were to say, can we meet if Boeing gets to rate 47 or is it 52 or is it 60-something? Well, the answer is yes. But now if you then ask me the same question, do Airbus -- can we support them getting to rates 65, 75 or higher? Well, the answer is yes. But then if you were to stack everybody on top of each other, if you add all of the demand for narrow-body of, let's say, an A220, an A320, a Boeing 737 and by the way, let's now stack on top of the build-out of wide-bodies on top and on top and on top and every one of them, then today, I don't think we could support all of that at the moment.

Therefore, you have to make a judgment, will every one of those rates come to, I'll say, to be or into fruition? At the moment, we would have -- as we gain conviction over the next few years that, that becomes the likelihood, then my suspicion is that we would actually have to put more capacity down to achieve that level of production because if you take the previous peak on narrow-body, it was probably around about 100 aircraft a month in 2019. We're not there yet. But if you stack today's aspirational numbers on top of each other, then you have to be producing 150, 160 aircraft a month. And that's a lot of increase over the previous peak.

Now are we in a fundamentally better position, let's say, in terms of the life cycle of new technology on an engine program? Probably yes. But if I suspect if you scan the whole supply base and said, can you produce 50% more than your previous peak? I suspect the answer probably would be no. And I think we would probably fit into that as well, which would say, no, we would need to build out more. Now have we -- if you looked at what we showcased last week in as vital of one of our manufacturing plants, and we've got 60 of them, we provided for additional space such that we could drop machines in should they be required.

So providing we're inside our own ability to produce machines because we produce a lot of our own equipment ourselves because we want to keep it hidden from view. But even where we buy on the external markets from third-party machine tool manufacturers, as long as we're inside lead time for those, then we're good. But because you're positive that every one of our end markets is growing, then, I'll say, places and capacities of machine tool manufacturers are becoming very tight. And so we've been trying to make sure that we can reserve capacity in as we can. But again, we've got to accept and believe the demand signals for our customers, and can you stack all of these things on top of each other? Because today, we probably would not have that capacity in place.

How -- I mean just to maybe unpack that a little bit. How tight is machine tool capacity? If you were to order something today, ballpark, how long would it take to -- I've heard things like autoclaves can take 2 years?

Yes. It really depends upon type of equipment. But you're getting at that 2 years and more than 2 years now in terms of -- unless you have reserve capacity, then it's becoming a problem. And so in our dialogue with some of our land-based gas turbine customers, the situation is if you believe that demand and you want to contract for it, then every week that goes by, it's not necessarily lose a week here and therefore lose a week at the end of the timing of introduction. Maybe you lose a week now and you're going to lose 3 months when you need it because of the capacity in the industry and it applies both for plant and equipment, but also tooling.

So for example, we just built a whole new plant out for tooling because we need to more than double our own production of dyes, which is extraordinary if you think about it, just to double that and more. And not everybody -- not every company has the -- even the financial capacity to do that, whereas at least with Howmet, our customers, I think, believe that the answer is we can. And I think that's really important to them that they know that should we commit to doing it, then we have the management depth to be able to do it, we have the financial depth to be able to do it. And that's really important at this stage of the economic cycle with the supplier that can.

And one thing you didn't mention was labor. Is labor become a challenge, as you start stacking all this on top of each other?

It's quite strange in that labor has become a little bit easier than it was in the immediate years after COVID, gaining, I'll say, labor in gestation, [Audio Gap] the quantity of additional new employees that have been required. But at the same time, we have experienced elevated turnover and gaining the right quality of employee has been a challenge for us. We've put a lot of effort into that and trying to reduce our employee turnover. And that's been additional routines through our recruitment processes.

We've actually built out additional training centers so that we can train people for a long period of time before we put them into -- this is for real in terms of those are production requirements. And obviously, because of the interlinking, let's say, 40 or 50 processes that some of our parts go through, if you make a failure of a part at the early stage, then it cascades through your whole manufacturing process. So training is really important.

And we've been emphasizing the recruitment and the training and even the degree to what's the average span of control of, I'll say, maybe manufacturing supervision in our plants such that there's a more intimate personal relationship with our employees to try to gain that because it's very important to us. At the same time, as improving, I'll say, that whole employee turnover, we've also been spending a lot of money on automation. I think you heard a quote last week from our Wheels business, so not in aerospace, where it was 1 robot now for every 2 people, which is a very significant level of automation.

And if you looked at what we built out in that new engine plant, again, a very high level of, I'll say, machine input versus the labor input. But that's not just done for, I'll say, labor input costs and to do with variability because of labor turnover. It's also vital for the quality. In fact, some of the tolerances of our parts have now reached a level where it's almost impossible for a human being to replicate that on a consistent basis, let's say, hour by hour, nevermind shift by shift. And so automation and machine input is there for quality purposes more than it is for labor cost purposes.

Got you. And we didn't talk about aftermarket demand. So if you've got all these OE programs, where the aftermarket fit in all of that? Because that's even -- that's growing too as a fleet grows?

Yes. I mean, we're seeing demand for the aftermarket growth for fleet growth, for sure, the build-out of both commercial aircraft given the very low scrappage rates that we have been experiencing in the last few years. You see it also in some of the major military programs where if we take the F-35 as an example, there's always a lag between producing that new aircraft and then what's the spares demand going to with what the duty cycle is and how many hours between the shop visits for that aircraft.

But then as the fleet grows, then we saw -- and we have these predictive models of what aftermarket demand will increase by. And so the prediction that by 2035, we'd be producing more aftermarket turbine blade parts for the F-35s and OE parts came to be. Now if you blow that forward and say the fleet will increase over the next 5 years by another 150-plus aircraft per year for the 5 years, so there's another 800 aircraft, then as you plan that through into the 2030s and that demand and then by 2040, and then those aircraft will probably be in service till 2070-or-something, then you can see what the aftermarket stream will be through those decades. And so that's an important part.

Then also with every new generation of aircraft engine, with the increase in, I'll say, emissions requirements or fuel efficiency, then the temperatures rating within the turbine has been tending to increase. The pressures increase because you want to optimize the fuel and gain more fuel efficiency and that in itself produces more exacting environment in the gas path of the turbine, which means that those turbine blades have to be operated and operated tends to be both the barrier coatings that we put on of various types, but also the basic construct of allowing airflow and increasing airflow through those turbine blades where we've reached a level now where we can consciously and deliberately accelerate the airflow or we can decrease it according to where you want those cooling parts to be on the turbine blade.

The way we exhaust the air from it and the holes and which -- what type of hole, what shape of hole and then now how we are trying to control the flow of air so that the air molecules will follow the curvature of the turbine blade and all of that is leading to, again, value for us. And so the complexity is increasing. And therefore, the aftermarket opportunity because as each engine has been introduced, then it's -- so far is that the theoretical time to replacement has yet to be achieved, and therefore, it's given us a higher replacement rate.

So we're now going through the part where we know that we haven't reached peak yet for the -- for example, on the CFM56 for the CFM area. That has not yet peaked. That's still got some years of growth left in it. And yet we stopped producing it essentially for OE demand 5 years ago. Now we have, let's say, in that particular customer, the LEAP range of engines, which is the shop visits are going to be increasing every year through the next 10 years. So we see that.

But also beyond that service demand, which will increase every year for the next 5 years, we're also seeing this temporary, I call it, a bit of a bubble we're going through because of the early life failures of some of those parts in some of the countries in the world where air pollution is greater or you're seeing silica in particular, let's call it sand from the Middle East or whatever, that's causing, again, thermal problems in the -- after the combustor, and therefore, parts are having to be replaced. And therefore, we've got underlying secular demand. We've got, what I call, a bit of a bubble demand. But the thing you know is that the demand is increasing and the sophistication of the part is increasing and therefore, tending to be good for that part of our business.

And will that require more investment in capacity to support all that aftermarket across both those end markets?

Compared to history, probably. And so we're having to make assessments of what those demand requirements are. Also, it's stacking it, as I said, according to what we think the OE level of it will be building out through both narrow-body and wide-body in the coming years. So a fascinating -- it's not a problem, but a fascinating thing to work through. But also, it's like everything, the risk and reward go together or maybe it's reward with risk.

And then with defense budgets have been growing around the world in the U.S., pretty robustly, potentially for fiscal '27, very robustly. I think we -- a lot of us know about the F-35 opportunity. Are there other new potential opportunities for Howmet in defense markets, given the growth there?

Well, we try to work on most things which are going on. So you could look at, first of all, what's the next-generation uplift to performance of the engine on an F-35 or you could say what is going to be the engine of choice for the F-47 or is the Navy going to get a plane and what will be that engine of choice. So we try to position ourselves well for those.

I mean the next thing which is quite exciting, which is, again, the degree of demand is probably not able to be really determined at the moment is the future use of collaborative combat aircraft. So these unmanned aircraft that will fly alongside a manned fighter, I mean is it 2, is it 5, is it 25? We don't yet understand what that end demand will be and maybe it will be also a function of defense budgets and the blend between manned and unmanned aircraft.

And so -- and we -- neither do we know who will be the airframe manufacturer of choice. Will it be like one of the existing defense primes with one of these newer companies that have been entering the market and who will gain the contracts and who will be successful is like we don't know yet. But we're trying to position ourselves for the engines, as an example. So it's not just the structural parts or the fasting systems, which those CCAs will require, but also what engine.

And of course, each airframe manufacturer, there won't be a different engine for every one of them. There will be a common engine, which -- so the eventual choice of who's going to produce them, but they will make those engine selection. So the last 3 selections, we've been part of that. And so we've been positioning for it, believing that it's a good market to deploy our engineering resources, but we don't understand yet its size. But thinking overall, let's say, a 5,000-pound thrust or 8,000 or 15,000-pound thrust engine for a collaborative combat aircraft, it might be bigger than the manned aircraft, depending how many, but we don't know how many.

But it's another chip we'll place down on the roulette table and say this is a good thing for us. At the same time, it's not just rocket motors, but some of the larger missile systems are now requiring a turbine as well. So we're sort of trying to cover that part of the market. And also with the -- we've all seen large orders for missiles in the last, I'll say, 2 or 3 years, and it seems like almost a day doesn't go by without another order place for them. And so whether they are defensive missiles like Patriot systems or whatever, we also tend to make sure that we're well placed for parts on those as well, albeit it's not the biggest part of the Howmet business, but it will be an interesting increase in demand for us over the next few years.

And just going down that a little bit. In commercial space, there's been a real push towards reusable rockets that require turbines. Is that an end market that you guys play in or...

Well, I wasn't quite sure what you're referring to there because most of the things -- I mean maybe for a missile, they never come back. So that's something different. I mean they are meant to be destroyed upon impact. So I've never seen one come back yet. On the collaborative combat aircraft, we have no clue. I mean, are they meant to be disposable or are they meant to return? I guess it will be a combination according to what the mission is required at the time. So some will come back and some won't. And we don't know. We're just humble parts manufacturers for...

I was referring to reusable rockets where some of those...

Oh, you mean for like space rockets like for Blue Origin or something?

Yes.

Yes, we do some of that stuff as well. It's been interesting. So we thought -- and our space business has increased a lot as, I'll say, the amount of parts which have been used in -- whether it's been SpaceX, Blue Origin or any of the others, USC or something, I don't know. It's been increasing. But what's been interesting is that a lot of other markets have seemed to have like come up more rapidly and gone beyond them in terms of opportunity. So right now, the area which seems particularly hot once you got through the, I'll say, new fighter aircraft or new stealth bombers and that build-out, which we're involved with as well, it's been the CCAs and the missiles, which has suddenly become a lot more interesting because you've got now beyond just like there's another lot and it's difficult for us to capacitize just for another lot because once you've done a lot, well, you can do the equipment.

So there's a reluctance to capacitize for it. But when you're seeing now demand for, say, you can see for certain missile systems demand for 7 years, it becomes more investable, and therefore, the considerations around capital deployment become different.

And then maybe, just as a last question, your own supply chain, do you worry about them? I mean how tough has that been to manage given you're ramping, they have to ramp too?

For the most part, we buy base metal. And so the difficulties obtaining alloy or alloyed metals has been fairly small for us. We do buy, for example, for our Rings business, where we do buy alloyed metal from other suppliers. And we also produce it for ourselves. So maybe we are 40% self-sufficient in where we do buy alloyed metal, whereas 60% comes from the outside. It's only like 5% to 8% of our business. The rest is base metal.

So we're buying from, I'll say, traders or smelters directly. So it's -- metal input has not been an issue for us at all. Right now, given the build-out, I'd be more worried about machine tool capacity than base metal capacity. Now we'll have to think about what the overall picture is. So is there enough alloy being prepared for all [Audio Gap] well, under the right circumstances or the right commercial arrangements, yes, we could. But that's not really our normal business. We only supply, to a degree, to our internal requirements. So we will alloy ourselves on base metal for, for example, our turbine blade business. But for our Rings business, we'll access just part of the market, say, up to a maximum of 8% of our material input from the alloy manufacturers.

Got you. Well, I think we're out of time, John. Thank you very much. That was a lot of fun.

Thank you. Nice to talk to you, Ron. Thank you.

Thanks.

Good morning, and welcome to the Howmet Aerospace 2026 Technology and Markets Day. I'm PT Luther, Vice President of Investor Relations. After today's presentation by our executive leadership team, we'll take some questions.

Before we begin, I'd like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and in our most recent SEC filings.

In today's presentation, references to EBITDA, operating income and EPS mean adjusted EBITDA, excluding special items, adjusted operating income excluding special items, adjusted EPS excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in our most recent SEC filings.

And with that, I'd like to turn the presentation over to John Plant, Executive Chairman and Chief Executive Officer.

So good morning, everybody. Welcome to the Howmet Technology and Markets Day. We hope to make it interesting for you. The objectives are, let's say, multifold. I had originally expected that the members of the management team will be sitting up here with me, but they said could they stay in the audience for just a little while longer because they're not used to being the movie stars that they truly are. And hopefully, you'll get some clear impression of their knowledge of the business and the confidence with which they lead each of their relative business unit segments. And hopefully, you got the opportunity to talk with them last night.

The next part of it is really to try to give you an outline of the business and a little bit more detail than you saw in our previous Technology Day, and also to talk to the things which have, I'll say, transpired and developed and how we've moved on since then. And then Patrick will do sort of wind up with the financial data that he wants to show. I know many of you are thinking that we're going to sort of give you the 3-year guidance numbers, but that's really sort of paper that we're going to hand to you as we walk out of the room. That was a joke for those people who are now recording and videoing the session.

And for those people who are -- I think we're trying to get it webcast live, but there's a technical glitch, but they'll be keyed in hopefully,shortly as we go through.

And finally, before I leave the stage and I hand across to, first of all, Merrick, for the Engine business, I'll talk to you a little bit about sort of what are you going to see today and what it is that I think should be exciting and to key in the things that really major and focus on as you do the plant to Whitehall. And you're going to hopefully see that our latest and greatest plant is yet another generation of technology beyond that, which we displayed, say maybe 2.5 years ago.

And then at the end of it will be Q&A, and I'll do my best not to answer every question because I know you really would like to hear from the other people.

So let's get started and put the first slide up and just make sure that it's there. So there's nothing particularly revealing in my slide. And you say, well, have you seen this one before, and the answer is absolutely yes. But I think that strategy for any business is one of a continuum, maybe a little bit refined here and there. But essentially, so what do we do? We really focus on differentiating ourselves and growing the business above the rates that we see in the marketplace. So growing above market is critical to us.

We also differentiate clearly and allocate resources of engineering and capital to where we see the best potential returns. So it is not smearing of resources and smearing of money. It really is allocated to the areas of highest return and the highest areas of potential growth. And then we also underpin that with financial and operational discipline. So we're very clear. We talk about it both on a monthly basis and, in particular, on a quarterly basis, how we're going to, say, do that allocation and focus and keep that operational discipline and financial discipline in place. And then finally also, in terms of allocation, we have a clear eye view of the way we allocate our capital allocation strategy and which essentially comes down to how we're going to return, say, all the money to our shareholders.

Moving to the next slide. You are familiar with how we look at the business in terms of providing ourselves with these differentiated products tending towards lightweighting, fuel efficiency and the things which you would expect for any business operating in the aerospace and land-based turbine business and, say, defense aerospace. It's all about trying to achieve higher performance using less and less input, say, requirements to them.

And then also, as you saw in our fasteners business last night, also the ability to offer reduced and improved assembly costs to the airframe manufacturers as well and giving them also the ability to have throughput and labor efficiency also combined with robotics which, again, Vagner will talk to. And then finally, with that also providing the opportunity for increased safety at every point as well.

Next up is the usual, I'd say, end markets and our manufacturing footprint and where do we operate. Well, essentially everywhere in the world that's appropriate for us, again, centered in the U.S. and Europe. We're also having operations, for example, in Japan and China and so that we're able to cover all of our customers on a global basis.

Turning now to the end markets. And so what are we looking for and how do we see them going forward? Well, first of all, commercial aerospace, the backlog numbers that we have for both wide-body and narrow-body aircraft are quite extraordinary, the highest they've ever been. And it should lead us to have, hopefully, uninterrupted growth absent some form of geopolitical events for the next few years.

And in fact, the backlog is so great that without an increase in build that is necessary then to order and to receive a new aircraft now, where it's a new narrow-body, you're looking into the early 2030s, or for widebody, it's more like in a decade from now. And so clearly, that is unsustainable and everybody is trying to increase the build rates. And therefore, the underlying volume is supportive of our revenue independent of us trying to obviously, again, grow above those markets by increased share and adding content.

Moving now to talk about our data center business and land-based gas turbines. And I just thought I'd put this slide in, in terms of trying to demonstrate that while we talk gas turbines for many different end markets, essentially it's down to the generation of electricity. And one of the fundamental drivers of quite an extraordinary growth is the build-out of these data centers.

And I put a map of the U.S., which seemed to be current, about 3 or 4 months ago. But every 3 or 4 months, if we look at it, that map changes with additional permitting and planned build-out over the next few years and the requirement for increased power to drive the, I'll say, drive those data center racks, the chips, not only for making them work but also cooling them and driving, you can see on the top right, the requirement for that increase in power.

And I just expressed it as an increase in percentages from, I'd say, 2025 baseline to show the growth coming from that segment of the market. And that segment of the market is producing strains, which you've also read about, for total electricity demand and driving, say, energy rates for us. And so it's become a particularly exciting part of the market for us to address. And the way we address it is through both the large gas turbines, which previously we only sold really to utilities or to our customers that serve the utilities.

But increasingly, the requirements for a stable power source for the build-out of these data center is putting even the larger gas turbines in certain data center clusters to provide that generation capability. And then also, you can see on the slide the midrange turbines, which have also showed, for example, the one produced by solar or aero derivatives by GE for GE Vernova. And you can see the customer set that we operate with in each of those areas. And then for this market, which you'll probably be less familiar for Howmet is that, again, we're the largest manufacturer and the highest market share for gas turbine blades in the world.

In terms of our defense markets, Again, we saw, again, very good growth last year, some 20% plus. And you can see their demand not just for the latest fighter generation, which is the F-35, but also for the previous generations of F-15 and F-16, which now have extended lives, in fact, significant new orders both from the U.S. Department of War and also, for example, for Saudi Arabia for the F-15 Super Eagle, where they placed an order for 200 new aircraft. And each of those has 2 engines on them, as you're probably aware.

Beyond the fighter jet that everybody is familiar with, we also serve other areas of the defense market. On the right-hand side, some of the parts that go to Howitzers that we provide and also for tank turbines. But one part which is increasingly notable for us is the build-out of missiles and the replenishment of the missile stocks for the U.S. and, in particular, demand emanating from Europe where it's quite extraordinary, both for the structural parts, but increasingly now for the new opportunity we see for the production of parts for the smaller turbines which are required for the collaborative combat aircraft and also the low cruise missiles.

And so these are turbines, which, say -- I mean, in the case of a missile, of course, they don't come back. But in the case of a collaborator aircraft, they may come back, they may not depending upon the particular mission specifics that they have. But it's going to be smaller turbines, much smaller thrust in that 5,000 pounds to 8,000 pounds to 10,000 pounds of thrust, very different to the other end of the turbines that we do, for example, for like a GE9x, which is over 100,000 pounds of thrust for that new 777X that we expect to be launched in 2027.

But all of those markets are exciting. We position ourselves for anything that's coming, so whether it is the next generation engines, which may be required for the F-47 or maybe the Navy Fighter, which is being considered at the moment, we try to ensure that whichever is the engine selection for any of the markets is that we are well positioned for it.

Finally, our Wheels business, which for some of you who took quite interest in the aluminum wheels. And you can see that as a fundamentally strong business that Randall talked to many of you about last night and why we see it as maintaining and driving, again, both market share growth of the revenue line and also a very healthy profitability and cash flow and the characteristics of that and why it is that, and Randall is going to describe to you.

And with that, I'll stop for my slides. But I just wanted to now key in on what are you going to see for the rest of the morning. So first of all, besides the fact that it's a new plant with a next generation of technology that anybody has seen previously, it's also the very first time that anybody of the invited guests in this room will have had the chance to see how we start or the early stages of our manufacturing process. So previously, you've seen how we, I'd say, assemble and nest parts through wax into casting.

But you've never seen us show you anything to do with how we provide the course for a turbine blade. And the reason why this is so important is that this is providing the passage ways for air inside the turbine blades. And these are made, first of all, with proprietary technology in terms of compounding. So the chemical compositions of the is highly protected. They go through multiple sort of manufacturing steps from being pressed and laid to rest and then fired to produce, let's say, in this case, a ceramic part. But also we saw some of the ones last night which are very, very small and providing very fine webs of passageways for air in terms the movement of them.

And when we produce one of these, the most important thing that you'll hear about during the course of the morning is what we're calling digital thread, which is our desire to try to measure these parts at every stage with the manufacturing process. So we may pick out, I don't know, 300 data points for measurement of these. We will know exactly the chemical compounding. We'll know the temperature at which they are produced, the humidity in the environment. We'll note the pressure that was in the press. We'll know exactly how are they were laid on the set of which they go into a heat treatment, the controls for the heat treatment.

And so we were producing, let's say, 50 data points of information about that as we produce it. And all of that knowledge for this part is then moved to our wax department. In the same way, we're going to see data points collected for all of that before it's then encapsulated in a shell, which is, again, proprietary technology in terms of the chemical compositions and the slurries and how we measure viscosity and, again, I would say the composition at each stage of that part of the manufacturing.

Before we move it into then where we may decide to insulate it in certain parts where we're providing insulation wraps, which are precisely measured and places where we don't measure such that we can then prepare it for casting. And along the way, we'll be measuring, for example, the frequency of the ram, which is then moving the part into the casting so we can detect the fractional vibrations. So by the time you finished, let's say, through 40 or 50 manufacturing processes, depending upon the part, we'll have picked up millions of data points. And with the volumes you're producing, it's trying to understand those data points.

So as the parts become increasingly complex, as the airways become smaller and smaller and the ability to hold air on the surface of the turbine blades so that we're able to provide cooling where it's needed and we let inside the turbine blades because the air goes through the holes in the routes that you see here and a very large one, we'll provide in places where we'll accelerate the air and decelerate it. And so everything that we're doing in terms of complexity in next generation sort of goes against improving our yields.

And it's with this digital thread that we have through the business in this new manufacturing plant, it's where we're able to gather that data and provide in the first instance, well, with computers to analyze it, but then pointing us to where we need to go to make adjustment to the process to hold or to improve our yields. And then at some stage in the future, our concept is that we'll use those, I'll say, learnings that we have from the data and obviously use then AI-based, I would say, knowledge to actually automatically adjust the conditions of manufacturing.

And so when we pass the air through then on a large one, you can see here, if I can just draw it to your attention the very fine air holes that we have here to allow those air to come out. And you'll see increasing levels of complexity from big ones, which you've seen for, I would say, a land-based large gas turbine, 3 to 4 feet in length, to the very smallest of blades, which are now producing, I will say, air holes and shaped air holes, which Merrick will talk to to hold the air on the surface. And they are smaller than the human hair.

So there's a lot going on in the business. It's driving technology, trying to differentiate ourselves by also the ability to solve the problems that our customers may have and while maintaining a very protected level of IP inside the company so that we're able to do things that truly nobody else in the world is able to do.

And with that, I'll hand across to Merrick because he's going to describe to you in a little bit more detail, but I wanted to sort of base those concepts in your minds before you hear Merrick. And then you'll hear it again as we go out around Whitehall.

[Presentation]

All right. Well, good morning, everybody. I'm not sure we're going to need the tour now, John, after that explanation, I mean. Yes. Well, listen, I think we've got a very exciting day planned for you today. For those that are going to be visiting us for the first time, we're going to be showing you elements of our business that, frankly, we don't show very often. And if you have had the chance to visit us, then I promise you is not going to be the same old tour. Because as John mentioned, we're going to get to take you to the beginning where it all starts for us, and that's with our core manufacturing that we just completed an expansion up in Whitehall.

So we're very excited to get you up there. I know the team is very excited to get you up there. They don't get to show off very often. So it should be fun.

So look, anytime I get to talk about my business, I always have to start by saying I think we have something very, very special with the Engines business and for a lot of reasons, and we're going to talk about many of them today. But it starts with us helping our customers win in the marketplace. And I think that battlefront continues to be helping them increase fuel efficiency, reduce emissions and ultimately improve time on wing.

And the turbine section of the engine is where those elements are either enabled or constrained. And so if you're going to increase fuel efficiency, you need hotter temperatures. If you need hotter temperatures, then you need better materials and more complex cooling schemes. And in order for that to happen, you need more advanced manufacturing systems and processes. That's the cascade that we operate in today and it's helping our customers solve those elements that I think help them win in the marketplace.

And that typically culminates in us supplying strong, lightweight investment castings with complex serpentine passages and coatings. And those parts have to withstand the harshest environments known to man. And so let's talk about that for a second because I think it's important.

So I'm guessing that most of you probably flew here yesterday. And while you may not know the technical aspects of flight, I'm pretty sure you probably memorized every movement, sound, feeling that happens during that process, right? So let's talk about it because I think it's important as it relates to the engine. And so if you look at that diagram for a second, and if you can think about [ taxing out to the right ], those engines are in a low thrust mode at that point. Temperatures are probably 800 to 1,000 degrees, so pretty stable environment. Pilot pulls out on the runway, he begins to rev up those engines. You begin to feel those vibrations. He releases the brake, and you start rolling down the runway, right?

So there's a lot of things happening inside that engine at that point. Air is being sucked in through the fan blades. The majority of that area will bypass the core and be pushed out for propulsion. And then the remaining air will be sucked into the core. And as it is, it will be compressed and squeezed. Temperatures will rise, pressures will rise. And then it will go through the combustion chamber. Fuel get mixed in. There'll be a controlled explosion, and that air stream will get pushed through the turbine section, which turns the shaft, which turns the fan blade, right? The remaining air is pushed through the remaining stages of the turbine out the back for additional thrust.

All that's happening while you're picking up speed going down the runway in a very simplistic model, right? Now there's a point on the runway that pilots referred to as the V1 point or the point of no return. Once that plane crosses that point, those pilots in that plane are going to take off no matter what. So that plane crosses that point. You feel the nose of the plane lift off the runway, eventually the wheels. You can feel those G-force kind of push you back in your seat, right? At that point, those engines are operating their hardest. They're at maximum thrust or take off power.

And it's also at that point that our blades and veins in that red section have to survive an environment that would instantly destroy just about any other man-made object. So I'd like to say you have 3 impossibilities happening at that point. The first impossibility are the temperatures because those temperatures are now reaching or exceeding 3,000 degrees Fahrenheit, nearly 800 degrees beyond the melting point of the alloys that we use. That's what we call the inferno. The second impossibility is that now those blades are rotating at probably 12,000 to 15,000 RPMs, putting significant force on the integrity of those blades. That's what we call the stretch because a blade that at rest would only weigh a few ounces now is the equivalence of a fully loaded semi-tractor trailer. And the third impossibility is that while that air stream is moving through that engine at significant temperatures, it's also moving through an incredible force and pressure. That's what we call the hurricane because those pressure ratios are probably now 40:1 or the equivalence of being 1,500 feet below the surface of the ocean.

So you have the perfect storm of physics happening. And so here's the point. our parts have to withstand incredibly harsh conditions. And what we do is hard and complex and requires multiple layers of technology to make it all happen. But it's also those parts that ultimately determine the capability, the efficiency, the durability and, I would argue, the economics of that engine. So to be successful, we have to not only provide parts. We have to provide a system that allows our OEM customers to open up their operating envelope and, ultimately, get everyone home safely. And I can promise you that's something that we never take for granted. And I can also promise you that it's something that very, very few can replicate.

So how do we make the impossible possible or what I call routine on a daily basis? And for me, it always comes down to 3 things: how we manage airflow, what it takes to manage airflow in terms of the materials we use, our core technology, our material sciences, all that, scale and producibility, which means we often talk about the theory of one, which is that it's easier to make one or a handful of our parts. But to do it at the scale yields and volumes that we do it in, I don't think there's anybody that can compete with us. And the third thing is the power of vertical integration, controlling every element of that value chain, from developing our own core compounds to building and designing all of our own tooling, building and designing all of our own equipment, automation, furnaces, providing all of our own alloys, doing all of our own in-house testing all the way through the process to even machining and coating our own products, and in many cases, all of our competitors' products, too.

And so I think that's what anchors our market-leading position in just about every segment that we participate in. And I don't think that's just marketing language. That's backed by decades of qualification barriers we've had to overcome, deep collaboration with our customers and earning their trust and confidence that we can deliver the volume and quality of products that they need. And look, delivery is absolutely what our customers need right now.

I don't think I have to explain to this audience the perfect storm of demand that we're experiencing right now. whether it's commercial aerospace, defense, gas turbines or new and developing markets like space, missiles and drones. Everybody wants more. And that's not just theoretical or cyclical demand. That's backed by aerospace backlogs that go out 12 to 15 years, defense spending that's increasing around the world and electrification demand that, frankly, we've never seen before driven by an aging grid that needs to modernize and expand and significant demand that we're seeing from data center and AI build-outs around the world.

So the question I often get is, can we scale to meet that demand? And my answer is always, yes, and we're already doing it. It starts with our global manufacturing footprint, 30 locations located around the world, all aligned by product lines. That allows us to maximize our capacity utilization across life sites, best practice share across those sites. So we can quickly implement yield improvement programs, reduce scrap and increase our capacity.

Now we're also making investments strategically across our business in areas that typically become bottlenecks like tooling and core manufacturing and castings and coatings. And it's that execution, those investments, that are already paying off and what I would consider to be some pretty impressive financial results. And that's not just cyclical recovery either. That's operating leverage from higher volumes, better yields, more automation, a mix shift to more technologically advanced parts, workforce maturation, a laser focus on commercial discipline and a disciplined capital allocation strategy.

And so look, I like to tell my team that when you can combine technological differentiation with disciplined scaling, I think margin expansion can be meaningful.

And so let's step back for a second and take a look at the journey that's brought us here because I think it's a good perspective to have. And if you go back to the 1950s, to those first turbojets, and if you were to look at those blades, you would find a simple metal blade. Really no technology to speak of. They would often stretch and crack and fail due to the overheating of engines. But it was at that point in time that Howmet really invested to learn how to shape, cast and control metal. And those learnings would pay off for decades to come.

Now what's remained true, it seems, over the years is that every decade, the industry asked for better fuel efficiency, reduced emissions and better time on wing, right. And so as you get into the 1960s, cooling becomes a strategy. Engineers are not yet asking, can we make the metal stronger. They're asking, how do we keep it cooler. And so Howmet launches their first simple, single plane core technology. Now it's also at that point Howmet realizes that core technology is going to be the future. So we start investing significant R&D dollars to understand core materials and core process technology.

Now jump to the '70s, '80s and '90s. And I think that's really where the industry goes through the transformation and Howmet goes through transformation. Think about what's happening in the '70s, right? You have a fuel crisis, regulations are tightening across the OEMs and the airlines. Engines have to run hotter and burn more efficiently just so the airlines can survive. So engineers start tuning alloys at an atomic level. It starts with the progression from [ Equiax ] to directionally solidified where engineers realize, if they can align grains in perfect linear columns, they can create a path where thermal stress will pass through that blade, no transverse boundaries, increasing the life and allowing operating temperatures to increase a couple of hundred degrees.

Now the inflection point comes when engineers realize they can grow a blade from a single grain, a single crystal. No internal boundaries, no weak points. Again, life of the blade increases, operating temperatures increase a few hundred degrees. Now it's at this point that Howmet not only learns how to grow single crystal blades but to do it with an orientation that the OEMs need to match the centrifugal force of the blades, and not only that, but to do it at scale, yields and volumes that make it economically feasible. This is where Howmet's moat really starts to get deep and wide.

On top of that, our core technology is advancing rapidly. We're now launching multi-wall complex serpentine core technology. And if you think about it, engine OEMs, to certify an engine, it now spans years to get done. So they have to lock in on suppliers they can trust to meet their requirements. Switching costs become operationally dangerous at this point.

So as you get into the 2000s, it's not just new metals that are going to allow OEMs to climb the heat ladder. They need a system, a system of single crystal structures, complex cooling schemes and thermal barrier coatings. Howmet is the only supplier that can provide all 3. And so I really think at this point, we're not so much competing on price as we are who the OEM trusts not to fail.

And for Howmet, we don't simply win by selling more parts. We win by being harder to replace. And so we invest significant engineering resources into just about every development program. In fact, we're going to launch more NPI programs this year than we probably ever have in our existence. And we always have an eye towards the future. So whether that's the rise, a ducted version or the new sixth generation fighters, our engineers are working on the platforms and solutions of the future today.

And so look, if you're going to be harder to replace, you have to constantly be pushing the limits, redefining the boundaries on what was once thought to be impossible. And that's what today is all about and what we're going to try to show you this afternoon, the next frontier in core casting and coating technology and how we leverage those to not only resist heat but control it.

And look, it starts with our 3D multiwall fine feature core technology, enabled through additive manufacturing techniques, we're going to show you that this afternoon, in addition to our cast in film cooling technology where we can cast in film cooling holes on locations of the blade previously unreachable by OEMs laser drilling and EDM techniques. And not only can we cast in those film cooling holes in strategic locations. As John mentioned, we can shape the exit holes, maximizing film cooling across the surface of that blade, more importantly, directing that film cooling exactly where the OEMs need it. We can apply complex multilayer coatings with deep IP on how we coat the internal and external surfaces of those blades. We'll show you our latest advancements and investments this afternoon.

Now none of this would be possible without disciplined process control that requires near precision in maintaining core dimensional stability. And so what that means is how well we can balance that core through multiple operations, wax, shell cast, post cast, where just microns of movement result in failure and significant scrap rates that we can't afford and our customers can't afford. And we're on our third generation of core distortion technology, limiting core distortion, which we feel gives a significant competitive advantage over our competition. We'll talk more about that this afternoon.

And so look, john talked about the 2D digital thread. That disciplined process control, that precision is driven by 70-plus years of failing fast and decades of capturing data across every major operation. And now with that digital thread technology, as John mentioned, not only we can capture literally hundreds more key input variables, and with that deep data warehouse, we can now apply data analytics machine learning and AI to improve yields, improve velocity through our operations and ultimately provide better supply to our customers.

So look, I truly believe you cannot control or improve yield through inspection. It has to be through data. Because if you're waiting until CT to determine if that part is good or bad, not only do you lose the value of the part, you lose the capacity with it. So we follow a simple process. You measure early, you measure continuously and you correlate everything. That simply would not be effective if it wasn't for our 2D digital thread technology. We're going to show you real-world use cases of how we use that daily this afternoon.

And so look, I can't emphasize enough that the fabric of our success is our vertical integration, controlling every element of that value chain because our process knowledge compounds itself across each operation. And having that vertical control allows us to address variation in the process with clock speed. And that speed of iteration, equal speed to market. And look, when part of your differentiated technology is your process, are your factories, having that vertical integration helps protect the moat.

And so that's why we develop all of our own core compounds, we build all of our own equipment, all of our own tooling, much different than our competition. And while they may have levels of vertical integration, nobody has the end-to-end control of their process like Howmet does, which is why we're probably coating a lot of their products, too.

And so look, what we're going to show you this afternoon is really focused on our airfoil segment and products. But know that we've transferred all of our process control, our technology, even our most advanced 3D core technology to our IGT customers and products. Now those products bring new challenges and complexities because you're now measuring parts in terms of feet instead of inches. And you still have to maintain that same disciplined core dimensional stability, that precision across very large parts. And that is not easy to do.

The good news is that we're able to leverage our global manufacturing footprint. So we've got dedicated locations and assets focused on this product line not to compete with our airfoils capacity outside of some of our mid-level turbine and aero derivative products. And that's a necessity today given the increased demand that we're seeing from that segment, coupled with the fact that our market-leading share position continues to grow. So you've heard John talk about how we're positioning ourselves to grow and expand in that market in what we believe to be a long market cycle driven by electrification.

And so look, we're clearly in the middle of a super cycle of growth. And that growth has a ferocious appetite for capital. And you've heard John talk about the fact that Howmet is going to have to increase our capital spend over the next couple of years. A lot of those funds are directed at my business. The good news is that with my returns, it's more than enough to get John's attention on the capital. But you've also heard John talk about the fact that all these investments are backed by strong commercial agreements that protect the ROI on each project.

So we have a lot of work to do, but the good news is that we have a long track record of delivering large capital projects on time and on budget and being able to scale those quickly. And you'll see that firsthand this afternoon. And so look, we're going to throw a lot of information at you this afternoon, and I'm going to apologize for that upfront. It's going to be a little overwhelming. But if nothing else, I hope you take away these 3 things.

We're in the middle of a super cycle of growth. No matter what market segment you're talking about, everybody wants more. And Howmet is leading with their technology, speed and scale to market to not only capture that demand but to grow faster than the market, expand our margins and deliver the cash flows needed to support that growth and deliver the returns that our shareholders expect. And it's those investments that we're making today and we will make in the future that will further solidify our market-leading positions.

So thank you very much. I look forward to answering any questions that you have and seeing everybody this afternoon in the Whitehall.

[Presentation]

Good morning, everybody. Tough act to follow, so your attention for the next 20 minutes or so to get focused on our fastener business. I'd like to start by saying that you follow Howmet, and you know that in the last 2 to 3 years, we've made some remarkable progress in the fastener business. We've been posting sequential improvements of revenue, EBITDA, free cash flow. We also enjoy a position of leaderships in the markets we operate, both aerospace and industrial.

I didn't come here to talk about the past. I'd like your attention for the next 20 minutes or so to talk about the future and how we intend to continue to build upon the foundation we built in the last 2 or 3 years, continue to expand our margins, penetrate markets, grow above market conditions so perhaps at the end of my presentation, you share the same confidence that I have that our best days are ahead of us. So please give me our full attention for the next 15 minutes or so.

Okay. An overview of the business. So we are nose to tail in every commercial airframe in the market as well as engines in the aerospace side. We also have solutions for industrial markets that benefit from the types of products we make, particularly commercial transportation and renewable energy. Our products deliver superior performance to our customers by delivering solutions that are needed these days such as lightweight materials, single-sided applications as well as composite airframes, dissipation of lightning strikes, just to name a few.

On the industrial side, our products have remarkable solutions to manufacturing problems, such as welded assembly being replaced by fasteners as well as products that are friendly to be installed in situations like solar farms and wind farms.

This chart is very important because it's a unique advantage of Howmet fasteners. There's no other manufacturer of fasteners in the world that has a truly global footprint. We are present in every region of the world, which allows us to offer solutions of onshore, offshore manufacturing as well as best cross-country. In addition to that, it enables the growth of our distribution business, which I'm sure you've seen has been growing rapidly.

Peeling the onion a little bit more. Our aerospace business is about 80% of our revenue, and we have the broadest portfolio of products and customers. And we offer all types of fastening solutions that are needed by this industry starting from traditional threaded fasteners, both internally threaded and externally threaded, and nonthreaded products such as blind products, pin and collars, all the way to sophisticated latch systems. On the non-aerospace business, we benefit from similar technologies developed for the aerospace customers, delivering value to commercial transportation, particularly replacing welds.

On the renewable energy, these products are typically installed in harsh environments such as wind farms and solar farms. So these products need to be easy to install and not require maintenance throughout their lives, and that's exactly what our products do. For that reason, we enjoy a position of leadership on both markets, both industrial and aerospace. Also like to highlight, there is a significant portion of our revenue that is protected or under intellectual property. So on the aerospace side, about 30%, and on the industrial side, about 40% what we make has intellectual property of Howmet.

So this is the most important chart I have. So at this point, I'd like your full attention because this business, it's a mature business but has several themes of growth that we believe are going to continue to drive our growth above market rates. And I'll expand on each of them.

Starting with innovation, delivering value to our customers based upon their current needs. I'll have a couple of additional slides on this, but it's basically lightweight materials, composite applications, single-sided applications and automation. Capacity and capability, mostly driven by supply chain constraints, where Howmet, partially driven by the global footprint and our ability to invest, we are constantly looking for additional capabilities and looking for additional qualifications.

Market penetration is twofold there. Some portions of the market, we still have the opportunity to penetrate and increase our share. I'll name a few, business jets, MRO, industrial gas turbines, which is a focus of our business at the moment. And I'd like to pause just to talk about distribution for a minute, which is within the markets we're penetrating. In the last 5 years, our business has grown from approximately $50 million to $300 million in distribution services. We intend to continue to grow that distribution business driven by our portfolio, driven by our global footprint and driven by our technology.

And finally, inorganic. The fastener industry, there is a level of fragmentation in this industry that allows for additional inorganic activity. I'll expand more in the coming slides. I'm sure you know we recently announced 2 acquisitions. These acquisitions are aimed to expand our portfolio, add certain capabilities and penetrate the markets I described earlier.

Let's talk a little bit about innovation. A long history of purposeful innovation, very successful history. We have 20 centers with focused product development that's very driven by what the customer needs. So these days, composites are growing. Key platforms such as 787, 777 and even A350 are using composites, and these require better solutions for productivity, for rate increase, ease of installation, single-sided applications, which I will expand in a minute. But as you would imagine, coordinating 2 different employees, one on the inside of the aircraft, one on the outside of the aircraft to install a fastener is a significant issue when you need to increase rate. Lightning strike applications as well. Well, what that does, as you can see, compared to our main competitors, our number of patents is significantly superior as well as our number of trademarks.

I do want to talk a little bit about this particular product. I did spend some time yesterday with some of you talking about the Ergo-Tech family of products. This is a disruptive technology. So this product basically brings it all together to what customers need to automate their assembly lines, to get the rate that they need and reduce installation time. So this product is, again, single sided. So you only need one person or a robot on the outside of the aircraft, and that replaces the coordination of two individuals.

If you think about, for example, an A350, one circle around the fuselage takes about 3,000 of these guys. There are several circles of that in the aircraft. So imagine cutting the labor needs in half. So this product is absolutely phenomenal. We see between 30% and 40% reduced assembly times and the total cost of installation, as a consequence, is significantly lower. But more importantly, it enables rate increases which are needed. Now we have a whole host of Ergo-Tech solutions for metallic applications and nonmetallic applications, such as composites.

A little bit on our inorganic theme. So I'm sure you've heard or seen the announcements. Obviously, CAM, still under regulatory approvals. But what that does to us, it expands our portfolio to nontraditional fasteners. So there's a business of fluid fittings, couplings, heat shields, additional latches, which would expand our reach and expand our portfolio of offerings. In addition to that, there is a smaller fastener business that will bring efficiencies and supply chain opportunities to improve competitiveness.

The Brunner acquisition while smaller in size is actually quite interesting. This acquisition brings capabilities of bigger fasteners both from diameter and length, which traditionally is not a focus of our typical airframe products. And that opens up some potential markets for us, particularly industrial gas turbines where these size fasteners are needed. In addition to that, Brunner has a remarkable asset base, quite impressive, and that brings additional capacity almost immediately for our current business.

So in summary, yes, we have made a lot of progress in the last 3 years. We are confident that these 5 themes of growth that I've expanded a while back, again, innovation, capabilities, market share penetration, distribution business and inorganic will continue to drive Howmet to achieve growth above markets. So I am very confident that our best days are ahead of us.

Thank you for your attention. With that, Johan Wall.

Please take your seat at the front here.

Thank you.

[Presentation]

Good morning, and welcome to the Engineered Structures segment of this morning's presentations. It was great meeting many of you last night and going through some of our products and going through some of these details. Today, we'll take a bit of time to add a bit more color and more depth to not only what it is we do in the Structures group, but how we do it.

The first technical difficulty, what do I do here. Resilient business. Here we go. Yes. Got it. All right.

Well, with that, we'll begin with our journey because I think it's important to talk about how we've achieved what we've achieved in the last couple of years. And it really started with business rationalization. Here, we look to shed some of our businesses that weren't well aligned with our core capabilities. We also looked in cases to optimize our footprint where we had redundancy. But what this also brought was more focus to our management, allowing us to direct our resources to those areas where we can create greater value, focusing on those truly exceptional assets and capabilities that we house.

So as we step from the business rationalization, we move into product mix. And where business rationalization is done with a cleaver, product mix, we start to look at with a scalpel. And here, we start to look for those parts we've accumulated over time that were either highly commoditized, differentiated only with price or those products that just never proved to be a good fit for our processes and capabilities. And as we exit those, we begin to focus on what it is that we do well. And with that, we can then really start to leverage and work into operational excellence, driving in our business, of course, yield, level loading the production through our factories. This, in turn, brings labor productivity, lower indirect spends.

And last on the page but certainly not least is our margin management. You heard commercial discipline spoken earlier. And this is where we really start to focus ourselves to those differentiated products, but also we have that discipline where we're looking at each business unit and each product family inside that business unit to determine where it is that we may not be meeting our expectations or the expectations of our shareholders.

From there, we start to look at the asset base and capabilities we have. A truly unique and differentiated set of assets, exceptional in cases. Here, we really look at the 4 segments of our business units, starting with the titanium products. And what I would say is special in this case is the breadth of our capabilities. We're able to offer all levels of conversion and services that only a small handful in North America would be able to. In our forgings business, this is where we have the famous monuments, the 50,000-ton press, to name one, but supported by many others. These are truly assets the industry depends on, assets that are of national interest based on the programs they support.

And as you step across and you look at extrusions, machinings and assembly, these are often sectors of the market that are considered more commoditized, highly competitive. Even here, we found ways to differentiate ourselves in 3 things: the size in which we operate, larger cross sections in extrusions, greater machining envelopes. We also favor hard metal. And last, we really look to do products that are geometrically challenging, technically difficult, like some of the products that you saw last night in our display. This create barriers to entry that other sectors of this market may not have.

Then as we start to move forward, we see this cohesive strategy form that aligns closely to the market needs. And this has been mentioned, the need for lighter, more fuel-efficient aircraft, fighter jets with ever-increasing performance needs, in turn, requiring product geometries and complexity that have not been met in past generations. And our heavy capabilities in titanium lend themselves in favor of this market, a market where wide-body has a composite fuselage and wing, where we see that in future aircraft.

We take those key drivers, those exceptional and extraordinary assets, and we begin to convert it into products that enter the market at several different tiers, all the way from highly controlled titanium. We have our form products, new net shapes that allow us to take weight out of traditional manufacturing processes in closed eye forgings and extrusions and then those final machine products and assemblies.

As we move into the products that those assets and capabilities provide with this optimal footprint, with a better fitted portfolio of parts, we see a well-balanced set of products for the aerospace and defense industry. As I'm sure you all know, our products lend themselves towards widebody, the 787, A350, 777X, Naturally, the content of titanium on these aircraft are greater than single aisle. But we balance that with other products that we would have actually seen over here on the left, our aluminum lithium blades for Pratt & Whitney that engine the A320, our aircraft wheel and brakes that service the entire industry. But obviously, when you look at single aisle and the demand on that product, it's tremendous. It creates this balance.

When we move over to defense, it's well known. We have a very strong content on the F-35 starting with our bulk heads, but also all of our titanium products. This serves as, I would say, the table stakes of our defense business. But it is backstopped by hundreds and hundreds of other applications on legacy fighter jet programs, helicopters, munitions and missiles and also radar systems.

And for those of you that I didn't have a chance to walk through some of our displays yesterday, Vagner had his favorite slide, I also have my favorite slide, and this is it. And that's really when we start putting it all together, where we're able to add greater value for our shareholders through synergy. And here, we have our 787 seat tracks, which were displayed over here on the left. And then to the right, we have the bulk head, which is at the back. Now this is an aluminum bulk head. We brought that just because it weighs a little less and that's what we had available. But we also make the titanium variants, which are even more extraordinary.

In the case of the 787 seat tracks, what appears to be a relatively straightforward machine component, that's only one segment of a 35-foot part that we have all of the value add, all the way from melt, to billet, to extrusion, to weld, to machine, to assembly. And we kept that and deliver it to our customers on time, every time around the world. On the bulk heads, I'd like to say that it's one of the enablers of that aircraft, one of many, but a key enabler to the geometry and performance of that aircraft. It changed the way a fighter jet was put together from a stick frame construction to these large monolithic core forgings.

It actually enabled Lockheed to reduce a similar structure complexity from greater than 150 components that would be fastened and adhered to. Sorry, Wagner, that work to gain you there, a few less fasteners on the monolithic component. But it allowed them to take a product that would require thousands of man hours to assemble in the substructure level would produce lesser strength and meet lesser dimensional tolerances. It's this capability that we work together hand in hand with our customers to really be a part of that program, and it's something we're all very proud of.

So as we look at what we've been trying to achieve in the last couple of years, really, it's a disciplined approach to a dynamic market, a market where widebody has lots of stops and starts. We've had geopolitical events that have blocked out Russian-made titanium. Through all of this, we've been cautious about investment. While some of our competitors have rushed out to add titanium capacity, we've been more inwardly focused staying commercially disciplined.

But as you look at the backdrop, we're ready and well positioned for that wide-body ramp that is going to be upon us -- we have this strong content on the F-35. We see the green shoots of a lot of the new programs, next-generation fighter jet, the F-47, our satellite and our radar systems. The Golden Dome is putting a lot of pressure on our radar capabilities to mention a few.

But to close, I think what's important is I've shared with you our journey. I've showcased our exceptional and extraordinary assets that are critical to the industry, how they align with market needs and how we've been able to bring those together to bring returns to the Howmet shareholders that they've grown accustomed to.

With that, thank you.

[Presentation]

All right. Good morning, everybody. That's a fantastic video. I'm Randall Scheps. I'm going to give you an introduction to the Forged Wheels business a business that I've had the privilege to run for the last 6 years. So what we do in Forged Wheels, as the name would suggest, we supply forged aluminum wheels into the global heavy truck, bus and trailer market under the Alcoa Wheels brand name.

So you've seen the financials of this business. Their financials are quite strong. And this is a business that you'll notice as we go through has got some common threads with the other parts of Howmet that you've heard about today, sort of alloy expertise, metal processing coatings and surface treatments. So you'll see as we go through this presentation that this business is really quite unlike some traditional truck parts business that you might be familiar with or that you might have run across.

So the Howmet advantage really falls into -- there are 4 main pillars to the Helmet advantage, and these all work together to create quite a powerful moat around this business. So the first advantage is we are the #1 global truck wheel brand in the world. We're instantly recognizable within the trucking industry. Everyone knows what an Alcoa wheel is. In fact, you'll run across fleet operators who will refer to the wheels on their trucks as Alcoas, not as aluminum wheels, but as Alcoas. So we compete with steel wheels around the world, and these are typically commoditized steel wheels. And we also have a handful of regional forged aluminum wheel competitors that we compete with, also unbranded.

A little fun fact about the power of this brand within the trucking industry. We have 150,000 Facebook followers to the Alcoa Wheels brand around the world. At sort of various sites around the world, if you sum it all up, 150,000. So this brand really resonates in the industry.

So the second point here is we have full design control over our product. So we control our destiny from the alloy, through the forging, through the machining, through the surface treatment. We control how that technology rolls out. We control where it goes in the world. And what that does for us is it allows us to limit complexity. So we can rationalize SKUs and make the same part in 3 different flow paths around the world, which unlocks economies of scale in this business.

So the third is precision assets. So I've got an asset and, really, an enviable asset base of production equipment around the world. And what these assets allow is I produce at single-digit part per million quality levels, so single-digit PPM. And just for reference, in the industry that we're in, 50 ppm is generally deemed acceptable and good enough. So I operate at single-digit PPMs, which is below a 0.001% defect rate. And that's part of our brand promise. If you go back to element one here, part of our brand promise is quality and durability. So we deliver on that through single-digit PPM.

And then finally, scale. I'm 4x the size of the next largest competitor in the forged wheel business, and that unlocks all kinds of opportunities for automation, allow me to invest in automation, which I'm just noticing watching this video, there were no humans in that video. So that's a little bit of a preview of what I'll tell you a couple of minutes about automation. So heavy investment in automation and vertical integration.

So an example of how vertical integration helps me, when we take a forging and machine it into a wheel, generate a lot of machine chips, aluminum machine chips come off in that forging process. So because I have the scale to afford to build my own cast house, I can take those chips as they come off the machining centers. They go right back into my cast house. I can cast those into new forging billet really almost immediately. So think about the cost and the working capital advantages that, that brings to this business, that level of integration. None of my smaller competitors can touch that. You can't afford that level of investment when you're small.

So what is it that makes this market so attractive in a nutshell, and we'll go into a little more detail on this, but in a nutshell, truck fleets are converting from steel wheels to aluminum more every year. And there are two main forcing functions for that. You've got regulations are improving. The sort of regulations are increasing. Sort of drumbeat of every year, there's more regulation that adds complexity and adds weight to trucks. So the truck fleets are looking to offset that. The other forcing function megatrend is economic. Fleets are under enormous pressure to improve efficiency, and I'll take you through the details of how we can improve efficiency for the fleets. So you have those two big forcing functions that are moving fleets from steel to aluminum.

It's a safety critical part. We love that because a fleet is not going to take a risk on an unbranded, unproven, untested product with no reputation. They're just not going to do that to save money. So that helps us. It's a very large addressable market, about 75% -- depending on the region that you're in, around 75% of all the freight moves on trucks. Obviously, wheels are an important part how those trucks operate. So 18 million truck wheels are sold every year in the markets that we target. About 30% of those are forged aluminum today and we make most of those.

The other 70% are these commoditized unbranded steel wheels. So that is our mission in Forged Wheels, is to take that 70% remaining steel wheels and convert those to aluminum. And that's what we work on every day. So 70% of that market is open and untapped. And the really exciting thing about this is that, that 70% moves down every year. So we're making progress around the world region by region and moving that steel percentage down because of these megatrends. So we really are well positioned to win. We've got this #1 brand. We've got strong financials as you've seen, and we have the asset base to win.

So a little bit about the regions. It's just at a very high level. The market dynamics in these different regions are a little bit different. But you'll see there's a common theme on here, which is that we are #1 in all these regions. So North America is our most mature market. The aluminum adoption is quite high, but our product is also well understood by fleets. So growth in North America will come from us enriching mix with some of our proprietary surface treatments and also the growth of new energy vehicles, which will allow us to drive additional volume in North America.

Europe is very exciting for us now. You see that we have strong share. We have 90% share of the aluminum market in Europe. But that's not even the best part about the European market. The best part is that adoption is only 30% in Europe. So if you think about we have a 70% runway in the European market to convert to steel, it moves forward every year. That 70% gets lower and lower every year thanks to our efforts. Europe is also a huge taker of some of our premium surface products. So Europe is a very exciting market for us.

And then other regions, and this is Brazil and Australia and Japan, a lot of runway for growth and premium surface treatments there as well. So there's a very large untapped market in those other regions.

I want to add one point here, maybe somewhat unique to this business. Aluminum prices have been very volatile. I had a lot of questions last night about aluminum prices, a lot of questions about tariffs. What we do and a testament to the commercial power that we have in this business, we've got agreements in place with all of our customers and we pass all that through. So aluminum goes up, aluminum goes down, we pass that through. Tariffs, same story. We pass that through. So that takes that aluminum and the tariff noise out of our results.

So a little bit more about the megatrends, the regulatory megatrends. You got this constant drumbeat of every -- not every year, but this constant drumbeat of new regulations that are adding complexity, more importantly, adding weight to trucks. So you have fleets' strong desire to offset that weight and make the trucks lighter so they can haul more We, in fact, have a new regulation that's coming on January 1 of 2027, a new emissions regulation. So another example. That's going to add complexity. It will add weight to the trucks. So it just increases that desire by the fleets to pull weight out of the trucks.

And then the second is economic. Running a fleet is a challenging business. They are getting pushed all the time by inflation. They give insurance rates, labor rates, fuel costs. They're constantly battling inflation. And what we can do when we come with a lightweight solution for their wheels, we can save them money. So we always get an audience when we come in and say, hey, we can save you money because they're fighting these elements of inflation.

So the really exciting part about this segment is the chart on the far right here, and that's the adoption of aluminum around the world. So this year, we're going to be right around 30% adoption globally in the markets that we target. But look at where we've come from. So 16 years ago, it was single digit. So it just continues to march upward. That's driven by these two forcing functions that we talked about, regulations and economics. And you can see a little bit different profile. The white in these round charts, that's the untapped opportunity. That's the steel wheels that we're going after to convert.

So what is it that the fleets really need? We talked about running a fleet being a challenging business. They have a lot of market dynamics. Their margins are low sometimes. So what they really want from us is they need lower operating costs. They need lower maintenance costs. They need to be able to haul more freight. And they need ease of maintenance because maintenance is a big expense, and they don't want to have trucks that are down by the side of the road not running. So that's what they need from us.

The last element here is appearance. That one may surprise you a little bit if you have kind of a notion about the trucking industry. Appearance actually is important. In many cases, these trucks are an extension of a consumer brand. So if you think about Amazon, think about Walmart, think about Pepsi, think about Target, the truck is a rolling billboard. It's an extension of a consumer brand. They actually want and they will pay for good-looking wheels.

So here's what we deliver. We deliver all 5 of those elements for fleets with our product. So we can deliver up to 5% of fuel economy improvement. And you think a typical fleet could be paying up to $50,000 a year per truck just in fuel. So if you come in with a fuel savings, absolutely, you get their attention. We can add payload, up to 1,400 pounds more payload. And what that means for the fleets, if they can add 1,000 or 1,500 pounds of payload, that's more revenue with 100% drop through to margin. They absolutely love that. And the best part about the revenue and the payload is that the business case that we offer typically has less than a 2-year payback. So absolutely motivational for the fleets.

World-class quality. We talked about PPMs, That's part of our brand promise, Million-mile durability. I had a lot of questions last night. Typically, the wheel will outlast the truck. So we don't have a big spares business unfortunately, or fortunately, as you may look at it. But these wheels got million-mile durability. We're so confident in these wheels that every wheel we sell has got a 5-year unlimited mileage warranty. And then the icing on the cake for our value proposition is that oftentimes, because our brand is so strong and so well recognized, that when the fleet -- when it comes time for them to trade the truck in after 3, 4 or 5 years, in many cases, they will get most of the upfront expense of spec-ing our wheels.

Most of that upfront expense will come back to them when they trade the truck in after 2, 3 or 4 -- 3, 4 or 5 years. So that's really the icing on the cake. So scale and asset positioning is really where -- how that shines in this market. So scale brings us a couple of advantages that brings us advantages on the commercial side brings us advantages on the operations side.

On the commercial side, I've got connections with every major truck trailer and bus OEM around the world. And I've got -- and we talked about fleets sort of being fleets being very important to us. I've got 50,000 fleet relationships. And the way those relationships work is I've got a sales team in that as fleets are specking new trucks, I'm educating them about my product and asking them to check that box on the new truck order form and spec our wheels. So some of my competitors actually don't even talk to fleets at all. So this network that I have of OEM relationships, the network that I have of distributors, the network that I have of fleet relationships has taken decades for us to create and would be nearly impossible for competitors to match in any kind of reasonable amount of time. And it's very, very powerful. It pays benefits every day. New trucks are being ordered every day. We've got those fleet relationships to get so that we get spec-ed on those new trucks.

A couple of other elements that scale unlocks. Obviously, I've got full value chain control, all the way from alloy to ingot to forging, to machining to proprietary surface treatment, all kinds of proprietary know-how and patented technology in that chain allows me to invest where like competitors can't because I have that scale. And then finally, automation. The scale that I have allows me to invest in automation. We decided about 5 years ago, we were going to really lean into automation in this business and have reached a point now where I've got close to 500 robots in this business, which to put that in perspective, we've got 1 robot for every 2 employees -- every 2 human is working on the production floor, 1 robot for every 2 humans.

So we are well set up to generate that next level of advantage from machine learning and AI because this is just so highly automated. A little bit about our technology. You see from the hardware in the back here, we've got some interesting surface finishes that fleets really value. We've got 150 patents and trade secrets that are protecting our technologies. I'm going to just highlight 2 of the technologies here. There are many more. These are the 2 that really are drivers for us. Number one is Dura-Bright, and this is a proprietary surface treatment. And what it does is it locks in that shiny image of a new wheel and then maintain it for the life of the wheel. So the wheel look shining coming out of the factory. 5 years later, still look shiny. The fleet doesn't have to maintain it other than run it through a truck wash and it maintains that great look and it's also corrosion-resistant. This is a very high-value product for us. Fleets love it, especially in Europe and this is a nice upsell for us.

The second element here is it's really a suite of technologies, the foundation of it being our MagnaForce alloy, which is a patented alloy that we developed specifically for truck wheels, our competitors don't have access to this. And when we combine it with our design know-how and our process know-how, we can create a wheel that's 17% lighter than anyone else can. We're the only ones that have this alloy, competitors don't have it. So just to sum up, we've got a fantastic business. You've seen the margins. You've seen the working capital profile, well positioned with a nice moat around it in an attractive and growing segment. The #1 brand in the world, nobody can even touch it instantly recognizable within the trucking industry. We've got full design control, which allows us to manage complexity, keep the SKU count down so we can get those economies of scale.

Fantastic assets, vertically integrated. So we control every step with those proprietary processes. And then finally, the scale of being 4x our competitors, which unlocks all kinds of opportunities around automation. So there's a tremendous amount of pride in this product. I hope you can feel it, and I really enjoy taking everybody's questions last night. I love to talk about truck wheels, tremendous amount of pride in this product. So what I would invite you to do is the next time you're stopped in traffic next to a big rig, take a glance over at the wheels on that truck and take a look for that logo. And then think about how cold wheels when you see it. So thank you.

I almost had to pull Randall off the stage otherwise, you'd been talking about wheels for the next 2 hours. You're probably gathered by that, Patrick.

Yes. Okay. So I'm Patrick Winterlich and I'm now honored to be the CFO of Howmet. I joined about 3 months ago. And I have the pleasure this morning of kind of wrapping up before the Q&A, it with some numbers to let you know how the company has progressed over the last several years, and that's been a fantastic progression. So I'm honored to do that. So as you can see on this chart, a 9% revenue CAGR at a very solid growth, and that has led to a 17% adjusted EBITDA CAGR at an 870 basis point climb in the percentage margin, and that's top decile performance, which wouldn't surprise you. That has then in turn, led to a 37% adjusted EPS CAGR, even more impressive. We've seen a 50% reduction in our interest expense, and I'll come back to our sort of capital asset deployment and improvement in the balance sheet later and a 640 basis point in our operational tax rate.

So all of that, you can see 9%, leveraging 17%, leveraging 37%. That is a great progression, and that's what we need to maintain. And all of that has then led to $4.5 billion of cumulative free cash flow over that period. And over that period, we have averaged over 100% free cash flow conversion against net income. So a fantastic platform from what you've seen the presidents present. So what have we done with that?

We have deployed all that cash in various ways. In the first way is we have strengthened our balance sheet dramatically over that period 2020 to 2025. We've reduced gross debt from $5.1 billion to $3.1 billion, so down by $2 billion. That has improved and helps to improve our net debt-to-EBITDA leverage. So our debt comes down, our EBITDA has grown. That leverage has improved significantly from 3x to 1x where we finished 2025. Our pension and OPay liabilities, the gross liability, you can see the small chart there on the bottom corner. We've gone from $2.9 billion to $1.4 billion and as you all know, pension liabilities are not what you want on the balance sheet. And so turning that growth -- reducing that gross liability by 50% is a tremendous step forward, and we continue to look and work on them.

$2.4 billion on share repurchases. That's about 33 million shares. So I think we finished the year at about 404 million. That's 33 million shares fewer than we had in 2020 and $430 million on dividends and you will have seen us move from $0.02 to now where we are $0.12, and that equated to about $180 million in 2025. So this is a busy chart, and I'm not going to walk through all these numbers, but it's really the shape.

And if you look at the 4 businesses, you can see '23, '24, '25, all those margins are climbing. Tremendous performance across engines, fasteners, structures and wheels. And you can even see compared to 2019, 3 of the businesses are now at a much higher level than we were in that peak year. The only reason wheels isn't is because of the dilution of the aluminum costs running through that business. The underlying performance, the conversion margin, if you exclude the metal cost is much better. So all 4 businesses have done tremendously well. There's no outlie. Everything is strong is my message here. And that's led to the bottom line, where you can see how that finished at 29.3% or 720 basis points higher than we were in 2020.

So a consistent, solid performance moving upwards. And what is all that built on? Well, it's all built on what the 4 presidents talked about. And so on the left side here, you've got technology and solutions. Howmet is a leader in the technology it has. The material science, the process technology and the capability to do that at scale and to deliver the quality of that scale. That is an incredible asset. And we do that to meet the solutions and provide the technology and solve the problems for our customers. As you've heard about this morning addressing the higher temperature, higher pressure requirements in modern ad engines. That's crucial. Very few people in the world can do it and Howmet does it fantastically. Howmet is well positioned with the titanium and the fasteners to meet the growing composite adoption in the world on modern aircraft, lowering maintenance costs through the structures and the materials we provide and the equipment we provide with them. And then that's very relevant today, fuel economy with oil touching $100 a barrel, you just heard the narrative from Randall about the fantastic Alcoa brand of Wheels, that Howmet brings to the space.

And then with -- so what do we bring? We bring products and commercial strategy, an exceptional product offering, operational excellence through innovation, automation, and the footprint, which I think almost all the Presidents alluded to that you can see across the globe, Howmet has a fantastic presence to meet the markets and to satisfy the customer demand we have. And then you have the commercial strategy, the commercial excellence. Some of you will have spoken to Mike on actually last night, who leads a lot of that along with other people. But Mike is front and center of that Howmet. We have long-term deep commercial relationships with many partners around the world. We capture price. And believe me, Mr. Plant knows how to capture price and share through LTAs. And again, as you've heard some of the presidents talk about, our contracts allow us to pass through materials, inflation and tariff impacts, which really help protect and boost Howmet's margins.

And the cost competitiveness through the scale, through that global footprint through the technology is hopefully there for everyone to see. So now looking forward beyond 2025 a little bit, and I'm really just referencing the midpoint of the 2026 guidance that we provided in February. So you can see on this chart, we're growing to $9.1 billion of revenue at the guidance midpoint in 2026 or 70% increase in revenue over 2020. We're moving to 30.3%. EBITDA margin, up 970 points, and that translates into an EPS increase of 475% if we hit the $4.45. But again, our midpoint guidance calls out in 2026. So that platform is there and it's going to deliver more growth in 2026. And that revenue, those margins translate into more cash, and you can see between 2020 and 2025, we grew over $1 billion of free cash flow from under $400 million to over $1.4 billion, a 30% CAGR and we're now guiding to $1.6 billion at the midpoint in 2026.

All the while, free cash flow conversion has averaged more than 90%, which is the target we've talked to, well over 90% between 2020 and 2025. And we've done that while we've invested in the capital requirements over $1.5 billion in that period 2020 to 2025.

Another way to look at cash generation, sometimes known as free cash flow margin or free cash flow as a percentage of revenue. You can see the -- really, really -- and if any of you look at these statistics, these are very strong numbers, especially for a heavy manufacturing company. 10.3% in 2023. And now we're guiding to a very healthy 17.6% at the midpoint in 2026. And we're going to push beyond that as we go forward.

We see the opportunity to grow that even further. So what is all that built on? Again, you've heard the presidents talk to it, but just to go over it, a strong operating playbook. Growth above market, the differentiated products, the technology we have just provides a really fantastic foundation to keep that going. We've got this very strong potential to increase margins across our entire platform, productivity, automation, the adoption of AI. You're going to see some of that this morning when we go to White Hall, the foundation is fantastic for continued growth. We focus very -- and John and the team and the presidents are very focused on allocating capital to where we're going to get the best growth and the best returns.

Now 70% of our capital, about $450 million, 70% of that $450 million in 2025 went towards engines. That business is growing very strongly. The other businesses also get invested in, but we're going to be very selective and very targeted on where we get the best returns.

Cash flow. We continue to aim at the same target, 90% cash flow conversion against net income. And we're developing that fortress balance sheet that you've heard us talk about before. And that fortress balance sheet gives us optionality when it comes to capital deployment. And just to talk about that capital deployment, as I wrap up here, you can see 2020 to 2025. We deployed over $2 billion, $2.1 billion to reducing debt, gross debt, share repurchases of $2.4 billion. We paid $400 million of dividends. And whilst doing all that, we paid -- we've invested $1.5 billion in capital expenditure. So a fantastic history of deployment.

But now we look forward, where do we now go. And so as we look at the 2026 priorities, we continue to be very disciplined and look for growth and returns, and we've guided to $470 million of CapEx at the midpoint. We're now working to complete our investment, our M&A, our acquisition of CAM for $1.8 billion, which is going to further strengthen and enhance our fasteners business. We're also going to remain in a disciplined way, in a focused way, vigilant for further M&A opportunities.

We're going to be generating the cash, generating the capital to have that opportunity, but we're going to be very selective. We do not want to dilute what we want today. We want to continue to strengthen. We expect our share buyback in 2026 will be above 2025. And while doing all that, we remain very, very focused and disciplined in terms of our overall strategy. And so our leverage ratio, we expect to be around 1 at the end of 2026, and we can only do that because of performances that you've heard about this morning. And so to wrap up, we're working hard to build the financial muscle to do it all. And thank you for all listening this morning. And with that, I'm going to hand it back to John.

Thanks, Patrick. So I think my 2 colleagues are going to rejoin. I was getting a bit concerned at 1 point. I assume it's a bathroom break, but they might have feared your questions. So I think we have about half an hour. So we can -- if you have any questions, that is.

Yes. Give me a favor. We have mic runners in the room. So wait until you get a mic and then please give your name and affiliation. Why don't we start with Peter here in the front.

Peter Arment with Baird. Thanks, John and the rest of the team, giving us great details. Maybe a big picture question, but we've heard comments from SpaceX talking about the way they cast components they're wrapped their engines. They've done it in a rapid scale, and we've seen 3D printing for solid rock promoters for other companies. And we're just wondering when I'm thinking about Merrick's sort of fastest [indiscernible], like any impact when we think about 3D printing, why we aren't seeing more in the businesses that you're involved in?

Let me have the first go and then if Merrick wants to supplement. So we use 3D printing. But we're also very selective where we use it. So in some of the inserts that you're going to see as you go through the plant today. Some of those things that go into making these parts because of the complexity of them and they don't -- the stake of manufacturing is that they don't have some of the sheer forces that we have to make from the metal parts. So we do use it to produce extremely complex shapes. So we are familiar with it. We have experimented with 3D metal printing as well. So obviously, that's composite plastic and composite types, metal printing, essentially everything that we looked at was never able to withstand the sort of forces that Mark was talking about. So imagine the sheer force and the centrifugal force with the stretch of compression then when you've gone to a single crystal structure that provides a limit integrity, which is not possible with the current generations of, I'd say, additive printing.

I'm also being quite leary about when we have experience that we printed like latches for Airbus, as an example, and we both came to conclusion that it wasn't worthwhile. I say -- won't be one said in the future, but it didn't achieve anything. The costs were actually higher. And so like what was the point of doing is when you're going to produce higher cost parts. Now -- is it possible in certain aftermarket applications where the volume variety is very different to what we're trying to do, it has applicability that may be -- and then the question is where do you capture value? Where is the profit pool in, say, metal additive printing.

And I think -- you can see the benefits of the people who design the different alloys and detonation of these metallic particles that go into it to where it's in a power or a wire form. So that's a profit pool and the person who, let's say, adds together 15 components can produce them in 1. I think that's a big benefit for the recipients of that, let's call it maybe more the end customer.

I think the middle ground is the person who has to invest in all of the machinery to do additive printing gets squeezed between those two and so I don't judge the profit pool is of sufficient interest for us to spend a lot of time at it, nor is it be applicable to any of the parts that we do. So having said we made it on both. Anybody else would like to add any points seen from fasteners engine or anything.

Yes. I would just maybe just add that again, you'll see where we're using additive and 3D printing this afternoon and where we think it makes sense in our business. It comes down to that -- I talk about the 3 things: scale and producibility, right? We're not there yet on the metal side of it. You can see it in space because of the low volume of parts. But it wouldn't fit in right now with our hungry.

And solid rocket [indiscernible] have a different, I would say, stress back from the nozzles, the force's in one direction, not in multiple directions.

I had a comment for fasteners. Well, we always need to be vigilant with the new technologies and their adoption. Fasteners is probably 1 of the last in the order of priorities that technologies like this will eventually get to. You don't really get a lot of metal benefits of savings because of the shapes of fasteners are typically cylindrical. So you don't get a lot of benefits of the 3D and also the risks associated with a joint that may not pass with compared to technologies that have been established for a long, long time. I will not discard, but I would say to you, unlikely at the moment.

John?

John Godyn here at Citi. John, I wanted to follow up on IGT and the outlook. You had a great slide that had a number of charts where you showed demand through 2030 and then 2035. A lot of those charts seem to suggest that the growth rate between '25 and 2030 was a lot more than the kind of $1 billion to $2 billion doubling in revenue that you're forecasting. So I'm just kind of curious, upside risk to that $2 billion. Maybe you could just elaborate on the outlook for IGT.

I did point out that I don't only covered that segment of the market. So it may look better. So I did want to make sure that I say it again because you're looking at this slice of the market, therefore, the percentage growth is higher if you look at the, let's say, total electricity demand, then obviously, it's a much lower percentage because of the baseload for, let's say, other industries homes, et cetera, et cetera. But the pure data center elements driving our growth is higher than -- it would lend you to that conclusion except for you need to take account of what's the electricity demand is what we're trying to serve for the whole of the load throughout the say, whether it's the U.S. or the globe.

So I only showed U.S. graphs there, not for the world again. And we are truly serving every market. So whether it's, let's say, any often, when it's Mitsubishi Heavy, Siemens, Power, over in terms of the [ Ansaldo ] for the large gas turbines, then you have to look to all of their end markets and all the aggregation of that demand. And so they also see that -- so in my discussions with them and trying to get comfortable with us deploying the amount of capital we are is what is the data center underpin what does it look like through 2030. What does it look like beyond 2030? And also, the themes of what's going to be the electricity demand and use of power sources in Europe beyond some of the energy markets, I think we're already disrupted by what we've seen recently.

And then also, for example, in the U.S., we also have to consider if the demand for -- from data center is so big, how much comes from the grid, how much comes from individual, I'll say, independent, I would say, power generation. And then what's left for -- we talk about the consumer. We talk about data centers. We don't talk about other industrial requirements. And I think we're going to see a lot of mini and micro grids established whereby we'll see the continued rise of the midsized gas turbines throughout the 2030s as well being installed to support manufacturing plants around the world, including in the U.S. to achieve that. So I'm interested in what does the demand look like 3 years, 5 years, in 2032, 2035 and throughout.

It forms a view of how much capital that we are willing to deploy to those markets and how we pass between them, between existing technologies. The newer ones because all the things that I'm holding here going into the new generations of some of these type of turbine blades, and at very different rates between different customers. And so there's a tremendous amount going on in that market. So I just want to say that was a segment there's always a danger in showing a segment rather than the whole electricity demand.

It does seem like the upside -- or the bias is to the upside on that $2 billion, though, based on everything you just said.

Well, it also requires turbine manufacturers to be able to manufacture the turbines and all the things we've experienced in commercial aerospace over the last few years of their supply chains and ability to put them together. So I think we're going to be doing our part of it, but ultimately, it always comes to what's the weakest link in the chain, and therefore, we have to like apply a cautious lens to it, let's say, how we feel.

Thank you. I got to mic here.

I'm glad I'm not doing it, PT is directing.

Michael Ciarmoli, Truist Securities. Maybe at the risk of not making friends. It sounds like Randall, you take tremendous pride in the business. Wheels only 10%. It's got a tremendous market opportunity globally. Does wheels make sense in the portfolio over the longer term, kind of fighting for resource allocation with some of these mega trends in aerospace defense, I think.

If you've got something, it's a bit like my children, I love each of my children equally. And -- so I love each of the businesses equally because I'm going to say I give them the amount of resource allocation equally, that's a different matter. So if Merrick's like tall and growing like a weed, then maybe he deserves a bit more if he's going to build some muscle as well. But no Randall deserves and if we have wheels in the portfolio, then we must make it a good part of the portfolio and be willing to invest. Again, relative priorities and you have to be -- we look at it on a hammer basis, not a wheels basis or a fasteners basis, it's what -- now does each business have to justify its place in the portfolio? Of course.

I mean it's all a question of try to look at it in a very dispassionate way as well, like what's the value that we can create from owning the business compared to what's the size of the bag of gold you're willing to offer me for the business. So I'm also discussing have to say I think I will do the right thing for the shareholders. So Mike, if Truist and your affiliates point a bigger bag of gold in front of me, I might get tempted to sell wheels, but not today, and it's unlikely you can afford it where it makes sense, but that's how we look at it. So no Randalls are valued part of the portfolio. And if you don't think that way, you shouldn't have it.

Why don't we pass to Sheila?

Sheila Kahyaoglu with Jefferies. Maybe for Merrick and John. In engines, can you talk about the conversations you're having today, Merrick? I think you said this is the most -- this year, you'll have the most new product introductions. How that's helping you gain content in your revenue algorithm and how you think about where we are both on the aerospace side and the next uniter side in terms of the new engine build, how you're balancing investment in the build and how you think about folks like crack building up their own castings capacity.

Yes. I thought that statement that Merrick made might get us into trouble. But I mean when we talked about it to now, it's -- first of all, it's true that we do have a large amount of new product introductions, which I suppose, in 1 sense, it's pretty exciting. i don't think I'm going to pick out like a list of the top 5 for you. But it is good. The flip side of NPIs in any manufacturing business is a bit to screw it up. And it is always 1 where -- as you know, we go through learner curves on these because of the complexity of some of the products. So there's an appropriate, I'll say, amount of caution on like where are we should do, what yields will get, how we'll improve them as we go through the year into 2027. So the way I look at it is that those NPIs are going to be progressive through the year. And they're going to be carefully controlled. So we keep ourselves in, I'd say, in good shape. And some of them, you actually are going to see bigger benefit as we going to '27 than you'll see in this year, both as the volume scales and also the -- I'll say, the improvement as we get in yield as 3 months in, 6 months in a year and then you see very different outcomes in terms of those as we have to learn. Merrick, anything you'd like to add?

No, I just said yes, each program has its own story, but they do -- they continue to build ramp throughout the year and into 2027. And we're -- it's really across our business, whether it's air foils or IGT or structures. We've got new product interductions across the across the segment.

And I think the final part of the question was, did we -- were we worried about who was it you were saying?

[indiscernible].

It's not easy to do, and is each time anybody thinks that they may, let's say, consider doing some things in the investment casting market. Then if you listen carefully to it, we moved the goalposts by a considerable amount. And so the best example I can give you like in terms of like so what has happened, if you look at the -- take the F-35 and its engine. The original plan was that, that would be dual-sourced. That was the Department of Defense back in the -- those times in the 2016 or something period. And it was meant to be, I think, 70% for Howmet and 30% for our competitive as it was. I mean that was 20 years in the development of that level of technology.

So it takes it takes -- if you looked at -- this is an example holding in my hand, which as you know, 1 thing I forgot to mention while I degress, is that you see it now, then you don't see it. So win some money in the room crumbled one of these things up last night, whoever it may have been, is that we -- I think we did try to retrieve the parts [indiscernible] did because we were worried about you chemically analyzing them to see what would have been done because you see what you'll see today is you'll see it of course, in the final deliver product to customer, which is metal, it's all disappeared. So all of the control that went into the core towards the wax, everybody it is then sucked out and dissolved and disposed of that you'll never find and never see it. And so you don't know what it's got.

So I'm going to put this 1 and back in my pocket as I would drop it and whatever. And when you think about it with the -- we talked about third-generation tolerance control. So you look at where we've moved to since 2021. And so that level of [indiscernible] control that we had back in the, let's say, 2018, '19 period, when it's 70-30, but our competitor was never able to get qualified after 20 years of development. 20 years is a long time, and they weren't able to get there, is that then when we did the LTA renewal, we contracted it 100% across the turbine. Now what does that do -- you have the simplest level, will you get a bit extra guaranteed profit and cash flow. Well, that's like, yes, but that's not the reason why we would be willing to do it. It's because it actually stops somebody else learning how to do it.

And if you think about the things we've been talking about, when we've talked about what's the balance between price and share, it's always been a conversation. I'm not interested in necessarily taking our shares down to want to grow above market, but gaining that share has been really important to it because every time we gain a scale advantage, it's really important to us because it gives us a level of ability to invest in automation, which you saw in the previous generation of what we showed you so.

But now if you imagine that we've moved the goalpost both on the technical front, and on the ability to automate and on the digital thread, then it's made it even more difficult for somebody to compete with us on an equal footing. And so when we think about the things we're doing for, let's say, the next-generation military engines. So think those engines, which will go into the -- either the F-35 upgrade or the F-47 maybe it's going to be -- I mean, every 1 of those is going to be at another level. And we're able to take the technology to another level. So we're working on solutions, which enable additional temperature ratings, additional thrust, does it carry weapons payload and all of these things.

And then in recent ones where we've done in the rotorcraft programs is that we've again sought to be it high share possible. So what we've done is where the policy has been, we want dual source. And we said, yes, we'll do it for you, but you can dual source it to Howmet.

Now what do I mean by that? Well, we'll put part of the production in this state and part of a production in that state. So you have supply security and which is what is necessary supply security, so that those military assets are able to keep flying through any form of confrontation and have, let's say, immune to, let's say, fire or explosion or anything else that might go on. And so because the technology such that we've moved the goalposts to enable the performance that's required. It's like giving us a unique technological advantage, which you want to do. So we keep pushing it. So it's driven by the technology mode, driven by the volume mode, driven by the risk scale, scale giving us what me and Randall talked about the amount of, I'll say, machine assist in automation.

And again, these parts now, a lot of them, you actually don't want a human -- this was proven last night. Anybody that picked it up and they said, I'll shoot up damaged it. Well, you don't want the human to touch it. You really don't because when we do it, we actually also place them in a certain way. So the things that we don't talk about, is it flat? Is it a side? Is it [ move to ] things? So then we will covered in, let's say, wax, they will put it into -- we'll insert the seeds that go in to grow the crystals. And at what angle do we do it when we nest them and it's like -- so we -- like multiple paths of -- multiple metal moving through nesting systems where these things are going.

We also handle them at different angles. So we're controlling the rate of flow of metal, the viscosity of the metal and also the orifice is how fast does it flow? And then it's there's a lot of stuff that goes into this. So I'm getting quite carried away now. I mean as long we're saying we're trying to move it. So it makes it difficult for anybody that wants it. And as Merrick said, it really is -- it's relatively easy to make one in a lab, but making 10, 100, 1,000, making several thousand a week, that's really difficult. Merrick, anything you want to add?

No.

Okay. We are going to go to Matt, back.

Matt Akers from BNP Paribas. Could you talk about structural castings. I think it was one of the only areas you mentioned in the presentation where you're not #1. So as you kind of look at the opportunities ahead of you, does it make sense to kind of invest and become #1 in that market? How do you think about kind of gaining share over time?

Our strategy has been, first of all, a saving principle that, do we want to improve our relative market position? Yes. Have we been doing so? Yes. Have we been going about it? Well, we thought probably 5, 6 years ago, and it's the same strategy now because we tend not to change them very much. Is that -- where our competitor is number one in that Precision Cast parts. So they were the big guy on the block. And it didn't seem to make sense to us to just try to go head-to-head with somebody who's got the capital assets in place already.

They've got the tooling in place already. They've got the experience of making those parts in a way. So to go in mid-cycle and try to rest parts away from them, in my view, is stupid. It's too strong maybe, but not of the greatest sense because what have I got to do? I've got to put in new capital assets. So I'm not on yesterday's depreciated assets. I've got to build new tooling. I've got to spend 2 years, 3 years in qualification. I'm going to spend 2 years in going through a learner curve process to be able to produce at rate that compete with the yields.

So every part of the economics that I would have on yield, cash deployment and therefore, expected returns, in my view, it was not a very sensible mission to take on. Now does it make sense that where we have some special capabilities. So like for us, we're really, really good at small and round stuff, putting in the very basic terms. And so we made it there. We looked at other areas that were coming up or where there were supply difficulties, and there was a justification for us to enter.

We also have engineered ourselves onto a lot of new programs. So rather than try to compete on yesterday's LTA, which is on a renewal program because the engines are still running, we looked at what's coming up new. And then we deployed all our engineering resources to make sure that we engineered onto -- so we put a plan out there is the whole engine. There's the 20 structural castings of that engine. So we will cluster ourselves all over that next one that's coming through. So that what it would do is as and when those -- so those products came to market in the engine space that we were there and we would naturally first of all, grow, and we would naturally, I will say, take share and do it from a sensible set of capital deployment because the other thing about structural casting business, why -- it also has different hallmarks to it -- because of the capital intensity, so it's even you'll see extraordinary capital intensity in the turbine blade business, structural casting is a level above that because the size of the [indiscernible] size of the furnaces as an example.

But you don't have the aftermarket, you get very few that require, I would say, change in an MRO business, where it is very different in the things that we make, and I really like being on the wearing part of the engine because of that volume. So if you look at some of the high running programs that we have, we ended up where the -- after the volumes going into the service sector into the -- through the customers or the MRO shops is as high as what's going to OE.

And that gives you a level of repeatability and also a life going to the future. So you take the 1 we are all working like [indiscernible] the CFMT6, that stop production essentially. I mean 1 or 2 engines a year, but stop production 5 years ago. Today, we're making more of those parts today in 2026 that we did in the last -- any year in the last decade. And that's the wonderful thing about positioning yourself, right, thinking your way through what gives you that sustained advantage into the future. And what's more, the volume is going to go up again this year. So what could be better than that. And now it's gone past model, and therefore, the pricing structure is different as well. So you have to really think where do you want to be the big guy on the block and an [indiscernible] where you're not, how are you going to improve where you are.

But at the same time, don't take on what just to be a suicide mission of just throwing the forces at the castle or the fort or whatever you want to call it. I'm just getting my [indiscernible]. That's not what I call being a good businessman. Well, you can call me a whim, whichever you want to do. I don't mind. I'm very relaxed about it.

We go to Ken.

John, I wanted to follow up on some of your comments you made on the digital investments you're making. Do we see this reflected maybe across the segments? I think you were specifically talking about the engine business. In margins, how do we maybe better sort of gauge the return on these investments you're making, maybe a better top line growth through yield? Maybe just a bit more detail on how we see that flowing through in the scope of these investments. And and how they can really impact the business.

You're an area now, let's call it, machine learning and artificial intelligence, how do we apply it and where do we apply it in the company, which is a really big topic. And I would like to believe that -- I try to educate myself as much as possible, like where are other companies who is at the forefront of this and where do we stand? Because there's a lot of talk, maybe a lot of hype. And how does -- I am not talking about me as an individual using Claude, the Anthropic search engine or something like that or ChatGPT. I'm talking about now using some of these, let's say, large language models to model our data. And I think the biggest payoff for how that is in our manufacturing operations more so than in our offices. Now I'm not saying that there are things to be done there as well. But in terms of gaining control of manufacturing and weight offers as by way of, let's say, yield and smoothing everything out.

I think those opportunities are vast. And so where I choose to spend my time thinking about it and we've had reviews collectively and individually with each of the businesses and I think the last one was even 2 weeks ago, and it was -- that was more centered on the engine business and how we're applying camera systems and a series of images that we gain, how we're using CT scans, how are we using X-ray images and all this sort of thing, also in terms of things we heard about digital thread because there's lots of threads even within that subject.

I think we're still at the infancy quite honestly, because we try to put into place those things that we have the bandwidth to do -- and what I mean by that is that we've been under such stress for deploying our capital in new facilities. I think you know we're -- we have built 3, I think, new manufacturing plants extended to. And we've just bought another site in a brownfield and we're sort of reorganizing another one. We've got a lot going on. But the best place for us to deploy these I'll say, potential control techniques of using artificial intelligence is where we can gather the data and put the sensors on the machine. So putting sensors on, let say, measuring the vibration in machines, measuring the temperature or measuring the pressures in molding machines and so on in a very detailed way in how they affect the part.

And so we're -- I don't want to say experimenting, we're certainly not more than showcasing it. We're actually doing it in the plant you're going to see today. But that is not representative of the whole company. It's not representative of even what we do on the white haul side because we looked at plant 1, we upgraded a few years ago, maybe 2021? And then was it Plant 10? I don't know, I always get confused by the numbers, in 2015 or something.

So you see the generations, but those machines don't have all the sensor capabilities that we have. And so you can not achieve anything in my view on artificial intelligence in manufacturing if you don't have the data. And to get the data, you have to fit all your machines with optical systems, with sensors on measuring all of the facets of that machine.

And we have a capital base developed over tens of years, which doesn't have that -- so in the case of John's business in our structural -- structures business, while we've upgraded many of those like large forging presses to the latest and greatest in hydraulics and control systems, they don't have all the center capabilities that we require to have data capture to go the next part of the journey. But what you shouldn't take for that, therefore, we're, let's say, [indiscernible] certain parts of that. What we're doing is thinking our way through where do we want to put those sensor data gathering systems? How can we apply it? What control points do we want? And so we're working our way through methodically like like oil dispensation in a forging press at 1,500 degrees, how much even to we want to spread that oil before the forging press get that, all those things? And how do we meter it rather than just spray it in there. It's good enough, spray a bit of oil.

You've got to gather that data. So it's a journey which is going to take us, I don't know, 5 years more. But the important thing is that we're thinking about it playing resources, we're spending money at it and I think have a clear-eyed, well-thought-out program of what we want to do and also spending time. So when I go to Japan in April, it's not just a bit of a customer, not just because our new client, but I'm trying to look at what's the least and greatest I see in robotic manufacturing where AI is being applied? And can we keep up with the people who are at the forefront of this in the world, and that's what we're seeking to do.

So I'm just trying to describe to you, this is a journey we're on. And I think we because if we can apply it where all of that, all those new things are coming through for us in our new plants, that's maintaining control at the forefront of the manufacturing and product and materials technologies where we're using it then to also change our chemical compositions on shrink rates as an example. We're actually applying AI for that today already. And it's fascinating, but we're applying it where it matters, the stuff that's new coming through, not trying to think we're going to spread our energies of everything because we don't have it.

We pretty much maxed out on a lot of despite recruiting hundreds of engineers and we have. Its because we are maxed out just because of all the opportunities at the moment, my -- for me, it's clustering the waterfront and to make sure that I've got that contract, that contract, that customer to gain that revenue. And I can fill in afterwards a bit of automation and a bit of AI, my view of the world.

I think that's a good place to stop. We run out of queue.

You sure? Because there's one guy that has been putting his hand up. I've got 1 more question. Rob has been trying for so long. And I mean he's got the right accent.

It's the British matter. Robert Stallard from Vertical Research. Actually a question for Merrick. My question on have you mentioned patents. I think it trademarks and how you had way more than your competitor. I was wondering how this works. Is that a patent over the actual part? Or is that a patient over the process? And how difficult does that make it for your customer to subsequently give that work away to someone else?

I'm sorry, I didn't catch that.

The patent side, I'll cover it for you. So I'm going to rescue you.

Okay.

So we don't have patents over the design. That's not what we do. We work together to co-design. So we explain what is the [indiscernible] possible. So we can take -- they can take -- or jointly, we can take those design limits to its extreme and to achieve that. But all the things like how do we -- all the things I talked about, what goes into making one of these, what goes into the temperature we cast at, the angles we cast that, how we position crystals, how we have, I would say, models to look at how we gate, how we run what angles would do, what cooling that we do with different parts of the -- I think that's all Howmet's technology. But the final IP, so let's say the part that goes into a GNX engine on a 787, then those turbine blades will have -- the design control will reside with our customer, GE. And so then they also them because part of the, I'll say, the dealers, they control effectively the route to the aftermarket to the MRO shop. So we don't go directly to the MRO shops around. We have to have a different, I'll say, strategy altogether if we did that and we choose not to for, I think, good reason.

Thank you. Can I close up? I think we'll close up here.

Good morning, and welcome to the Howmet Aerospace Fourth Quarter and Full Year 2025 Conference Call. [Operator Instructions] Please note, 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, Gary. Good morning, and welcome to the Howmet Aerospace Fourth Quarter and Full Year 2025 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 factors that could cause the company's 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, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial 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, and welcome to Howmet's Q4 and Full Year 2025 Earnings Call. Let's start with the highlights on Slide #4. Q4 was an extremely solid quarter. Revenue of $2.17 billion was up 15%. Full year revenue was up 11%, and hence, the final quarter saw an acceleration of growth. EBITDA was $653 million, up 29%. Our operating income was $580 million, an increase of 34%. Full year EBITDA of $2.42 billion was an increase of 26%. Free cash flow after record capital spend of $453 million was $1.43 billion, which is more than $100 million above the guidance and a 93% conversion of net income. .

Over the last 6 years, aggregate net income conversion to free cash flow has been 95%. Earnings per share were $1.05, an increase of 42% in the quarter over 2024, resulting in a 40% increase for the year. Capital deployment in the quarter included $200 million of share buybacks, $50 million of dividends, $55 million for preferred share redemption and a further $125 million for debt reduction. The closing cash balance was $743 million, allowing for further share buybacks in January and February with $150 million completed quarter-to-date.

I'll stop at this point and let Patrick provide commentary by end markets and by segment.

Thank you, John. Good morning, everyone. Please move to Slide 5. Another solid quarter for Howmet's with end markets continuing to be healthy. We are well positioned for the future and continue to invest for growth. Revenue was up 15% in the fourth quarter and up 11% for the full year. Commercial aerospace growth remained strong throughout 2025, with revenue up 13% in the fourth quarter and up 12% for the full year. Commercial aerospace growth is driven by accelerating demand for engine spares and a record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Commercial aerospace engine spares were up 44% for the full year, driven by both legacy and next-generation engines.

Defense aerospace growth continued to be robust at 20% in the fourth quarter. For the full year, Defense aerospace was up 21%, driven by engine spares, which increased 32% as well as new F-35 aircraft builds. Commercial transportation revenue was up 4% in the fourth quarter. However, it was down 5% for the full year, including the pass-through of higher aluminum costs and tariffs. On a volume basis, wheels was down 10% in the fourth quarter and down 13% for the full year.

We continue to outperform the market with Howmet's premium products. As mentioned on the Q3 earnings call, we have combined the oil and gas and IGT markets into a single market we are calling gas turbines. The definition of oil and gas versus mid- to small IGT has become blurred since many turbines now have an increasing end use for data centers. We have provided historical gas turbine revenue in the appendix on Page 19.

Gas turbine growth has been very strong with revenue up 32% in the fourth quarter and up 25% for the full year. Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers. Within Howmet's markets, we had robust spares growth. The combination of commercial aerospace, defense aerospace and gas turbine spares was up 33% for the full year to $1.7 billion.

Spares revenue accelerated throughout 2025 and now represents 21% of total revenue versus 17% in 2024 and 11% before and 11% in 2019. In summary, 2025 continued strong performance in commercial aerospace, defense aerospace and gas turbines.

Moving to Slide 6 and starting with the P&L. I will focus my comments on full year performance. Full year 2025 revenue, EBITDA, EBITDA margin and earnings per share were all records. On a year-over-year basis, revenue was up 11% and EBITDA outpaced revenue growth being up 26%, while absorbing approximately 1,500 net new employees predominantly in the Engine segment. EBITDA margin increased 350 basis points to 29.3% with a fourth quarter exit rate of 30.1%. Incremental flow-through of revenue to EBITDA was excellent at approximately 60% year-over-year. Earnings per share was $3.77, which was up a healthy 40% year-over-year.

Now let's cover the balance sheet and cash flow. The balance sheet continues to strengthen. Free cash flow for the year was a record at $1.43 billion. Free cash flow conversion of net income was 93% as we continue to deliver on our long-term target of 90%. The year-end cash balance was a healthy $743 million. Debt was reduced by $265 million in 2025. We paid off the remaining $140 million of our U.S. dollar long-term due in November 2026 at par. We also paid off our $625 million 2027 notes with newly issued $500 million notes due 2032 and $125 million of cash on hand.

The interest rate for the 2032 notes is 4.55%. The combined debt actions for the year will reduce the annualized interest expense by approximately $22 million. In the fourth quarter of 2025, we redeemed all of the outstanding shares of our preferred stock for $55 million, simplifying Howmet's capital structure. Net debt to trailing EBITDA continued to improve, ending the year at a record low of 1x. All long-term debt is unsecured and at fixed rates.

Howmet is rated 3 notches into investment grade by all of our rating agencies, reflecting our strong balance sheet, improved financial leverage and robust cash generation. Liquidity remains strong with a healthy cash balance, plus a $1 billion revolver complemented by the flexibility of a $1 billion commercial paper program, neither of which were utilized in 2025. Turning to capital deployment.

CapEx was a record $453 million, up approximately $130 million year-over-year as we continue to invest for growth. About70% of CapEx was in our Engines business as we continue to invest for market expansions in commercial aerospace and gas turbines. Investments are backed by customer contracts.

In 2025, we deployed approximately $1.2 billion of cash to common stock repurchases, redemption of preferred stock, debt paydown and quarterly dividends. For the year, we repurchased $700 million of common stock at an average price of approximately $161 per share, retiring approximately 4.4 million shares. Q4 was the 19th consecutive quarter of common stock repurchases. The average diluted share count improved to a fourth quarter exit rate of 404 million shares. Moreover, so far in 2026, we have repurchased an additional $150 million of common stock at an average price of approximately $215 per share. As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $1.35 billion. Finally, we continue to be confident in the strong future free cash flow. For the year, we paid $181 million in dividends, which was an increase of 69% year-over-year from $0.26 per share in 2024 to $0.44 per share in 2025.

Now let's move to Slide 7 to cover the segment results from the fourth quarter. The Engine Products team delivered another record quarter for revenue, EBITDA and EBITDA margin. Quarterly revenue increased 20% to $1.16 billion, commercial aerospace was up 17%, and defense aerospace was up 18%. The gas turbine market was up 32%. Demand continues to be strong across all our engine markets with strong engine spares volume. EBITDA outpaced revenue growth with an increase of 31% to $396 million EBITDA margin increased 290 basis points to 34%, while absorbing approximately 320 net new employees in the quarter. For the full year, revenue was up 16% to $4.3 billion. EBITDA was up 25% to $1.44 billion, and EBITDA margin was 33.3% which was up approximately 250 basis points. All of these were records for the Engine Products segment. Moreover, the Engine Products segment added approximately 1,440 net new employees which has a near-term margin drag, but it positions us well for the future.

Please move to Slide 8. Fastening Systems had another strong quarter. Quarterly revenue increased 13% to $454 million. Commercial aerospace was up 20%. Other markets were up 14% on renewables demand Defense Aerospace was up 7% and commercial transportation, which represents approximately 10% of fasteners revenue was down 16%. EBITDA continues to outpace revenue growth with an increase of 25% to $139 million despite the sluggish recovery of wide-body aircraft builds along with weakness in commercial transportation. EBITDA margin increased a healthy 290 basis points to 30.6% as the team has continued to expand margins through commercial and operational performance. For the full year, revenue was up 11% to $1.75 billion. EBITDA was up 31% to $530 million and EBITDA margin was 30.4%, which was up approximately 460 basis points. The fasteners team delivered solid year-over-year revenue and EBITDA growth, while maintaining a relatively flat headcount.

Moving to Slide 9. Engineered Structures performance continues to improve. Quarterly revenue increased 4% to $287 million. Commercial aerospace was down 6% due to product rationalization and was essentially flat with the previous 3 quarters of 2025. Defense aerospace was up 37%, primarily driven by the end of destocking on the F-35 program. Segment EBITDA outpaced revenue growth with an increase of 24% to $63 million. EBITDA margin increased 350 basis points to 22% and as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability. For the full year, revenue was up 8% to $1.15 billion. EBITDA was up 46% to $243 million, and EBITDA margin was 21.2%. EBITDA margin was up approximately 560 basis points as the team continues to make significant progress.

Finally, Slide 10. Forged Wheels quarterly revenue was up 9% as a 10% decrease in volumes was largely offset by higher aluminum costs, tariff pass-through and favorable foreign currency impacts. EBITDA was strong at $79 million, an increase of 20% despite the challenging market. EBITDA margin increased 270 basis points to 29.9%. The unfavorable margin impact of lower volumes and higher pass-through was more than offset by flexing costs, a strong product mix driven by premium products and favorable foreign currency. For the full year, revenue was down 1% to $1.04 billion. EBITDA was up 3% to $296 million. EBITDA margin was a strong 28.5% and in a challenging market and was up 130 basis points year-over-year. The wheels team has continued to expand margins despite market metal cost and tariff uncertainty.

Lastly, before turning it back to John, I want to highlight a couple of items. Firstly, in mid-2024, we established a 2025 dividend policy to pay cash dividends on the company's common stock at a rate of 15% plus or minus 5% of adjusted net income. Cash dividends were approximately $181 million or 12% of adjusted net income in 2025. Looking forward, we envisage that the dollar value of dividend distributions in 2026 will be higher than in 2025. Secondly, in the fourth quarter of 2025, we completed the annuitization of the U.K. pension plan, resulting in a $128 million reduction to Howmet's gross pension obligations. No new pension contributions were required in 2025 to complete the transaction. A third-party carrier will now pay and administer future annuity payments for this plan.

Now let me turn the call back to John.

Thank you, Patrick, and let's move to Slide 11. Let me turn to the outlook for the company and I'll provide summary comments before providing more detail for each market segment. The vast majority of the markets we serve, including commercial aerospace, defense, and land-based gas turbines are in a growth phase. The commercial truck wheel segment is stable at a low level and should begin to show signs of growth towards the latter half of 2026. Firstly, commercial aerospace is buoyed by increased air travel, both domestic and international. The highest growth is seen in Asia Pacific, notably China, but also in North America and in Europe. Freight traffic also continues to grow. Passenger demand combined with the recent multiyear underbuild of commercial aircraft have together led to a record OEM backlog stretching into the next decade. New aircraft builds, including narrow-body, wide-body and freighters are planned to grow at all aircraft manufacturers. I'll provide expected build rates later in the call. .

In addition to these robust newbuilds, spares continue to be elevated by the expanding size and growing age of the current fleet of aircraft. This is further enhanced by durability issues found in some modern engines essentially due to higher operating pressures and temperatures, which are required to achieve increased fuel efficiency. Air pollution in certain parts of the world further contribute to the problem. Defense markets, especially fixed wing aircraft are also buoyant. The largest platform, the F-35 continues to be steady for OE builds, again, with a very large new build backlog while spares also continued to grow due to the size of the fleet. In fact, for our Engine Products segment in 2025, the F-35 spares demand exceeded the OE demand for the aggregate value of spare parts provided. The F-15 and F-16 programs are also seeing new builds with reasonable quantities.

Howmet see a strong further demand from other parts of the defense and space industry also, namely tank turbines, missiles, rocket motors, [indiscernible] and also spare rocket parts. The gas turbine business is entering its largest growth phase in years, while oil and gas demand seem to be steady. The demand for electricity generation, especially from natural gas for data centers is extremely high. If we aggregate both large gas turbines and small- to medium-sized gas turbines, we expect that our base business of approximately $1 billion should double in revenue to $2 billion over the next 3 to 5 years and even more growth is envisaged beyond that, especially for mini grids.

Howmet is well positioned in this segment by the supply of turbine blades, where we are the largest manufacturer of gas turbine blades in the world, covering our key customers of GE Vernova, Siemens Power, Mitsubishi Heavy and [ Saldo, Solar and Baker Hughes ], plus parts for aero derivative engines produced by GE Aviation. We have recently completed new contracts with 4 of these 7 customers while negotiations continue with the other 3. Additionally, the build-out of the turbine fleet over the next 5 years, and she has a healthy and growing spares market for years to come.

Turning now to commercial truck wheels. We weathered the volume downturn in 2025, especially in the second half, share growth and penetration versus steel wheels helped. For the year, commercial transportation revenue is down 5% despite material and tariff recovery covering part of the volume downdraft. The market appears to be stabilizing, and we now believe that Q1 will be the quarterly low point. Given the new 2027 emissions regulations remain in place, we anticipate that this will begin to help demand in the second half of 2026 and then we should see the inventory multiplier effect still take effect as the truck builds increase.

I'd like to mention the commercial aircraft build rate assumptions upon which our guidance is based. Albeit we will match aircraft build rates, whatever they eventually turn out to be. For Boeing, the 737 assumption, is 40 aircraft per month based on a rate of 42 as a daily average coming to the month without vacations. And the 787 is 7 a month rising to 8 a month by the fourth quarter. For Airbus, the A320 assumed to be 60 a month, while the A350 is at 6 per month. Q1 2026 guide numbers are revenue of $2.235 billion, plus or minus $10 million; EBITDA of $685 million, plus or minus $5 million and EPS of $1.10, plus or minus $0.01. You'll note that our Q1 revenue is an increase of 15% year-on-year above the average for 2025. We remain positive on the growth for 2026 while noting the dependency on aircraft builds.

For 2026, the numbers provided exclude the acquisition of CAM. Revenue of $9.1 billion, plus or minus $100 million, EBITDA of $2.76 billion, plus or minus $50 million, earnings per share of $4.45, plus or minus $0.01 and finally, free cash flow of $1.6 billion, plus or minus $50 million. The EBITDA incremental for the year, is it guided to be approximately in the early [ 40% ].

I would now like to turn to portfolio commentary. In the first -- sorry, in the last few months, we've been very busy. We've signed and closed on the purchase of our fastener business in Wisconsin, [ Puna Inc ]. We believe that this acquisition enhances our product offering and opens up new markets for Howmet to explore, especially in the longer length and wider diameter parts in the fasteners market. The impact of this acquisition on Howmet's earnings is not material. However, it provides a very good platform for future growth. The more significant acquisition has come in the Aerospace fastener and fittings business, for which we have agreed to pay $1.8 billion. Upon deal closure, the earnings per share effect in the balance of 2025 will not be of a material effect. And hence, the guide is kept clean until the date of closing is known post the regulatory processes.

These actions strengthen Howmet's portfolio of businesses going into 2027. The theme has been and will continue to be to play to our strengths and allocate capital decisively to businesses that are growing and showed the strongest returns on capital and cash generation. We're excited about the future given these portfolio improvements as well as the growing commercial aerospace and gas turbine businesses. Further growth updates concerning the gas turbine business will be provided as we've progressed throughout the year. I'll now start and turn the meeting over to questions. Thank you.

[Operator Instructions] The first question is from Doug Harned with Bernstein.

John, I'd like to understand sort of how your thinking has evolved when you look ahead over the next 5 years with engine products. Clearly, things have changed. And can you contrast your expectations for the relative growth across commercial, aero, defense, gas turbines as you think about planning, investments and so forth. And then related to this, you just reached a record EBITDA margin of 34%. In [ branding ] products. Are you near a ceiling with this? And what's enabling you to get to these higher margins?

Okay. So as you say by thinking has evolved. I guess, thinking always evolves with the passage of time and the circumstances change. I mean, I think the constant throughout this start off with commercial aerospace, where I've been convinced that growth will be robust and continuing. As you know, sometimes over the last 2 or 3 years or maybe 4 years, it hasn't been quite as good as we had envisaged, and that's principally due to the difficulties in final assembly of aircraft and also engines. But the trajectory has been positive and the future continues to look really good.

And so when I consider the backlog the commercial aircraft that are there. I think it is quite extraordinary. And I think the word extraordinary is appropriate. And that applies to both narrow-body aircraft and wide-body aircraft. Since if you were to order a new aircraft today, you're really looking at delivery beyond 2030. If build rates were not to increase that it would be possibly almost towards the end of the 2030 decade. And so there's a very strong requirement for builds to increase. And so I think that backlog number gives great comfort in the investments that we've made. And you've seen our capital expenditure developed very notably over the last few years. And we've talked previously about building out another complete manufacturing plant and extending say, 1.5 manufacturing plants in it for our commercial aerospace business. So that's been very significant, and that's on top of the new engine plant that we built in 2020 coming on stream at that time, we started COVID there's been a tremendous investment for the commercial aerospace market.

At the same time, we've seen very solid demand for defense and I think the surprise there has not been the solidity of the F-35 more so the fact that the other legacy aircraft have also seen significant new orders. But the F-35 is the flagship program that we have. But now when we look out, there's a significant emerging segments of missiles for us, where we are seeing very significant demand increases and just at the moment, we're also spending a lot of engineering efforts to try and ensure that we have position on engines for drones and for the larger cruise missiles. And so again, we see defense as a continuing good sector for us and which we're backing with investment dollars in a significant way.

I think the biggest change to my thinking has been for the gas turbine market. And historically, if you've gone back by 7 years, 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. And then I think things began to change with, I'll say, more consistency of product management by our customers so far less new product introductions and therefore, more buildable repeatable product. And then the emergence of demand, which seem to be a long ongoing need to support the renewable industries where the base level of capability and fast response. But you didn't really stop there and now I'll say, the emphasis is probably a little bit less on renewables and more on fossil fuels.

And certainly, when you look at it, if coal-fired power stations are not being retired then the tremendous demand that's there can only really -- realistically be filled by the natural gas market. And so when you look at it with the demand projections for data centers and that was without the advent of AI, it caused me to think about willingness to invest. And so we did tick up capital deployments in new equipment in 2024 and then more again in 2025. And you saw the capital expenditure for the year very, very significantly above that, which we envisaged at the beginning of the year, you could go back to our guide a year before. And now we're looking at 2026, where it's going to be a higher number again. And we've picked the midpoint of about $470 million but I could envisage it rising above that. But at the same time, we're really trying and ensuring that we have that consistency of free cash flow conversion of the 90%.

And so 2025 was a year where there was not a lot of new output from the capital expenditures that we had put into the ground I think it's more a question of yield improvement to allow for the average of a 25% growth in that area. And we had been, I'll say, quite successful and probably exceeded our expectations of the improvements we could make. And as you know, in previous calls, I've talked about building a new plant in Japan, which has been done. Building a new plant in Europe, which has been done and then placing new capital into those 2 new manufacturing plants plus the existing one in the U.S. And so a lot of that capital will come on stream towards the back end of 2026 and into 2027. But it hasn't really stopped there. And in dialogue with our customers more recently, we are seeing again, further demand patterns evolve where additional investments are required.

And so right now, if I were to call it, I envisage that 2027, we'll see an even higher capital number if all of the -- all of our discussions come home. And I quoted in my prepared remarks about 4 out of 7 customers that was the -- both a very large gas to [ via ] customers and the, I'll say, small and midsized. But if I just confine it to the large gas turbines for the utilities, but now some of them being sold directly to data centers where it's a gigawatt of energy output is required. Then we've now completed 3 out of 4 I will say, outcomes or discussions with those customers and have reached agreements whereby we would seek to invest more for the future while ensuring, again, that we have healthy returns for Howmet shareholders.

So I think that really covers how -- I think that is involved in our thinking, both through commercial aerospace, defense, supplementary areas and further market opportunity in defense maybe be collaborative combat aircraft as well and their engine requirements and now in the gas turbine market. So it's a particularly exciting time. And as you know, we always back the areas investment in the company, which earn higher returns. I hope that covers it, Doug.

Well, and just on margins, the 34%, which was unusually high.

Well, I think it's a good margin. As you know, I never I'm willing to consider what margins are for the future because I find it always a very difficult topic to cover. As you know, we don't seek to take them down at the same time, predicting increases is not something that I've ever been willing to do and because so many factors come into play regarding that. I mean, at the moment, I see, for example, I have to take on additional cost, not only of the new manufacturing plants, but also I think that we're going to sort of recruit another net 1,500 people plus in 2026 into our Engine segment. And so on all of those people would require training and et cetera, et cetera.

So there's a lot going on and I'm also very clear that if we were to hit all that marks then again, the output that we need to achieve won't come from just the new capital load, we've got to try to attain further yield improvements, which then requires us to have effective labor and also bringing together all of the -- I'll say, the flow that we have and trying to get more repeatable product through our manufacturing facilities. And I think the opportunity, which I see in the midterm is that we will be able to move for more batch production in the gas turbine area, it's more of a flow style production which, again, towards the end of the decade, should begin to, say, further give us impetus on yields and therefore, margin. But it's way too early to predict that, Doug.

the next question is from Seth Seifman with JPMorgan.

This is Alex on for Seth today. Maybe one kind of more specific to the guide for this year. Based on the guide for Q1, the midpoint of the rest of the guide for 2026 kind of implies minimal improvement in revenue, adjusted EBITDA and adjusted EPS. Now wondering if you could kind of walk us through the puts and takes there and why that is? And also on the margin, the full year guide kind of implies that the margin is going to decline 30 bps for the full year from the 30.6% in Q1. Wondering how much of that might be related to maybe some start-up friction related to the engine capacity additions you're expecting to come online this year? Or if there's maybe some other things we should account for there?

Let's say, 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. And one thing I haven't commented on is that we actually purchased another manufacturing plant. So let's call it a brownfield in February of this year essentially aimed at the gas turbine market because we've literally run out of square footage. And so I mean, all the capacitization that we've been considering.

And then as you have heard, we're taking on 2 acquisitions, 1 of which we've closed, 1 of which we expect to close during the year. So between building out of capital equipment, building out of new sites, recruitment of labor and also the acquisitions we've talked about. That's an enormous amount going on and it's always a struggle to believe you'll be successful on every single one of them and et cetera, et cetera. So I mean, for me, 30 basis points of margin is not really significant. I'd look at the incrementals, and I'll say it's like, I think, 43% in Q1 and maybe, I think, 41% for the year. So again, pretty close.

And we've got to make sure that all of those new manufacturing facilities come on stream, build products while taking on labor. And there's always the possibility of us not hitting everything in quite the way we do it, and therefore, I think the caution is always the best way. And we take, as you've heard we say in the past I guide seriously. So I think predicting 30.3% EBITDA margins for the year is pretty good at this point. And if we manage everything really well, and maybe it will be better. But at this point, I think we've given you the best shot of what we think is a balanced view of everything that's going on.

The next question is from Robert Stallard with Vertical Research.

John, I just wanted to follow up on your comments on the ITT investment. Do you think the ROIC on all this spending is going to be similar to what you've achieved in commercial and aerospace in the past?

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 put in our commercial aerospace or defense space. And so it's all the order of magnitude. If you look at the embedded return on capital, again, at a very similar nature. Of course, the more, I'll say, brand-new virgin capital, you deploy [ Catacas ] a bit of a drag on those returns. And at the moment, it's difficult to plan out all of the blends that might be going on since we haven't bottomed yet what the final capital deployment will be in the gas turbine sector.

As I said, we've completed 3 out of 4 of the major large gas turbine customers or across the whole of the gas turbine segment 4 out of 7. So there's still a lot to consider. And each one of our customers are also looking themselves whether they can achieve an output increase across all of the, I'll say, their own builds plus other, I'll say, component suppliers. So all of those discussions are continuing and therefore, the final capital build and exactly the timing of it will, it's going to be deployed, it's difficult to know. But the direction of what I've tried to indicate, we know it's like we spent maybe 300 -- I can't remember the number there, $350 million plus or minus or $340 million in '24, $450 million in '25, we're saying 470 midpoints with a plus or minus 20%.

But if you ask me to give a gut feel, obviously, more like a plus at the side at this point? And '27, again, it's not fully baked by any means, but I envisage at the moment to be at least the amount that we have in 2026 or possibly higher as we complete all of these things. And then just trying to say, bring it all to earth as we plan all these things out. And again, make sure that we can afford as you envelope of cash generation we've talked about. So just specifically being on ROIC, it's also of a similar order of magnitude today but the blends of what's new capital versus the existing base, that can change as we move through the next 2 or 3 years.

The next question is from John Godyn with Citi.

Cash generation has been strong, financial leverage at record lows, like you mentioned. I just wanted to talk about capital deployment a bit. How you're thinking about M&A versus buybacks. And with M&A, we saw the consolidated aerospace manufacturing deal, which was a bit larger. I'm just kind of curious how you're thinking about the landscape for larger M&A and growth opportunities that could unlock.

First of all, we've been -- could you bold on providing returns to our shareholders essentially passing back all of the cash flow that we have achieved whether it's been share repurchase, dividend, I see debt reduction in the same category, while ensuring that we have always invested enough to be able to basically drive the organic growth of the company forward. And you've seen consistently growth in the double-digit area for several years and also indicating another double-digit growth for this year. And if we're successful on all of the capital expenditure this year than I envisioned '27 were also going to be healthy.

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, 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. And so if you think about CAM, $1.8 billion is significant. But at the same time, where we think about the leverage is we're below our long-run target average, let's call it, 1.5% or less than that. And so CAM doesn't really stretch us, and we envisage being able to continue to buy back shares as well. So it's not a -- currently, it's not a choice 1 or the other. We're able to -- I'll say, at this point, do it all. We're investing in the business at record levels, so $450 million, trending to $500 million. We're deploying share buyback in a significant way and probably going to end up with a larger buyback in 2026 that we had in 2025.

We are deploying capital into CAM of about $1.8 billion. And if I give you dimensions for the [ Butner ] acquisition, it's in that $120 million to $150 million range of capital let's say, about $60 million of revenue. So at the moment, if you think about it and also be kicking up dividend as well, even though the dividend yield is not the highest because we're growing so rapidly. I mean we are managing at this point to do it all. So I don't see why we have to fundamentally say we're going to do one or the other. And so we shall keep doing whether other M&A opportunities come up, but again, be very disciplined. And you've seen in the 2 we've done very much down in the middle of the fairway. It's in segments that we know well, segments that have earned the right to grow, segments that are producing very healthy absolute margins. And so an increased CapEx for fasteners, absolutely. Willingness to deploy for an acquisition, absolutely. And it's not stopping us also buying back shares as an elevated rate above the previous years.

The next question is from Scott Deuschle with Deutsche Bank.

John, given the demand for gas turbines and the unique value that Howmet creates in that market, do you see a future scenario where your gas turbine revenue at interim products could ultimately be larger than the commercial jet engine revenue?

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. So I guess the short answer would be no. I think the most notable thing though, that it's going on, it's not just for us, the growth in absolute volume and I think I've talked about it in the past, but maybe not sufficiently. There's also a product mix change going on at the same time, whereby some of the technologists that was previously deployed in aerospace are also now being deployed in the gas turbine business probably even more so in the small to mid-range gas turbines, but also now in the large gas turbine area, when that is providing air flow passages through the turbine blades and therefore, requiring us to call the core tools to be able to provide those air passage ways.

And that, again, produces for us a content increase. So we're looking at the -- both the absolute requirement to build more tunnels plus also the evolving landscape over the next few years, I'll say, more complex type of turbine blades, which again plays to our strength and capabilities. So it's all good, but I'm not yet ready for the premise that it could exceed. I mean, I don't know where we're going to be, say in 2030 or beyond its -- there's a lot of things going to happen yet to get this current obviously, requirements built out. But you do see the need for electricity increasing at a rapid pace, really for not just the next 3 years but well beyond maybe for the next decade and beyond.

The next question is from Sheila Kahyaoglu with Jefferies.

And John, it does seem like you are doing it all. You are in the process of closing CAM and you just did the [ Bruner ] acquisition, marks more M&A than you've done in the past. Maybe if you could just give us greater depth in terms of the market that opens up, the product offering and how you're thinking about maybe the returns as you think about either building or buying in terms of these investments?

Yes. I think the -- so I start with the CAM acquisition. For us, it takes us into the fittings and couplings area of, I'd say, the wider fastener market and that helps us to build out those segments in a more significant way and bring another very powerful force to market with the, I'll say, the backing and the ability to deploy capital behind it. And so that's particularly exciting for us and also, I think it's also exciting for our customers because I think they need and they see the opportunity for Howmet to provide further support in those segments of the market. .

I mean at fasteners, of course, it's good, it's interesting, and we appreciate all of it. But I think the main thrust would be in those other adjacent segments that we can build out. So that would give you a bit of a theme on CAM. In terms of Bruno, 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 a 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 or the size of capital to manage long lengths of bolts nor diameters in excess of an inch diameter. And so [ Bruner ] offers us a ready-made solution for that.

And when we think about the markets that we don't serve, both in aerospace and in parts of industrial, where if we had got that product offering, then we would be more significant in the market and therefore, again, help our growth rate. And that's what [ Bruner] brings to us. And so if we were to try to build out that capability ourselves, particularly in the commercial aerospace segment, by the time you've engineered it or how you've deployed the capital you've got the certifications whereas now we have already made profitable in the base business which we can now seek certification of into certain aerospace applications and also to the wider market.

So again, it's where I think the application of the heft of how [ met ] and our commercial position and the ability to deploy capital and make further investments is really going to see a benefit for us and for our customers where we're bringing a powerful new product capability to the market. And so that's the essence of the [ Brewer ] acquisition.

The next question is Myles Walton with Wolfe Research.

You have [ Louis Fed ] on for Myles.

Good morning.

John, I was hoping you could provide some additional color on how spares performed in the fourth quarter and the full year 2025 between commercial and then defense, I guess IGT. And what are your thoughts for 2026?

Yes. So in aggregate, our spares business grew over 30%, probably getting close to 33% for the year. And so again, a very healthy growth rate for us. Against the mark, where I think I said that we saw spares moving towards 20% over '25 and '26 in terms of the total revenue of Howmet. 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%. Inside that 21% is that it's about 40% of our engines business. And to give you one other bit of color inside our overall, let's say, 32%, 33% growth last year. Commercial aero was early 40%. And so healthy growth. And we see that growth continuing into 2026. I haven't called out a specific number yet. But having achieved the 21%, then hopefully, we don't regress from that. And hopefully, it continues to be a larger portion of the Howmet overall revenue picture.

The next question is from Peter Arment with Baird.

Patrick. John, regarding like engine margins in general, like automation has been a big part of kind of a beneficiary for you. Can you maybe give us a little more color on like kind of where you are in the automation journey and for engines and are there other opportunities in the business that you seek for automation?

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 help us or need for additional employees, there you can see we've been hiring at a significant rate. We've made sure that all of the new capital we deployed as a high level of automation. So when we showcase our new manufacturing plant in Whitehall next month, you'll see something that I talked about in one of the previous calls about digital thread and to track manufacturing to an extraordinary degree and also allow us to bring I'll say, machine learning and AI to a degree across that plant. And so I'm very hopeful.

But I also know that first, for capital has been so high, and it's not just can we deploy the cash, but it's also where we can. It's also the engineering bandwidth, which has been totally absorbed by I'll say, the new markets that we've been developing for and customer requirements. And so it's taken a bit of a back seat in '25 and '26 and so the moment our choice has been will match the market and achieve that. And that's far more important for us to just to say, maintain and grow our market share and meet customer demand, and we have the opportunity in maybe it's '27 or probably more like '28, '29 to go back and also make some of the processes that we did not do while we're doing all of this, even though all the new stuff we're doing is highly automated.

This concludes the question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Howmet Aerospace Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note 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, Drew. Good morning, and welcome to the Howmet Aerospace Third Quarter 2025 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, 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 factors that could cause the company's 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 fees, adjusted EBITDA, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial 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 welcome to the Howmet Q3 call. Let's start with the company highlights on Slide 4. Q3 was a very strong quarter for Howmet. Revenue growth continues to accelerate and was up 14% compared to 8% in the first half. Within this revenue growth, Commercial Aerospace increased 15% and within this number, commercial aero part sales increased by 38% for a total spares increase of 31%. EBITDA was up 26% and operating income up 29%. Cash flow was also healthy at $423 million after capital expenditure of $108 million.

Year-to-date capital expenditure is approximately $330 million. Regarding share buyback, $200 million of cash was deployed to buybacks in Q3 with an additional $100 million buyback in October. October year-to-date buyback is now $600 million, which is $100 million higher than the 2024 full year. We also paid off the -- up of $63 million of the U.S. term loan early, which was due in November 2026 and with the resulting net leverage now stands at 1.1x net debt-to-EBITDA.

Dividend payments were also increased in August by a further 20% versus the prior quarter and earnings per share increased by just over 34%. Other commentary, which may be helpful is that working capital days improved year-over-year, allowing for the increased capital expenditure for future growth and all within the free cash flow number previously referenced. Head count did increase by a further 265 people, mainly within the engines business as we staff our new manufacturing plants. As planned, the increase in head count has slowed as we go into the second half, although we visit hiring again as we pick up in early 2026.

Now let me turn the call over to Ken to cover the markets and segment performance.

Okay. Thank you, John. Let's move to Slide 5. So end markets continue to be strong, with total revenue up 14%. Commercial Aerospace was up 15%, exceeding $1.1 billion in the quarter. Commercial Aerospace growth is driven by accelerating demand for engine spares and a record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Defense Aerospace growth continued to be robust at 24%. Growth was driven by engine spares, which increased 33% and new F-35 aircraft builds. .

As expected, commercial transportation was challenging, with revenue down 3% in the third quarter, including the pass-through of higher aluminum costs and tariffs. On a volume basis, wheels volume was down 16%. Finally, the industrial and other markets were up a healthy 18% driven by oil and gas, up 33% and IGT up 23%. In the future, it's likely that we will combine oil and gas and IGT when reporting revenue by market. The definition of oil and gas versus mid- to small IGT has become somewhat blurred since many turbines now have increasing end use for data centers.

So in summary, continued strong performance in Commercial Aerospace, Defense Aerospace and Industrial, partially offset by commercial transportation. Within Howmet markets, the combination of spares for Commercial Aero, Defense Aero, IGT and oil and gas was up 31% in the third quarter.

Now let's move to Slide 6. So starting with the P&L. Q3 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. Revenue was up 14%, EBITDA exceeded $600 million as it outpaced revenue growth and was up 26%. EBITDA margin increased 290 basis points to 29.4% and while absorbing the cost of approximately 265 net head count additions. Earnings per share was $0.95, which was up a solid 34%.

Moving to the balance sheet and free cash flow. The balance sheet continues to strengthen. Free cash flow was excellent at $423 million. Free cash flow included the acceleration of capital expenditures with $108 million invested in the quarter and approximately $330 million year-to-date, which is higher than the full year 2024 capital expenditures. About 70% of the capital expenditures year-to-date is for our engines business as we continue to invest for growth in commercial aerospace and IGT. Investments are backed by customer contracts. Quarter-end cash was a healthy $660 million. Year-to-date, debt has been reduced by $140 million as we paid off at par the U.S. term loan, which was due in November of 2026.

The early prepayments will reduce annualized interest expense drag by approximately $8 million. Net debt to trailing EBITDA continues to improve to a record low of 1.1x. All long-term debt is unsecured and at fixed rates. Howmet's improved financial leverage and strong cash generation were reflected in S&P's Q3 rating upgrade from BBB to BBB+, which is 3 notches into investment grade. Liquidity remains strong with a healthy cash balance and a $1 billion undrawn revolver, complemented by the flexibility of a $1 billion commercial paper program, both of which have not been utilized.

Regarding capital deployment, we deployed approximately $770 million of cash, common stock repurchases, debt paydown and quarterly dividends year-to-date through September. In the quarter, we repurchased $200 million of common stock at an average price of approximately $182 per share. Q3 was the 18th consecutive quarter of common stock repurchases. The average diluted share count improved to a Q3 exit rate of 405 million shares. Additionally, in October, we repurchased $100 million of common stock at an average price of approximately $192 per share. October year-to-date common stock repurchases are $600 million at an average price of approximately $156 per share. Remaining authorization from the Board of Directors for share repurchases is approximately $1.6 billion as of the end of October.

Finally, we continue to be confident in free cash flow. We increased the quarterly dividend by 20% in the third quarter to $0.12 per share, which is up 50% higher than Q3 of last year.

Now let's move to Slide 7 to cover the segment results for the third quarter. The Engines products team delivered another record quarter for revenue, EBITDA and EBITDA margin. Quarterly revenue increased 17% to $1.1 billion. Commercial Aerospace was up 13%. Defense Aerospace was up 23%. Oil and gas was up 33% and IGT was up 23%. Demand continues to be strong across all of our engines markets with strong engine spares volume. EBITDA outpaced revenue growth with an increase of 20% to $368 million. EBITDA margin increased 80 basis points year-over-year to 33.3% while absorbing approximately 265 net new employees in the quarter.

Year-to-date, engines have invested in approximately 1,125 incremental head count, which has a near-term margin drag, but positions us well for future growth.

Now let's move to Slide 8. The Fastening Systems team also delivered a record quarter for revenue, EBITDA and EBITDA margin. Revenue increased 14% to $448 million. Commercial Aerospace was up 27%, defense aerospace was up 2%, general industrial was up 3% and commercial transportation, which represents approximately 12% of Faster's revenue was down 17%. EBITDA continues to outpace revenue growth with an increase of 35% to $138 million, despite the sluggish recovery of wide-body aircraft builds along with weakness in commercial transportation. EBITDA margin increased a robust 480 basis points year-over-year to 30.8% as the team has continued to expand margins through commercial and operational performance.

Now let's move to Slide 9. Engineered Structures had a solid quarter. Revenue increased 14% to $289 million. Commercial Aero was up 7%, and defense aerospace was up 42%, primarily driven by the end of the destocking of the F-35 program. EBITDA outpaced revenue growth with an increase of 53% to $58 million. EBITDA margin increased 510 basis points to 20.1% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability.

Finally, let's move to Slide 10. Forged Wheels revenue was essentially flat as a 16% decrease in volume was largely offset by higher aluminum costs, tariff pass-through and favorable [ warranty ] currency. EBITDA was strong at $73 million, an increase of 14% despite a challenging market. EBITDA margin increased 350 basis points to 29.6%. The unfavorable margin impact of lower volumes and higher pass-throughs were more than offset by flexing of costs, favorable product mix driven by our premium products and favorable foreign currency. The Wheels team has continued to expand margins despite market metal cost and tariff uncertainty.

Now let me turn it back over to John.

Thank you, Ken. Let's move to Slide 11 to discuss the outlook. In summary, before I go into details, the outlook is solid. Air travel continues to grow year-over-year after a solid summer period. The backlog of commercial aircraft extends for many years, even after assuming increases in build rates throughout the next 5 years. The current aircraft fleet has aged. These factors combined to provide both healthy OE demand and the growing demand for aircraft aftermarket parts, especially in the engine for wearing parts, namely the turbine blades in the hot gas pass section of the engine.

Defense sales continued to be strong with steady F-35 OE sales, plus some increase in legacy fighter jets, namely the F-15 and the F-16. This is also combined with growth in defense spare sales. In oil and gas, the demand is steady, while growth in IGT is extremely strong, again in both OE and aftermarket sectors. The part of the market, which I have not previously made much commentary on is the midsized turbines of up to 45 megawatts where growth of both aero-derivative engines and dedicated midsized turbines is expected to grow for many years. This is mainly the result of data center build-outs and the need to supply these data centers with either independent fundamental electricity supply or with very fast-acting turbine response to ensure uninterrupted supply from the grid and from utilities.

It is increasingly difficult for us to separate the end market for these turbines between oil and gas compared to IGT. Commercial truck volumes continue to struggle with smaller fleets, in particular, not buying trucks due to the low freight rates and also combine this with a large price increases for Class 8 trucks, principally due to tariffs. The tariff changes continue to produce uncertainty for Howmet. However, the net tariff drag continues to be small at around $5 million plus or minus as discussed in the last earnings call.

The revenue outlook for the balance of 2025 has increased compared to the prior guide, benefiting from the stronger Boeing 737 builds and also engine spares. The build-out of our footprint with the 5 new manufacturing plants or extensions continues. The most vital immediate part of our expansion going into 2026 is the new Michigan Aero Engine core and casting plant, which is on track with the machines now building some parts. There remains a lot more equipment to be installed during the next 6 months, but everything is currently as it should be. The new plant we've installed for tooling is now equipped and staffing well underway.

Being a little bit more specific regarding the 2026 outlook, we see revenues of $9 billion plus or minus is an increase of about 10% year-on-year. This number will be further refined in our February 2026 earnings call, where we will also provide more detailed guidance.

Moving to the fourth quarter of 2025. We see revenue to be $2.1 billion, plus or minus $10 million, EBITDA of $610 million, plus or minus $5 million. earnings per share, $0.95 plus or minus $0.01. And for the year, the numbers are -- revenue at $8.15 billion plus or minus EUR 10 million, EBITDA at $2.375 billion, plus or minus $5 million; earnings per share of $3.67 plus or minus $0.01 and free cash flow of $1.3 billion, plus or minus $25 million.

In summary, 2025 is another good year for Howmet with free cash flow guided substantially higher than the last earnings call, even after the higher capital expenditure, which is there for future growth in the company.

Before moving to Q&A, I did want to thank Ken Giacobbe before his years of dedicated service. It's been quite the journey for Ken and him being my partner in all of this from his days at Alcoa to Howmet, which interestingly, as 1 of the 3 parts of former Alcoa is now worth more than the single Alcoa company ever was. All the very best to Ken in his well-earned retirement.

Thank you, John.

I just want to offer you the opportunity of adding any comments.

Yes John, appreciate the kind words and appreciate the partnership. It's been a privilege and a pleasure to work with you, the Board of Directors and the Howmet team. Results have been remarkable. I think a lot of that is driven by the positive culture that you had built over the years. That culture is 1 that we talk about quite a bit, 1 of focus innovation in terms of everything we do, empowerment, accountability, shared purpose and winning, which is quite refreshing.

As I look forward, I believe Howmet well positioned for the future with a clear, clear path forward and an exceptional leadership team at the helm. So as I conclude my 20-year, 21-year tenure with immense gratitude and also confidence in Howmet's future, I want to thank you for the opportunity to be part of such a remarkable organization. So wishing you and the team continued success.

So I guess, Drew, we could move to Q&A.

[Operator Instructions]

The first question comes from Kristine Liwag with Morgan Stanley.

And Ken, congratulations on your retirement. Thank you for all the thoughtful insights over the years and hope you've got something very fun planned. So maybe, John, the investments in technology you've made in Aerospace has yielded in Howmet being a clear leader in this area, especially for the hot section of the jet engine. Now pivoting to this data center build, we're starting to see this industry really gain a lot of traction. You've called out CapEx increases last quarter and also this quarter.

Can you just take a step back and provide us more color on what the competitive landscape is like for turbines and IGT? How differentiated is your technology, the pricing environment? And what's your expected returns in this sector and how that compares with aerospace?

Okay. So that's a very broad question gives me the opportunity to talk now for at least an hour...

I'll keep it to that question though, John.

Yes. This is only 1 question. So first of all, clearly, this build-out of data centers and the requirement for electricity to not only also drive the processing and the microchips that for these advanced microchips that are being installed, but also the electricity required to call them is producing an extraordinary level of demand, which I think we know that the utility companies themselves and the grid is struggling to cope with and how can that be satisfied.

It did change again, the new incoming administration in the early part of this year when there's a greater emphasis on foster fuels and really the natural gas being the technology of choice compared to renewables. And so that has caused us to think again regarding the investment profile for this business. So the back class of the fundamentals appear to be well set. Certainly, you look for the next few years, the build-out and the requirements are extraordinary and the question remains, of course, what would it look like at the turn of the decade in terms of each future growth. But having said that, I do think these data centers, which are there not just for the introduction and use of AI, but also just fundamental requirement from storage means that, that electricity demand will be there. And so solid and gives us a lot of confidence to invest albeit we don't have the same clarity regarding backlog numbers that we have in the Commercial Aerospace market.

So you don't quite have that same I'll say, clarity and visibility into the back orders. So it's caused us to keep rethinking our investments, and we've picked it up again this year. And you've seen with our guided capital expenditure increases in investments that we are making. And we expect that CapEx in 2026 and indeed going into 2027 will be also at high levels while not disturbing what our fundamental aim is, which is to convert 90% of our net income into free cash flow. And so it's a tall order at the same time, we're excited to be part of this growth opportunity.

When I think about sort of what's happening there is growth in both the large industrial gas turbines that you see bought by utilities, which provide the electricity, which is transmitted over the grid. But now given the large demand is that there are gas turbines being installed at the data center sites or plus the data center sites in a centralized facility to provide that underlying electricity. And then beyond that, is that back up [indiscernible] in the case of where you just can't guess a large gas turbine at the moment because they're quite scarce and orders are now going out. If you place a new order, you're not going to get that big land-based gas turbine to probably into the 2030 or beyond.

Is that as a case where a lot of midsized volumes are now being installed, not just for the fundamental production of electricity, but also because they are very fast reacting is that it ensures that the supply of electricity to the data center is uninterrupted. And therefore, it's providing a lot of stimulated demand for the aero derivatives. And in fact, if you look at the I think results this week of Caterpillar. They you're seeing that, and they're 1 of our major customers in those midsized turbines. So it's quite exciting.

And then in terms of technology, it's going very much along the same lines that we have in -- had done in aerospace where we have moved or are moving from turbine blades, which are solid to turbine blades, which are increasingly core, what I mean my core is that you have air paths through those turbine blades to provide them with cooling air such that those turbines can be run at higher temperatures. So it's very much going along the evolution path that we've had in the aerospace world. And so as we move forward over the next, let's say, 2, 3, 4, 5 years is happening right now is that we're installing additional capabilities to be able to produce the sophisticated -- tolerance calls that enable that next level of technology to be achieved and that's both for the midsized turbines and indeed for the very large turbines that utilities tend to buy.

If you look at the most recent development, without giving you specific market numbers or customers. Some of those now initial turbine blades are as sophisticated as they possibly most sophisticated commercial, not necessarily military but commercial aerospace use in terms of the numbers of, I will say certain time pathways to those turbine blades. So -- and of course, with that goes content and value because it again is producing the level of capability electricity generation well above what you could have achieved turbines in, let's say, 5 years ago or 10 years ago? So it's a pretty exciting landscape in terms of playing to our spreads of the more sophisticated technology. It's causing us to expand.

And you've heard me talk about the new manufacturing plant that we have or are building, in fact, at the end of this year, the structure will be complete to enable us to put new capabilities and, for example, new casting machines into that plant in the early part of 2026 to bring capacity on, not just for our customers in Japan, like Mitsubishi Heavy but also other customers like Siemens and GE and [indiscernible] , et cetera. So -- and we're doing that, plus we're also expanding our plant in Europe significantly and also placing new capital in the existing footprint of our U.S. facility.

So we're expanding in each of our 3 major sites where we produce gas turbine parts and really excited to be part of this journey which really is evolving very much in the same way as an aerospace business, not only for those midsized turbines but also now with the very large gas turbine. And so it's a pretty exciting time for us. to be able to build out this business to be a very significant contributor for the company.

So I'll stop there just in case I'm now getting too carried away with it. But I want to make sure you hit the point of your question, Kristine.

The next question comes from Myles Walton with Wolfe Research.

John, I'll try to ask a question that won't let you go on too long. But the market implied growth in your $9 billion, could you share that as well as perhaps you've been running, obviously, well ahead of long-term incrementals the 30% to 40% that you had previously spoken of long been blown past, is '26 another year of very high incrementals as we've seen in the last couple of years?

Let me deal with your latter point first, regarding margins and incrementals. I think as you know, I don't really give color on that at this time of the year, that's more for the February call. So I'll certainly deserve any profit guidance for February. I note that in Q3, our incrementals were, again, quite healthy at 50%. Obviously, we've given you a guide already for Q4. So I think it's a similar number for Q4, but Ken could always correct me on that. So it's pretty strong for this year. Next year, I guess, when we come up with a number, I mean it will probably [indiscernible] because it always does. We don't seem to be able to satisfy your expectations.

At the same time, I think that whatever we come up with will be a very satisfactory in 2026. So it's a long way of talking about the subject for a minute or 2 without actually seeing much at all. In terms of the first part of your question, which was where did we see end market growth. So my sense is that getting too deep into the guide at this point it's an approximation. I think Commercial Aerospace will be stronger in 2026. So I think the build-out of narrow bodies, both for Airbus and for Boeing will be stronger in 2026 as it has been in 2025. And also the likelihood of the widebodies, particularly the Airbus A350 and the Boeing 787. I think both of those are going to be at a higher build rate this year. So I'm pretty optimistic about Commercial Aero.

So I see that being a few percentage points as an absolute higher than in 2025. In defense, coming off this year, which is pretty strong at plus 20, I can see us having a mid-single digits increase again on top of that into 2026. I'm pretty confident about our positioning on the defense side. And on the -- I was going to call it the industrial segment, which will wrap up 3 segments, which is the gas turbine one, which I think you can sense is going to be at the high end, the oil and gas which would be in the middle and then general industrial, we should be at the lower end or combining all of that and say, basically, that just getting into double digits as an increase. So that will be the sense I have for the underlying big segment commentary for next year.

But while I'm on a role, I'll just talk about inside Commercial Aero because I know you've got a follow-up with the question like what's the underlying assumptions. So I think Boeing 737 will be higher. So I'll say I use 40 or getting into the 40s as an approximation, the A320 into the early 60s or maybe, I don't know, 62,387 million you 7.5 and the A350, maybe 6.5 could be 7. So it's in those sort of areas. So it's is giving you directionally what I think you want without getting too specific because, again, I'd like to see how people close out our customers close out this year, what stated inventory is, as you know, certain of our airframe customers have been taking [indiscernible]. And I have to think about the robustness of their build while they've been taking [indiscernible] and the consistency. And hopefully, we're going to see improved consistency into 2026 in the same way we've seen it for the last 2 or 3 quarters, where it's become somewhat a little bit more predictable.

The next question comes from Ronald Epstein with Bank of America.

This is Mariana Perez [indiscernible] on for Ron today. First of all, congratulations, Ken, on the retirement, and congratulations on your contribution to the company and the industry in general.

I'd like to follow up on -- try to dive deeper as we think about next year into 2 things. Number one, how we think about, I'll say, on the commercial aero part, destocking trends and aftermarket trends or spare engine trends despite like these runs that we are all expecting on OE. And the second 1 is when you think about IGT how dependent the guidance is on the capacity that will be coming online end of this year and mid next year? How sensitive is guidance to the timing of that like incremental capacity?

Okay. Let's deal with the IGT part first and then go back to commercial aero. This year, we've seen the benefits of both small increases in gas turbine build at the large land-based turbines, probably a slightly higher build in terms of those midsized turbines in percentage of increase. But this year has also featured an increase in spares as the existing fleet both types of turbines and maybe the midsized turbines being very strong in terms of their space requirements because those fleets are working harder. So that gives you a picture there. For this year, when we move into 2026 and into '26 and '27, again, we're going to be -- we're going to see fundamental demand and this demand in turbine builds are expected to increase again into '27 beyond '26.

Is -- on the OE side, it's going to be obviously a factor are all the turbines going to be actually be built that are planned and how we are able to step up to those builds. And so I see that as -- whereas this year, I'd say, been slightly stronger on the spares and -- but still solid on the OE side next year. I think we're probably going to see a higher vector compared to this year on the OE demand but still strong spares demand. So again, I'm feeling pretty positive about those segments. I think difficult to judge exactly yet which 1 will win in terms of those 2, if there was at least between them.

Moving back to the Commercial Aero question. I've already given you a commentary regarding what I think build rates are, I think destocking essentially is finished this quarter, and I don't really see much evidence of that remaining if anything, it could only be a little bit left in the titanium area where people build up stocks because of either lack of build or trying to provide security stocks in the case of what happened after the Russian invasion in Ukraine and the supply issues out of [indiscernible].

In terms of spares and engine space, I think the 2026 is going to be another very strong year for that. If you do with CFM first, then I envisage that it's going to be strong on the CFM56 because the existing fleets continue to work hard still a backlog of parts and the end units are going to be put back on wing and into the air. And similarly -- and maybe even a higher area for those V2500 and the GTF engine. So spares demand is going to be very strong. And as these jet engines transition to the new, I'd say, versions of them, so the new parts, which you've got into the LEAP-1A and the ones which should go into the 1B next year and then into the GTFA then there'll be not only the OE demand but also the retrofit requirements for improving the robustness of those engines and to get a lot of engines back on wind. So I think I covered it.

Yes. And if I may squeeze another one, it looks like Asian history now because of how hectic the year is, but it wasn't long ago that you guys have to call for force majeure on the tariffs and raw materials, could you mind like giving us some color around like how you set today? And how you think about risks on raw materials and pricing and pass-throughs going into next year?

Well, I think we're pretty solid in terms of pass-through capabilities either under existing contracts or with new agreements that we've made with our customers for each of our end markets. And so what was the gross effect that we could see, I think, originally, it was up to $100 million. That the delay of implementation and certain exemptions that have been provided maybe that number came down. And then recently, we've seen some of the tariff increase again, thinking now on the Class 8 area. So it's been moving around and still continues to move around even as recently as yesterday.

But the net effect is still sub $5 million for the year, and that essentially is the drag that's just in terms of timing of recovery. So as an issue for Howmet, it really is a nonissue, sub-$5 million, and therefore, hopefully, it disappears into the woodwork in 2026.

The next question comes from Sheila Kahyaoglu with Jefferies.

Congrats, John, on great results and Ken, on your retirement, although I'd argue with Kristine that working with John has plenty of fun. So I don't know what you'll do in retirement, that's even better. Can I...

I can agree with that, [indiscernible] you thinking.

Ken, I'm going to actually put this 1 on you just given, I got the comments on Howmet being more valuable, then the 3 pieces was very interesting. So over the next few years, where do you see Howmet state just given where the balance sheet is, leverage is at record lows, margins in each segment are terrific. So lots of areas of expansion. How do you think about Howmet over the next few years?

Yes, Sheila, I think I'm going to have to let John answer that one. I don't want to get fired this late, right?

I think the -- if you look at the journey that we've made over the recent years, from a trying to install a performance culture through, I'll say, more difficult times of COVID. It came upon us fairly quickly and then trying to really invest in our technology and then really address growing the company. And I think the growth trajectory is very encouraging. And so while we've been like -- walking on chewing gum or doing the [indiscernible], we've been growing and improving our margin. And my thought is that we'll continue to do that. But if the value equation, then I think maybe the growth will be a more significant factor over the next 5 years than the margin factor, and that's not to say that the margin won't improve, that's what we come to work for every day to try to achieve that.

I think there's lots of things yet to further expand in terms of whether it's increased automation capacities that we have or capabilities that we have in the company. There's the thing which we've been talking a lot about recently about how we can use the artificial intelligence and machine learning and our manufacturing plants. So it isn't just basic automation. It is data collection at extremes that we've never seen before. And when we have the opportunity next March, where we're planning on an Investor Day or Investor Technology Day facing it at [ Wisol ] plant again and we'll showcase the new manufacturing plants that we have there, beyond just the fundamental increase in robotics, which I think people have seen it also at a high level. It's another stage beyond that.

But for me, probably even more important that is that the what we've served the digital thread that we've been building throughout the manufacturing process from the chemical compounding right the way through core prep and then into [indiscernible] casting and being able to provide data and individual traceability right back to which fundamental elements for each of our parts that we're manufacturing. And then with that huge amount of data that we are positioning ourselves to collect, is that using various techniques to be able to use our [indiscernible] because the sheer scale of data we have or we've got to have available to us takes us something beyond any human being could possibly advise data crunch. And so I think that's going to lend towards a further improvement in our ability to improve yields and an improved yield, of course, goes with economics.

And then with the improvement in the yields, we can take the design tolerances to the further level, which you'll provide again for the next generation of content improvement and fuel efficiency for both not only our aerospace segment but also the gas turbine segment. So I think all of that coming together and using a combination of automation and AI and all the things we're trying to position for is going to be good for Sheila.

The next question comes from Noah Poponak with Goldman Sachs.

Congrats, Ken, on the retirement and the evolution of this financial model. Wanted to come back to incremental margins. Guys, you had this historical framework a few years ago of 30% to 35% on the incremental and you've now created this kind of wall of tough compares, but you've now had 2 quarters in a row where you've had a well above the 30% to 35% despite comparing to well above that. And so I was hoping to better understand is price or productivity, the bigger driver at the moment. And then as you move into 2026, can you stay above that historical targeted range despite the tougher compares?

Yes. I mean, again, I'm going to try to get away from 2026, Noah, at this time. And any number is always going to be a combination of things. In our incrementals, we've got obviously some leverage for volume. We've got the benefits of automation. We've got the benefits of yield. We've got the benefits of content and also, we have the benefits of price as well. So we have many individual threads going into that. And the only, I would say, parts which are currently negative would be the fairly high in gestation of labor, which takes, I think, as you know, a fairly significant trading time, never mind just the cost of recruitment.

And there's a slight degradation initially from those employees in terms of yield. And so what do I expect going forward is that hopefully, the drag of that labor becomes a little bit less because the denominator gets higher. But my guess is that we're probably going to have to hire a net higher number of people ultimately as we move through 2026 both for priming the pump again at the start of the year as some of the equipment I talked about comes in, plus the fact that we also envisage having to step up again into 2027. And so if you would ask me to call it today, I'd say we probably end with a higher net number. And so you've got that which will weigh upon us while still hopefully achieving all of the productivity improvements from the threads of automation and the new equipment coming in with a much higher level of, I will say, again, automation that we had in the past.

So there's such a lot of moving parts. It's difficult to pass all of that out. And then the only thing I haven't mentioned is the content on average will improve again as we move into next year because we'll be moving from 1 generation of technology to the new generation technology at some point during 2026 for the LEAP 1B program as an example. And then, of course, we have the GTF advantage, which is also being made today in fairly small lots. But with that significantly increasing as we go into 2026, really to get to a much follow run rate in 2027. So there's so much going on and with the buildout [indiscernible], it's really difficult to give you. I just feel at this point, we've managed us way through fairly well with really healthy incrementals. And I mean anything above -- I mean, if our EBITDA is at 29% anything above that is incremental beneficial to the company.

So I'm feeling as though we're going to be above that for next year. But without -- I'm not willing to comment yet about whether we're going to be on par with our incrementals this year or not or whether inevitably, there has to be some flattening of that. That it's just -- I don't -- the wait till February to comment about that.

The next question comes from Scott Deutsche with Deutsche Bank.

John, I think you said CapEx will remain at high levels into 2026 as well as into 2027. So just to put a finer point on that, should we be thinking about flattish CapEx in those years relative to 2025 work at that increase? And then does the mix of that CapEx shift more toward IGT and midsized turbines or is the majority of it still focused on aerospace?

In terms of absolute numbers, the majority is absolute dollars will still be higher for aerospace. But I think there'll be a percentage as a mix of a total. I think that the investments we're making in both the large and midsized turbines possibly be a higher relative percentage than it is this year. I think the 1 question I forgot to add on the way through the Q&A section as what do the economics look like for these turbines? And essentially, it's the same as for Aero. So if you were to pick up both our absolute and our incrementals for either the IGT part of our business, both large and midsize or aero and they're pretty much the same.

So it doesn't really matter what the say, the color of CapEx, which segment goes into because the most very good. And for me, it's more the fact that we have the opportunities. And it is just as I look forward, we, I'll say, more or less framed out, well, I think we're going to do 2026. But every time we sort of examine or have new conversations with [indiscernible] in fact, I was in Europe for the first part of this week. And I think if I got back last night to be able to do our earnings call is that, again, is only a conversation about improvement in opportunities which are there before us.

And so what causes me to believe that 2027 is also going to be significant number for CapEx. And so I see this year as we've moved up from what we thought was going to be I don't know, 350 to 370 or something like that, maybe a bit lower on that side we now probably going to burst 400. But as you see in 400 but with actually improving cash flow is that I think the greatest pleasure that I'm going to have next year is being able to deploy that amount of capital or more. And we don't deploy capital just because it's fun to do. It's hard work, but it's going to be backed by clear-eye thinking about customer utilization, customer commitment and economic return.

And I think you know we have pretty high hurdle rates for that to deploy that fresh capital. So my view is it's a good thing if we can spend 2025 level in 2026 and more in 2027 are more than that's going to be a good thing. And we just see increasing opportunities to build out the business.

[indiscernible] there's no further questions or Drew [indiscernible]. PT I think we should close given the fact less than a minute to get [indiscernible] ask a question.

Mike, did you have a question, Mr. Ciarmoli ?

Yes. John, not to belabor the point, and I'll try and be quick here with the call closing out. But back to these incrementals I mean you're clearly benefiting from spares demand, a combination of legacy utilization, combination of durability issues I mean, are you overearning on the Aerospace spares now? And is that driving the strong incrementals, does that normalize at some point? -- as maybe some of these light work scopes or different kind of work scopes trend back to normal?

Well, first of all, in the year, in the short term, pricing into the spares part and an OE part are exactly the same over a long-term basis that are differentiated because of, let's say, parts going to pass model. So no, there's no case of the over-earning in the immediacy. If you go back to previous calls, I have said that what we see is our spares business in total increasing every year for the next 5 years, didn't really want to go beyond 5. We may discuss whether it's is going to be the same angle increase, but there's no case that I can see where spares don't increase every year through the end of the decade. So that's pretty positive.

Thanks, Mike. So it's 11:01. So Drew close the call.

Yes, sir. This concludes our question-and-answer session and the Howmet Aerospace third quarter 2025 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.

Good morning, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace and Defense Equity Research team. So thank you, Howmet, for being here. John Plant, in case you don't know, Chairman and CEO; Ken Giacobbe, who's over there, sitting shyly is the EVP and CFO; and PT, who keeps us at bay when we're out of control. So thank you, John, for being here.

John, you've done a fabulous job when it comes to Howmet. There was one interesting contrast in the second quarter results, where many suppliers, including yourself, saw an inventory destocking, but Howmet's commercial OE business still grew low single digits unlike many. So in large part because of the actions you've taken over the past year, are you seeing any sense of shift from your OEM customers? And how do you think you're keeping -- how are you thinking about supply chain levels and production?

So I think you start off with where did we see the destocking occur and that really was a continuing theme from the first quarter where I think Boeing were trying to slim their balance sheet and understandably so given the fact that maybe for the last now, maybe 2 years, they've aspired to build at rate 38. And we're taking parts of, I'd say, close to that rate where it was applicable in terms of the ERP system. But if they weren't building, then clearly, they've built up a bank of parts. And post the capital raise, I think they really did want to realize some of that inventory into cash. And so I think that's where the destocking originates from.

And then the question is what's the duration of that relative to the increase in their build because now they seem to be achieving a more consistent picture and indeed seem to be rolling out at their stated rate 38 in the last couple of months. And so it's good and especially with statements about wanting to see that increase. And so I guess it's a balancing act between consistent rate production, potentially increasing their rates.

And while I see it taking away some of the safety net they've had by way of parts availability from their own inventory. I assume on the assumption that the supply base is in a much stronger position to be able produce consistently given the comments that have been made over the last couple of years about the supply chain and the supply chain causing them difficulties of building. So it's quite an interesting, I'll say, balance between all of that. And my expectation is given the rate aspirations, should the FAA agree, then any destocking will be over with fairly soon.

I think it's safe to call you conservative. You start out these -- the guidance for the year with OEM production rates for the 737-33 for the year, A350, A320 in the 50s, both A350 and 787 around 6 per month. I think it's safe to say the narrow-bodies are doing better than that, just given what we've seen in the August delivery numbers. So I guess, how do you think about your confidence in the sustainability of those rates and future rates from Boeing and Airbus? And where do you rank your confidence across those four platforms as we head into the second half of this year and into '26?

Yes. I think I went quite giddy in the second quarter call and said rate 33. I think it was lower than that at the -- in the first quarter. So I feel as though it's easy to get bit by being too optimistic about where rates of production are going to be. And we always have to consider what's the aspirational rate compared to where you think it will land and then also are we able to respond by way of our own inventory, the inventory which is at the customer and also then the capacity we have available both for machine tool capacity and also, I'll say, labor training. And so providing that we've got all of that in good order, then there's been no rate that any of our customers have aspired to achieve that we haven't been able to be able to meet. And so any claims of shortage, I have been very firm about rejecting any such statements on that basis.

Would you want to give confidence levels, rank the order of the platforms?

Confidence in meeting rates.

Meeting rate and growing rate into '26.

I feel really positive that rates are more likely to increase now than I have in the recent past. I think the noise about supply chain, for the most part, is behind us, whether that noise historically was justified or not. But right now, do I think that whether it's Airbus narrow-body or Boeing narrow-body, I think both of them are more likely to increase in '26 than not. And similarly on wide-body, I think we've been in this long period of where there's been an aspiration to increase wide-body build and it hasn't really happened for a variety of reasons. But now I do feel as though we're on the cusp of seeing some rate increases. And it's always going to be one of degree.

So does Boeing get to rate 7 consistently, then does it go up further in the year on the 787 or on the Airbus A350, are they, I'll say, fuselage supply issues that they've had from Spirit Aerospace, do those begin to ease given the fact they had teams of people from Airbus in those operations for some time now. So I think it does. I think it gets better. So I suspect that when we do give some -- possibly in November, some like initial thoughts about 2026 or when we more likely give a more accurate guide in February next year, if you ask me, what's my expectation? I feel as though we're going to be seeing a growth picture for next year. Now will it be as much as you want?

I want a lot.

And good point is you always want so much. It's insatiable demand and expectations are very high. And as you say, I kind of want to walk on this earth first before being in the clouds with you.

Okay. Sounds good. Let's talk spares. So total aero defense, IGT spares represented about 11% of your sales back in 2019. Now you're up to 20% of sales. That's because the business has grown, I think, 40% in the first half. So how do you think about the growth for the remainder of the year and what's driving it?

I think the conditions underlying for spares are healthy for Howmet. And I'd start with the it's a former generation of aircraft using the CFM56 engines or the VM2500 engines. I mean it's no secret that the fleet is working harder, and that's really a function of the inability for the airframe manufacturers to produce the -- I'll say, the production levels they really wanted to produce over the last few years. And so you've had sustained underbuilding and therefore, an extraordinary backlog has now developed, but the existing fleet has to work harder.

And so I think the overhauls, which are being done for those aircraft and engines when they come in to the MRO shops is being done at a deeper level because I think the expectation is they're going to have to continue to work harder over the next few years than they previously anticipate. So I think it's a longer and deeper overhaul because of the expected duration of those aircraft into the future because I think the aircraft production achievement next year and the year after, we're still going to be below the demand input. And so when you got that condition, it's really healthy for the spares business.

And so let's say, if you use CFM as a proxy for that discussion, previously, people used to talk about it peaking in 2024 or 2025. And a year or so or maybe 2 years ago saying, I think it's more likely going to be 2028. And I think now everybody is coalescing around volumes are going to continue to increase through 2028 and then degrade very slowly from that point. But meanwhile, all the, I'll say, more modern engines, given the achieved duty cycles of those engines, those are coming in more frequently for spares and turbine blade replacements.

And so the LEAP engines or the geared turbofan engines, we're all familiar with both the longer-term outlook, providing fundamental secular growth because of the temporary pressures those engines are facing and then beyond all of that is that we are in this, I call it, the bubble for the next 2 or 3 years, whereby the amount of change from the Generation 1 turbine blades is going to be very high because of the lower duty cycles that have been achieved compared to that, which had been, I think, anticipated.

And I think its most egregious in some of the countries where the pollution levels are high. I mean, those frequency of shop visits have caused, I know one airline that ceased to exist because there's so many airplanes on the ground. So demand is going to be high and the replacement of the fleet. So when, for example, the geared turbofan advantage engine parts become, I'll say, available next year, then it's going to be an interesting few years between that, which is supplied to OE and that which goes to service and the retrofit of the fleet.

You know what, I just realized that when I first started covering Howmet, I thought about the aerospace spares business is somewhat random, but we really should have been modeling it like we do for a CFM shop visit and the content increases as you get into the LEAPs. Is that a fair comment to make?

I think it is because the story isn't just about the backlog of, I'd say, of aircraft. It isn't just about, I'll say, the lesser duty cycles that have been achieved. It's also a story of content increase as you improve those turbo blades for additional durability and then the retrofit of the fleet. And then you played all again in the defense area as well. So you have to look at F-35. And it looks as though the statement I made a couple of years ago that I thought 2025 was going to be the crossover year when we'd actually produce and supply more spare parts than the OE production.

And indeed, in the first half, that's -- we can see it's just occurring right now. And so with the increase in the, I'll say, fleet of aircraft, so if there's, I don't know, 1,075 or 1,100 F-35s out now by 2030, it's going to be over 2,000 and maybe by 2035, 2040, it's going to be 3,000 of those aircraft out there, then the spares market will indeed continue to increase, and it doesn't increase in a linear way because of, I'll say, the additional flying hours those aircraft are doing in the shop visits.

I'm looking at PT because I'm going to sneak another question. Of the three spares businesses you have, IGT included and commercial and defense, how do you think about the fastest grower from here? Sorry, PT.

I didn't know that you were restricted on amount of follow-ups on a single topic, but...

On the earnings call only, not here.

Okay. No, I think it's free form here. Anything goes. Definitely, IGT has seen a really strong start to the year because of the existing fleet running harder just because of the fundamental electricity demand that's -- and requirements are going on. Meanwhile, there's not been sufficient ability to build new turbines because you can't just materialize that capacity at thin air. And so everybody is building the capacity for new turbines, but the fleet is working harder. So spares has also been really strong there. It's so difficult to handicap.

At the moment, I'd give it in terms of percentages, I'd still give commercial aero over the next 2 years, the edge on the spares growth. So I suppose the only thing you can take from that is 2026, I think the spares growth will be -- continue to be high and positive.

Great. Let's turn to -- on the high-pressure engine products, you can't ship them fast enough, and there was some talk last year that there was a bottleneck. But you went out of your way, made some charts, showed us your output and squared that away. So how do you think about how much additional volume can you squeeze out of your existing footprint versus the engine production ramps that we have seen from GE and Pratt and what their goals are?

So I think one of the best meetings we had in 2024 was when I wanted to blow away some public statement, which had been made explicitly stating the Howmet was a bottleneck because I didn't like it because it wasn't true. And so I wanted to have Safran, GE, and Airbus in the same room, so we'd have one set of data to look at. And so we could all stare at it and indeed demonstrate that our output was up 40%, 50% in the year. And of course, then how that's allocated by our customer that which goes to spares compared to OE build is their decision, not ours. So we were very clear there was enough parts to make any deep amount of OE engines last year.

And then I went further in November and said, for the new generation of parts, which put 500 engine sets, not 500 blades, but engine sets of blades into inventory to make sure that the position in 2025 was good. So all of that's occurred. Most important has been us building 1.5 new plants, so a whole new plant in Michigan and I'll call it half of one by way of extension in Kentucky to expand that capacity. And that capacity comes on stream really at the back end of this year and going into 2026.

And before then, any increases that we're bringing out of the system in terms of high-pressure turbine blades has been more a function this year of yield improvements and also bringing together to the system new tools where if existing tools have been running so hard that they were, I'll say, beginning to decay in performance and to replace the brand new tools. And so we've put in place some high degree of new tooling this year to give us the improved yields, which are getting us through this period at the moment before the capacity comes online at the end of the year.

A few years ago, you talked about having increased market share by roughly 1 point per year over 4 to 5 years to around 50% of the industry's high-pressure blades. I think back to your Technology Day back in 2022, there was a case to be made that your quality and tolerance for industry-leading. So how do we think about the couple of hundreds of millions of aero engine CapEx? And if you could talk about where they are and as you look to improve the industry's durability issues?

Okay. So capacity is one part of it of the equation. Technology is another part of the equation. And indeed, the tools to produce it is another part. So it starts off with I think the fundamental position is one where we use proprietary materials to create the cores, which allow us to finally tolerance the air passage ways inside the turbine blade. And we try to move the air going through them at differential speeds such that at certain points, there's a higher degree of airflow and other points, there's a low degree of airflow. And it's just trying to maintain a consistent temperature profile for the turbine blades and increasingly keep trying to advance that technology.

And so the next thing we're doing is now to be able to profile whole shape such that we allow the molecules are there to follow curvatures in the surfaces. And so it's getting pretty advanced to be able to do that and to be able to bring those developments to market, then the materials control has to be done at an extreme level. And to enable that to happen, we have to have a degree of automation because it is not really possible for human beings to consistently be able to operate at those levels of fine tolerances and positions or even to assemble the parts, which consistently produce the yields that we need to make the industry be able to work. And so there's a lot that goes into that.

And clearly, we're trying to move the goalpost at each point. So when we bring this new plant on stream later this year, I think the degree of technology and automation that we have will be at another level than we did in the last generation, which was only 5 years ago in 2020 when we brought that to existence, which again was, I think, at an industry-leading level. We're sort of moving it again with a level of ability, which means that some of the parts that we're making in 2026 are really taking the levels of sophistication from some of the military technologies and making them at the sort of volumes that we had in commercial aerospace, which I think will be an extraordinary achievement.

Can we talk about engine expansion a little bit? This is one of my favorite topics. So you have 2 facilities that I think first Aerospace comes on by year-end, the second one 6 months later and then two IGT in late '26 and early '27. You've hired 4,000 people since 2022 in engines. They're making scrap right now and learning on some of MR. I love the way you give headcount per quarter. So I guess, how do you think about how much more hiring is needed? And can you talk about the CapEx that's coming online and how we think about the profitability associated with that?

I think the rate of increase of headcount, I'm hoping to slow it in the second half of this year to allow the labor we have hired to, I'll say, to achieve maturity and to get ready for real production. I mean -- but then if things work out the way I like, and of course, the way I'd like and what they actually do is can be quite different, then my thought is that next year, we'll have to start hiring again and at a higher rate than we have in the second half of this year just because of the build-out of all that we're doing at the moment. So it's actually -- it's between new plants and extensions, it's actually 5 building envelopes that we're doing at the moment, which is a lot to do that in addition to all the facilitization and equipment installation.

So we're under a lot of, I'll say, maybe it's stress, although I don't particularly feel stressed, but I guess somewhere between us or we're all just a little bit stressed, overworked. I didn't say underpaid just in case you went there. But it's just what we need to do. And the exciting part about really is I see the level of capital that we need to deploy in '26 to be of a similar level to 2025. And if you think about it, given that's well above depreciation, while still trying to keep faith with the metric we said over the long-term, we would like to achieve a 90% conversion of net income into cash flow. And so far, we've done it for the last 5 years, but we're slightly ahead.

And for me, the opportunity to invest in the business is really good because organic growth is by far better in terms of the return on capital that we get for it. It's better than buying our own stock back. It's better than acquisitive growth. At the same time, we are and we do buy our own stock back because again, it is return positive for us. And we also look at the opportunity for expanding acquisitively as well. So -- it's an exciting time for Howmet with all of this going on. But right now, '26 is looking to be a significant investment year. And I'm not able to frame 2027 yet.

And I suppose to some degree, it's going to depend upon the degree to which airframe customers are successful in taking their rates up. And therefore, rate increases again in '27 and '28 will guide us on that decision. And also, indeed, to some degree, this whole electricity demand borne of data centers, of which a lot of it is coming from the AI and the hyperscalers. I mean that's an extraordinary vector of growth for us as well. And it's -- again, it's hard to know exactly where does that go at the -- towards the end of the decade.

It's $500 million of revenue today, grew 25% in the second quarter. So does it keep up at that pace? And how do you think...

I think we need to try to grow it out at that 25% growth rate. Now whether we are successful or not, I don't know. I think that the demand appears to be there, and it's increasingly solidifying. And so I mean, we saw one of our customers this week in Mitsubishi referenced a higher growth rate for their IGT turbines. But this is not just the game for the large gas turbines for utilities. It's also the mid-range turbines for a lot of freestanding energy provision in data centers.

So the traditional aero derivatives are seeing increased demand. And the new, I'll say, mid-sized turbines up to 40 megawatts are also seeing extraordinary demand and new technologies being brought to bear, which again is helpful to us because we're moving from to more sophisticated aero style turbine blades, which again plays to our strength of technology and tolerance control.

On the engine expansion, the two new facilities that you're coming online, are they expansions of the existing ones? And I think you missed the profitability part of my question as they come online, do...

If I missed it, it's probably deliberate.

Right to IGT.

That was smooth. But you got to remember, Sheila bite your legs, and so she never misses when I tried to skate. So First of all, the one plant, which is a whole new plant is on a campus that we have where we had the existing land and we sort of built a new large 100,000 square foot plus facility there. And they do that on an expansion in Kentucky. Those really go to the aerospace parts, I'll say, increases. We also just facilitize the whole new tooling plant as well. So we've just doubled our capacity for -- because we produce all of our own tools for all of this as well.

And we've had to basically just double the capacity. So that's also been facilitized, is coming on stream now in toolmakers hired, et cetera, et cetera. So we're doing a lot. And did you forget about profitability by now?

No.

So I thought maybe I talked so long that you've forgotten that point. So do I expect to be profitable? Yes.

No, I hear you. How do you think about it relative to the segment, I guess?

The gas turbine segment, whether it's for the large gas turbines or for the mid-size and the mid-size being much closer to an aerospace type of turbine, they're all very similar in terms of profitability. So we're agnostic in terms of deployment of capital to the opportunity. It all comes down to the security of the backlog, the duration of it and what do we see disturbing that and also come to the right commercial arrangements as we capacitize that we feel that we're not going to be left holding the bag should the expectation for volume not materialize.

Okay. I'll let you off the hook.

Did not answer the question.

You sort of did, but it turns out you're not a one-trick pony. It's not all about engines. We got fasteners and structures that are also doing well. They are trying to get it in. Pony horses. Fasteners are running at about 30% margins despite the lack of wide-bodies coming in. So -- and you've had new leadership in both segments. So can you unpack the drivers within fasteners and structures?

Volume, of course, is always beneficial. And innately, volume can always cover up a lot of rocks. But volume has been helpful to us in -- certainly in our faster business, probably more so than in our structures business. But with a combination of volume and operations improvements, commercial improvements and not really mix at this point. I feel as though all of those things have come together. And just to peel the onion off a little bit more, it isn't also just mix between narrow-body and wide-body in the last year or 2, it's also been mix inside the narrow-body segment.

So where we're doing fitments of more one-sided fasteners and now we're introducing into the market automated assembly of those into the aircraft, then that has also been helpful because, again, we're trying to move the technology in our fastener business as well. So lots of things coming to bear. And if anything, the improvements in profitability have exceeded my expectations. So I think it's been a very solid strong performance from our fastener team.

And the only other strand which probably hasn't been talked about enough is that 4 years ago, we also created our own distribution arm and creating a management team around it. And the growth of that has been really strong. And there, we're making the full manufacturing margin plus the distribution margin on top. And so that's also been very helpful as that business has grown. So that which started out as a concept in 2021 has really blossomed into a strong segment of the fastener business.

In terms of structures, it's a little bit different flavor. It wasn't just the growth of the business. There has been a little bit. But because that business faces off to more defense, which is suffering under the over inventory position at Lockheed for the F-35, plus the, I'll say, dearth of wide-body build. So it wasn't going to see the same volume strength behind it. We want more shifting out the less good operations. So we took the opportunity to close down a manufacturing plant in Europe. We sold one in Europe, and we rationalized another one in the U.S.

And so there's been a little bit more restructuring in that segment to, I'll say, take away the bad bits. And maybe when we took away and sold our 7 businesses in 2019, we missed a couple of small ones we should have really stepped up to or we thought we could, but we didn't. And so the answer is we stepped up and said that's it. It doesn't -- it's not going to earn its place in the Howmet portfolio. So we dealt with it. And so cutting off some of the bad can be also beneficial to the performance and growth of the whole entity.

That makes sense. I got 2 minutes to go on 10 questions. So I think I have to pick one. I got to give Ken credit for the balance sheet and the free cash flow conversion. So what I really want to ask, I'll ask after this webcast ends. But -- so I want to ask about margins because I think people just think you get margins naturally. But what inning do you think you are in terms of labor productivity, the automation because Whitehall was the best facility I've ever seen, and you didn't let us take pictures or take notes really. So thanks, PT, for that. But I remember it. And so where do you think you are in automation and pricing strategy?

Certainly, I never really talk to margins because what's our job? Our job is to obviously try to make more, whether it's more product or gain more market share or to be able to step up to industry demand. But we don't control so much in the industry. It's always, I think, foolish to give margin predictions. I mean I think all the vectors we can talk to. So what degree of capacitization are we short or where is the technology leading us. So I think all of those things are positive for us, which we've already touched on.

So I try to steer away from that margin question and just to say where are we? We're still working at it, still trying to improve. And the only thing which I know we're not doing sufficient of now compared to where we were a couple of years ago is on the automation front. And while we're facilitizing these new -- 5 new entities, clearly, what we're bringing in is at a new level. And therefore, it will raise the overall average for the company. But there are still opportunities which we know we're not addressing because our first priority, our job one is to try to meet market demand and meeting that is going to be far more important and having the market share is more important.

And then there's nothing wrong with us in 2027 or 2028 going back and sweeping up anything we know we've left on the table way of automation opportunities. But at the same time, would I like to do both? Well, of course. But again, I want to prioritize because doing everything sometimes means you're not successful. So I always try to pick a few and try to make sure we're successful with a few. And if we do that, then we're going to have a good company.

Great. Well, thanks, John. I think you have a good company.

Thank you. Nice to see you all.

Thanks, everybody.

Good day, and welcome to the Second Quarter 2025 Howmet Aerospace Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Please go ahead.

Thank you, Megan. Good morning, and welcome to the Howmet Aerospace Second Quarter 2025 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, 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 factors that could cause the company's 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, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial 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 welcome, everyone. The results for the second quarter were strong. Revenue growth increased 9% year-over-year compared to 6% in the first quarter. And the revenue broke through $2 billion to $2.53 billion and exceeded the high end of guidance. Revenue growth enabled us to carry out the cost of the additional headcount as we prepare for the new capacity coming on at the end of 2020, notably for turbine air foils and the IGT build-out during 2026 and 2027.

EBITDA margins were healthy at 28.7%, up 300 basis points year-over-year, which was excellent given the significant sequential revenue and EBITDA growth. EBITDA was $589 million. Free cash flow was also healthy at $344 million. This cash flow enables share repurchases of $175 million in the quarter to total $300 million in the first half with an additional $100 million already completed in July.

Additionally, debt repayment was $76 million. We also announced an increase in the common stock dividend to $0.12 per quarter starting in August. This is a 20% increase quarter-over-quarter, which builds on the significant increases in 2023 and 2024. Lastly, earnings per share was $0.91, an increase of 36% year-over-year.

In terms of business segment commentary, Forged Wheels continues to do well with a 27.5% margin, a slight increase on the first quarter. Additionally, structure printed another solid quarter with EBITDA margins above 20%. The exact number being 21.4%. Lastly, how many incrementals were about 60% year-over-year.

I'll now pass the call to Ken to comment specifically on market sector performance and provide business segment commentary.

Thank you, John. Good morning, everyone. In the deck, you'll notice that we've added Slide 5, which gives you a quick snapshot of the first half performance. But we're going to move to Slide 6 now to talk about the markets. So end markets continue to be healthy with total revenue up 9% year-over-year and 6% sequentially.

Commercial aerospace was up 8%, driven by accelerating demand for engine spares. Commercial aerospace growth is further supported by the record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Defence aerospace growth continued to be robust, creating record quarterly revenue of $352 million, which was up 21%.

Growth was driven by engine spares, new engine builds and F-35 structures. As we expected, commercial transportation was challenging, with revenue down 4% in the second quarter, including the pass-through of higher aluminum costs. On a volume basis, wheels volume was down 11%, although down year-over-year, the Wheels team did an excellent job to flex costs and deliver strong EBITDA margin of 27.5%.

Finally, the industrial and other markets, were up a healthy 17% driven by oil and gas, up 26% and IGT up 25%. And within helmets markets, the combinations of spares for commercial aerospace, defense aerospace, IGT and oil and gas, continues to accelerate and was up 40% in the second quarter and represented 20% of total revenue.

As I compare total spares in 2019 was 11% of total revenue on a smaller base. So in summary, continued strong performance in commercial aerospace, defense, aerospace and industrial, partially offset by commercial transportation.

Now let's move to Slide 7. So as usual, we'll start with the P&L. Q2 revenue, EBITDA and earnings per share were all records and exceeded the high end of guidance. Revenue was up 9% year-over-year, exceeding $2 billion. EBITDA outpaced revenue growth of 22%. EBITDA margin increased 300 basis points to 28.7% while absorbing the costs of approximately 400 net headcount additions. Earnings per share was $0.91, which was up a healthy 36% year-over-year.

Now let's cover the balance sheet and cash flow. The balance sheet continues to strengthen. Quarter-end cash balance was healthy at $546 million. Free cash flow was excellent at $344 million, which was a record for the second quarter. Free cash flow included the acceleration of capital expenditures with approximately $100 million invested in the quarter and $220 million invested in the first half, which is up approximately 60% year-over-year.

About 70% of the first half CapEx investment was in our Engines business as we continue to invest for growth in commercial aerospace and IGT, which is backed by customer contracts. Debt continues to be reduced and we paid down an additional $76 million of our U.S. term loan, which is due in November of 2026.

The paydown will reduce annualized interest expense drag by approximately $4 million. Net debt to trailing EBITDA continues to improve to a record low of 1.3x. All long-term debt is unsecured and at fixed rates. Regarding liquidity, it remains strong with a healthy cash balance and a $1 billion undrawn revolver, complemented by the flexibility of a $1 billion commercial paper program, both of which have not been utilized.

Regarding capital deployment, we deployed $292 million of cash to common stock repurchases, debt paydown and quarterly dividends. In the quarter, we repurchased $175 million of common stock at an average price of approximately $142 per share. Q2 was the 17th consecutive quarter of common stock repurchases. The average diluted share count improved to a record Q2 exit rate of 406 million shares.

Additionally, in July, we repurchased $100 million of common stock at an average price of approximately $183 per share. July year-to-date common stock repurchases is $400 million at an average price of approximately $144 per share. Remaining authorization from the Board of Directors for share repurchases is approximately $1.8 billion as of the end of July.

Finally, we continue to be confident in free cash flow. We've announced an increase in the Q3 quarterly stock dividend by 20% from $0.10 per share to $0.12 per share payable this August.

Now let's move to Slide 8 to cover the segment results for the second quarter. The Engine Products team delivered another record quarter for revenue EBITDA and EBITDA margin. Quarterly revenue broke through the $1 billion mark with an increase of 13% to $1.056 billion. Commercial aerospace was up 9% and defense aerospace was up 13%, both driven by engine spares growth.

Both oil and gas and IGT were up approximately 25%. Demand continues to be strong across all of our engines markets with record engine spares volume. EBITDA margin outpaced revenue growth with an increase of 20% to $349 million. EBITDA margin increased 170 basis points year-over-year to a record 33% while absorbing approximately 360 net new employees in the quarter.

Year-to-date, engines has invested in approximately 860 incremental head count, which has a near-term margin drag, but positions us well for the future.

Now let's move to Slide 9. The Fastening Systems team also delivered a strong quarter. Revenue increased 9% to $431 million. Commercial aerospace was up 18%. Defense Aerospace was up 19%, general industrial was down 11% and and commercial transportation, which represents about 13% of Fasteners revenue was down 18%.

Segment EBITDA continues to outpace revenue growth with an increase of 25% to $126 million despite the sluggish recovery of wide-body aircraft builds, along with weakness in commercial transportation. EBITDA margin increased to healthy 360 basis points year-over-year to 29.2% after taking into account the impact of delayed tariff recovery.

The team has continued to expand margins through commercial and operational performance while flexing costs in the industrial and commercial transportation businesses.

Now let's move to Slide 10. Engineered Structures performance continues to improve. Revenue increased 5% to $290 million. Commercial aerospace was down 6% due to destocking and product rationalization and was essentially flat sequentially. Defense Aerospace was up 49%, primarily driven by the end of the destocking of the F-35 program.

Segment EBITDA outpaced revenue growth with an increase of 55% to $62 million despite the modest recovery of wide-body aircraft. EBITDA margin increased 690 basis points to 21.4% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability.

Finally, let's move to Slide 11. Forged Wheels revenue was down slightly despite higher aluminum costs. Excluding metal impacts, volume was down 11%. The Wheels team flexed costs to hold EBITDA to prior year levels and delivered strong EBITDA margin of 27.5%.

Lastly, before turning it back to John, I wanted to highlight on an additional item. We are reviewing the new tax legislation from the U.S. administration related to the timing of expensing of R&D and CapEx. We expect to have a modest free cash flow benefit in 2025, which will be used to fund additional CapEx investments. The modest benefit has been included in our increased free cash flow guide.

With that, let me turn it back over to John.

Thank you, Ken, and let's move to Slide 12. Firstly, commercial aerospace is expected to continue to grow. Q2 growth was 8% after some further destocking in certain product areas. This growth starts with passenger miles flown, which has been solid in Europe and relatively higher growth in Asia Pacific while flat in North America.

Aircraft backlogs are extraordinarily high due to prior period under bills and the need for modern fuel and emissions efficient aircraft to replace the increasingly aided fleet. There have been positive signs for narrow-body bills with Boeing achieving a recent 38 per month build rate for the 737 MAX. We also believe Airbus has achieved 60 bills per month for the A320/321 with some 60 A320s being gliders at this stage, awaiting engines.

Widebody builds have not increased substantially in the second quarter, but are expected to go a little higher in the fourth quarter and going into 2026. The underlying 737 MAX assumption within our guidance today is raised from 28 per month average for the year to 33 per month average for the year and supports a higher expected revenue, which I'll comment on later.

Spares for commercial aerospace, defense aerospace and IGT industrial, have increased by some 40% year-over-year and were at 20% of total revenue. This result is positive with the continued first half rate of being 20% of total revenue currently. Defense revenue was up 21% and has seemed to continue to exhibit the strength during the balance of the year.

IGT, oil and gas and industrial strength in the quarter was exceptional at 17%, with IGT up some 25%. Growth for the combined IGT oil and gas and industrial markets is expected to be high single digits for the year. And within the combined number, the IGT market is expected to be significantly higher.

Moving to Commercial Transportation. Within our Wheels segment, revenue was below 2024 by only 1%. However, metals and tariff recovery are now included in that number. Volume was down 11%, with continued softness expected in the second half.

In terms of general outlook is that we expect to see continued strength in commercial aerospace, defense aerospace IGT, oil and gas and an offset only in the commercial truck segment, which continues throughout this year. In 2026, the commercial truck market should stabilize, and hence, the overall picture for Howmet currently appears to be healthy.

In terms of specific guidance, we see the third quarter as follows: revenue, $2.03 billion. plus or minus $10 million, EBITDA of $580 million, plus or minus $5 million; EPS of $0.90, plus or minus $0.10. Q3 reflects the normal seasonality of lower European selling days due to annual vacations. The year's full guidance has been increased. Revenue has been increased by $100 million to $8.13 billion plus or minus $50 million. EBITDA has been increased $70 million to $2.32 billion, plus or minus $20 million. Earnings per share has been increased by $0.20 to $3.60 plus or minus $0.04.

Free cash flow has been increased $75 million to $1.225 billion, plus or minus $50 million. Revenue, EBITDA and EBITDA margin have increased above the second quarter beat. The higher revenue expectation is supported by both an increased spares expectation and the higher Boeing 737 MAX rate assumption.

Full year incrementals continue to be healthy at the mid-50% within -- with the second half in the mid-40s. The increased cash flow guidance includes an increase in our capital expenditure guidance to invest in future revenue growth with modest expected benefits from the new tax legislation.

It is encouraging to see our guide increase, especially the free cash flow guide, which provides even further optionality for capital deployment.

And with that, we'll now move to your questions.

[Operator Instructions]. Our first question comes from Myles Walton with Wolfe Research.

John, you did comment on the rationalization of products within structures. How meaningful is that? Is it going to be to the margins as well as maybe any headwind to departing from some lines of businesses or products.

The majority of the rationalization has already occurred on this on, Myles. And so if you go back to a commentary provided in the 2 prior earnings calls, I mentioned the sale of one business within structures and also the closure of another manufacturing plant, which is in Europe. And those 2 combined with us probably possibly being a little bit more discerning on order intake has enabled us to continue the momentum on improved margins.

So the way I see it is that revenues continued to be healthy and grow, and margins are signified. And I quite like, again, the team conversation doing a revenue increase and margin enhancement, which has played well for the company. The total revenue, which in that structure was certainly healthy from the defense side, less so from the commercial aerospace side, but that was essentially due to some destocking particularly in the, I'll say, distribution markets where some orders have been cut, I think as -- I think Boeing in particular, decided to do some destocking throughout the supply chain.

So I'm not expecting significant further rationalizations that we always remain alert for anything where it doesn't really contribute in a significant way to improve in the business, then we'll always take a hard look at it.

So should we expect the margins seen year-to-date to persist for the second half within structures at these new levels?

Well, that was our goal for the second quarter. I will say, yes, we did achieve it. And so my expectation is that we'll hopefully maintain where we are. So that would be a pretty significant increase year-on-year, and you'll see from the guide that we've maintained our margin outlook of EBITDA above 28%. So that assumes that we'll achieve that objective.

Our next question comes from Sheila Kahyaoglu with Jefferies.

John and Ken, crazy good results. So -- can you hear me, by the way, my voice is a little hoarse.

Yes. No, I can hear you well. Thank you for the compliment. Crazy good.

Yes, very good. If you could update us on the timing of maybe the revenue contributions from the various engine expansions you've announced across Aero and IGT as it seems like CapEx is increasing and pulling forward, is it fair to think unlike other companies' profitability on day 1? Are those sites dilutive to the segment? How do we think about pricing expected volumes? And just what are the key pacing items for those coming online?

Okay. So we've got 2 complete new plants, which are being or have been built in the Engine segment and 2 significant extensions. So that's a lot of square footage that we've been putting in place.

The first plant that we have essentially completed now in terms of the construction and equipment has been arriving is in our Michigan facilities. And I'm expecting some outputs from that that's salable output in the fourth quarter of the year going into 2026. And I think that's going to be important for us, particularly in the turbine airports market.

And that's supported by the extension that we have done in 1 of our Tennessee plants. So that covers that one. The other 2 are aimed at the industrial gas turbine market. Again, these are large -- to the large industrial gas turbines than the aero derivatives. And that is a brand-new manufacturing plant in Japan, for which that construction will not be completed until the end of this calendar year.

And then to serve [indiscernible] in the first quarter, probably going into the second quarter of 2026, and therefore, hope for output in the second half of 20 and then an extension of our plant in Europe. Again, with similar time frames with the expansion and capitalization in terms of assets which can produce parts really in in the second half of 2026 and then with them both coming on full ball for 2027. So that gives the picture across, say, the aerospace business and the gas turbine business. So quite a lot going on too.

And how do we think about the profitability profile of those coming online?

I'm expecting that any cost that we incur and we've been incurring costs each quarter you're seeing another headcount increase in the second quarter of just under 400 net new jobs into our engine business.

Clearly, we're carrying those those employees today and essentially, let's say, training and getting ready for production. And so the drag associated with that has really been offset by the leverage of the volume of increased volumes. And so it's working out, and I'm hopeful that as those things in terms of launch costs move out as we go into the 2026, particularly in the second half and in 2027, those can really get better, will enable us to hopefully produce an improved outlook for the business, which is also a pretty high today.

So that's the expectation. And it's a combination of hopefully reduced labor cost drag and also less production of scrap because obviously, people are still training and using materials, which don't get sold at this current stage.

Our next question comes from Seth Seifman with JP Morgan.

John, you talked about the strength in the defense end market this quarter and expect continued strength going forward. I guess if you could talk a little bit about the contribution of F-35 in defense overall this year and how you think about setting up for the future in F-35 given some concerns about future production rates.

Yes. So this year, I'd point to just on the F-35, I think, generally, the defense business has been strong with the legacy programs as well. But specifically for the F-35, we received, I think, 2 volume inputs, which have been quite welcome.

One is that we appear to have arrive at a tipping point when spares business for our engine products exceeds the OE production. And so that -- which we've been talking about would happen in 2025 for the last 2 or 3 years. It looks as though at that moment has arrived. And with the increased build was assume 150 aircraft per month -- say, per year for the next few years through the end of the decade, means that the fleet will continue to expand from its 1,100 to maybe 2,000 aircraft. And therefore, again, we see increasing contributions coming for that spares business as we go forward.

The second input to the F-35 volume has been during 2023 and 2024, I noted that [indiscernible] provision from our structures business. We were receiving input orders well below the Lockheed production rate as inventory was burned off on the excess supply relative to their COVID impaired builds back in 2020 and 2021. And so as that inventory was depleted, we're now running at a 1:1 rate, we believe relative to Lockheed's production.

And we are also optimistic that with the large input of new orders that have been into Lockheed for the I'll say international programs for that Pfizer aircraft that we'll see solid 150 per year rates through to the end of the decade and beyond.

Our next question comes from David Straus with Barclays.

John, I think you talked about your forecast for MAX through the year. If you don't mind running through your assumptions on your other key programs, 87, 350, so on. And then a quick one for Ken. Just if you could quantify, Ken, the amount of the tariff drag in Q2.

Okay. So in terms of underlying assumptions, the major shift from previous commentary was that max average of 28 per month for the year to 33, and that basically assumes that we'll consistently maintain rate 38 for the balance of the year and having cut off a significantly lower rate in the early part of the year.

787 should be around 6% average for the year with us moving to a rate 7, I think, in the second half. So sometime I'd say, during the third quarter or by end of third quarter, achieving a solid rate 7 on a consistent basis. On MPSA350,it's the same 6 that we understand more about some of the relief of the few large constraints there. And the other bright spots, which is not really computed at this stage is while A320, the builds have been solid.

We're still unclear about where that build will be maintained, and that's also really subject to the supply of engines because of the state of aircraft in the quantity of aircraft with no engines at this point in time. So that covers the major part of it. And I'll cut a tariff rather than break the call out. It's -- we gave you some metrics around the gross and net effect of $80 million and $50 million on the last call.

Since then, tariff drive, we think, has probably gotten better. So we asked to name it today would be going a net effect below $15 million, but again, I said it wasn't going to be material for our year. So you say if it was reduced, which it is, it's not significant. So that's been good. And tariff rate for the second quarter was, which is the -- probably the biggest quarter of drag, but can consort everything is sorted out was below $5 million. Significant 45 million in the quarter. And as you said, you would stand the timing of us incurring the cost and us receiving compensation from our customers.

Our next question comes from Doug Harned with Bernstein.

Industrial is now the fastest-growing part of engine products. And is the accelerated growth you're looking at, how does that depend on getting long-term agreements in place, such as with Mitsubishi. And basically, where do you stand on this process? And ultimately, how do you expect IGT margins to compare with those in commercial aero?

Okay. So let's start with the margin 1 first is that IGT and Aero are very comparable in terms of margins. So there's no dilution at all from that currently relatively higher growth rates that we see. So that's encouraging.

And then in terms of agreements, we've now have agreements with I will say 3 of the 4 majors completing with the other 1 in terms of the gas turbine area, I guess the big gas turbines. We've also just completed agreement with, let's call it, the not ever derivatives, but something like that with gas turbines in the up to 35, 38 megawatts taking out. But and so our business in aero derivatives is also very strong.

It's sometimes a little bit hard for us to truly understand when we receive the orders, which is designated for oil and gas or aero derivatives and then those derivatives going to, whether it's the, I'll say, marine market or other military bases or oil and gas or indeed IGT. But the the growth rate of aero derivative type of the size of turbines is certainly becoming very significant.

That we see it, it's going to be a really important part of data center build-out of energy supply over the next few years.

Is there any way to say when you structure these agreements how soon that growth will come from an individual agreement?

Yes. So an individual agreement, we know pretty well the growth that we'll see. Obviously, it's always dependent upon the complete supply chain. It's not just what Howmet does in terms of revision of that served by airfoils. But assuming that everybody is on stream for those programs and those new product introductions, then we have a pretty good idea of when the increased requirements are there. Any sense line with my commentary that I provided earlier in the call, Doug, where we are putting capacity in, and we're seeing increments of that capacity currently, but with the majority of it to come on stream early second half of 2026 and into 2027.

There's no major step function this year for sure. Our capacity because when we stepped it up last year, even again, it takes a full 12 or 18 months for us to begin we've been, as you can see from our CapEx numbers, been increasing that significantly as we've been moving through 2025, and that takes time to deploy.

And we kicked it up again by some $40 million by way of expectation in the -- for this year. So it's significant outlay that we believe will give us good results and good growth into the future.

Our next question comes from Robert Stallard with Vertical Research.

John, last quarter, you talked about your worry beads. And it does sound like you're a little bit more confident about some of the issues like tariffs or the Boeing build rates than you were 3 months ago. I was wondering if there's anything else on your worry radar that we should be worried about?

Well, not really. I can't call the commercial market precisely because we're not sure where any, I'll say, volume points we may have seen from the additional emissions requirements for 2017 would result in security volumes in the next 12 months. We don't know whether those emissions rigs will continue to apply it on what the new administration do ultimately decide or basically everybody is now prepared for those emissions by way of equipment for the truck. So that's 1 where it's difficult to be uptiertain.

We've tried to be on the cautious side of those assumptions. And so thinking that similar to '25, but could be better. So that's the important thing there is we don't think it's going to get worse, and so that's great. Elsewhere at the moment, things that appear to be pretty solid in commercial area given the backlog we fender on budget patio Europe are going up. F-35 is to us seems solid, and we know we've got enhancements coming from the block for coming in 2028 and as that's delayed another year or so. So that is looking help for them the IGT or aero derivatives for the data center is all sold. So I mean I still have my -- I'm always -- I think I'm worried I'm paid to worry about things and providing idea, then you don't have to.

Our next question comes from Peter Arment with Baird.

Nice results. John, you've talked a lot about in the past about headcount and basically, I think in some of your plants, you're producing more parts today than you were, say, in 2019, and you're doing it with a lot less people and faster this quarter adding no people and you had great growth. So maybe just talk a little bit about what you're seeing on the headcount and the productivity that you're actually seeing amongst various plants.

I think our productivity numbers for 3 of our divisions has been really solid. That's clearly not the case in aggregate for our engine business just because of the all the amount of people we've been recruiting in preparation for the, I'll say, future capacity this underlying protein adding in those gross numbers of maybe 1,500, 1,800 people over the last 12, 18 months. obviously, to some degree, weighing on us as we go through this.

But productivity for the company has been solid. It has been helped by some of the automation that we had put in over the last, I will say, 2 or 3 years, albeit now with slightly pausing on the automation given our capital really for capacity. And so where we're putting new equipment in, we're trying to ensure that at a highly automated level. but we're not yet going back and still completing some of the products that we know we could do, just so we can stay within our marks for capital, I'll say, free cash flow yield, substantiative net income, but we aspire to get to that 90% on average over the period of time.

But the important thing is for us to serve the markets, gain the market share. And then if we have the opportunity, let's say, in 27 or 28 to go back and focus and refocus on some of the automation and further productivity opportunities that we have. So our pass-through is currently, let's build a focus on the capacity and share and then we'll go back and map up in a couple of years' time, any remaining productivity opportunity that we know we have, which we just currently focus on at the moment.

Our next question comes from Ken Herbert with RBC Capital Markets.

I just wanted to follow up on some of your comments on inventory levels and destocking. It seems like that narrative has gotten a little more robust here across the supply chain. And you talked about it a little bit in structures. But as you look across sort of your portfolio, -- are there any areas where you see incremental risk of this if we do see maybe any slower ramp at either Airbus or Boeing on some of their programs? And how would you characterize for you sort of the inventory or destocking risk over the next few quarters?

So one of the things I noted from this quarter was in some of the other aerospace companies that have reported that they had some, I would say, is high single digit or maybe low double-digit reduction and drawdowns in the OE business for commercial aerospace. And one of the things I thought was particularly good for Howmet was that despite are facing the same customers and saying, I'll say, inventory reductions or underlying growth was sufficient. That our commercial aerospace business, we're still in positive in growth territory despite that.

And then when you layer in the additional business of spares, et cetera, -- and we produced what I think was pretty solid growth for the quarter, which is again a higher growth rate than we had in the first quarter. So we've been powering through some of that aerospace destocking, which has been occurring. And I can't be certain exactly where I'll say the likes of Boeing is on it.

I read that they're going to maintain a healthy level of inventory of parts to guarantee their build -- and I'm sure that they will because they need to achieve that smoothness of build. But in the way we've guided forward, we still layer in there the -- some destocking as we go into the third quarter while still producing positive growth in our commercial aerospace OE business with the spares and the defense and all that sort of thing. And in aggregate, we expect higher growth.

In fact, I think from our guide, you can see that we've picked up the growth rate to maybe 10%, 11% from what was 9% in the second quarter. So that's again, a signal of that. But obviously, with the absolute numbers reflecting the, say, the European vacations that occur.

So solid year-on-year growth. And if anything, a slight acceleration in the second half starting with the third quarter.

Our next question comes from Scott Deuschle with Deutsche Bank.

John, you had some very strong sequential growth in Aerospace Fastener revenues this quarter, but it didn't really drop through to sequential EBITDA growth at Fastening Systems. So can you just walk us through why we didn't see much sequential profit drop-through on those higher aerospace sales? Is that just tariff recovery lag as you referenced earlier? Or was that something else?

And the majority of any -- first of all, I thought 29-point-something was pretty good actually got. So it's not exactly a number. I will say crying about. Having said that, the -- if you look at the tariff drug that we experienced for the company, then, in fact, the highest area of tariff drag was in a faster business.

Again, we are expecting recovery as we go through the year is more of a timing issue. But if you adjust for a tariff drag then it's easier to get to a number starting with a 3. And so I don't think that's anything to be concerned about at all. I could go on to say, well, there's FX and this and the other. But there's no point really. The answer is it was a pretty good margin step-up year-on-year. Very sensible in terms of a sequential movement given that Piedra I mentioned to you.

Next question comes from Noah Poponak with Goldman Sachs.

I wondered, is there any framework for -- when we're looking at the upward revision of CapEx each of the last 2 years, how much you pick up from that in run rate revenue or the content gain on the engines and the IGTs where it's happening as a percentage, anything like that? And then how much of a tailwind and when does CapEx become to free cash as you get through that?

Yes. So right now clearly, we would not be investing and the CapEx with that expectation of future growth. Some of it, I think, is going to come in 2026. And hopefully, further in 2027 as we've obviously been actually further increase that number.

And if we've increased the number, it's going to take a full year loss for that capital to be deployed -- and so that's more going to affect '27 % and what the increase you just put through on this one Noah. And then in terms of profile, I think we should be in that 4% zone. And I'm still thinking that we're going to have a pretty elevated number in 2026. So this number, which now is in the high 300s. I see that persisting through next year.

And then with the, I'll say, volume aspect of that pressure coming off in '27 into '28, and then we'll have more, I'd say, optionality around investment for the automation and further productivity. So compared to where we've been, which was underspending depreciation, we're now overspending depreciation, but we have a very keen eye on making sure that we achieve our conversion metrics.

And so we're not trying to get crazy about it. and again, being very discerning where and how we deploy that capital. And just to emphasize, the point that, in our view, organic growth is by far the best for us in terms of return on capital -- you can see the equity returns to the company, and that's maybe an excellent return on organic growth and capital investment in the company. And given the choice of buying back shares or acquisitive steps then I'm positive, the organic growth and stepping up CapEx is really good for us, and it will be good for the future. means it's great if you think about it, that we have those opportunities to deploy the capital.

I've not given revenue guidance from it yet. If we follow the plan then I'm sure we'll be talking about the 2027 revenue picture in November when we talk about earnings then. So I'd prefer to defer on that just at the moment noah, but say we do see positive revenue growth as we go into '26 and positive revenue growth into '27. And so we're actually really pleased to deploy the capital and have more opportunities than we're actually capacitizing for.

Our next question comes from Gautam Khanna with TD Cohen.

Great results. I was curious if you could opine on pricing expectations next year and perhaps thereafter if you expect any change to kind of the rate of net increases you've had.

I haven't really talked much on the pricing front, except to say that we maintain the process that we've been going through, looking at wherever we renew our long-term agreements, what the movement in speed is by way of volume and variety and those parts, which have gone from OE to supply or OEM service just to service supply, and so we're following that discipline as we've done now for the last 6 years.

In terms of prior commentary, when I gave specific numbers, which I think the last one was in February of 2024, and I said that '25, would be similar, if not greater, was the last word that I use statin 2025 and -- and my expectation is we'll continue to process set could be a similar picture going forward into '26 and into 27. So just that consistent movement gate in terms of price. Nothing has changed for us by way of process, nor by way of annual expectation.

Our next question comes from Scott Mikus with Melius Research.

Industrial policy is a big priority for this administration. We're in a pretty big ramp on both the commercial aero and defense side. And when we look at the forging assets in the country, there's only 4 presses that are over 35,000 tons in the U.S., dated back to 40s and 50s and you happen to own 2 of them. So are there any conversations between you and either the DoD or the administration about construction or upgrades to new heavy forging presses.

There has not been skied, i.e., have we missed something when you asked that question. And it's certainly interesting because that capacity and that scale is unique for us. I think it's only one of the maybe press in the world that can do in that slot, I think, in Russia.

So yes, those are pretty important assets and are certainly absolutely critical to supplying the componentry that will be required for, let's say, the new apply to jet, the 47 and presume for the F-55 as well, as there's examples plus I'm sure some other aircraft parts. So those presses are, I'll say, vital to the defense industry. And so it's a conversation that maybe we should be having with the DoD Boeing support. So I guess thank you for asking the question. It's certainly -- I was thinking about that and maybe it's going to stimulate us into having that conversation.

Our next question comes from Kristine Liwag with Morgan Stanley.

John, it's great to finally see 737 MAX production rates continue to improve. And frankly, look, your execution has been stellar. But everyone in the supply chain needs to execute to be able to build a complete aircraft. So as you look around the industry to see where bottlenecks are for the Boeing and Airbus ramp-up. What do you monitor as potential canaries in the coal mine?

It's very difficult for us to see through the complete supply base of what might occur. I think there's probably other people better placed to do that and maybe including yourselves. The one area which I think to be really important for the industry for -- in the commercial area for the second half and going into 2026, is the build-out of narrowbody engines.

I commented earlier that bus have reportedly got 60 aircraft awaiting engines now and therefore, the production of both the LEAP range of engines by CFM and the GTF by Pratt Whitney are going to be vital to being able to deliver those aircraft and also to build consistently in the second half.

And so those production rates have to significantly increase. And my assumption is that they will because at the moment, what we can see on the HPT side, where we are intimately in the first few [indiscernible], there is a relatively good position way of overall inventory to produce. The strike that would happen in the first quarter in Safran is now over. Therefore, that's helping them and we supply now back into volume on the LPT side.

So I'm thinking that volumes are going to go up, but the question is, with the volume ramps of everybody, then is that supply going to be sufficient for everybody, including spare engines, et cetera, et cetera. So that's the one area which I'm sort of trying to look at more close it's closer to home and elsewhere, it's difficult for me to really see. I mean I can't monitor laboratories or seats or AB system. It's just too difficult.

And maybe if I could have a follow-up there on fasteners. Precision Castparts had their facility accident in the first quarter. Are you seeing the orders materialize from customers to make sure that they can meet all of those products. I mean it is the largest or it was the largest fastener facility for aerospace in the world. And the gains that you're getting, how does that compare to what you initially thought?

Okay. So I think PCC is trying really hard to maintain as much production as possible with movements to plants in California. They've also been moving a lot of equipment that was still functioning. We're able to functional from [ Jan Kinston ] to a local facility let's say, I believe, something a several hundred piece equipment have been moved. But at the same time, the complete picture can we service by just standalone.

In the last call, I commented that we moved to about $25 million of orders for that sudden -- we're still bidding out several hundred part numbers. The picture today is that we've moved much closer to $40 million. And therefore, it's good. We are still building -- bidding out a lot of part numbers. So we're sort of gradually moving towards what we said as an internal target for us for that business and a healthy increase in revenue for the company as we begin to supply those not massively today, but increasing here over the next 12 months.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Okay. Good morning, everybody. Why don't we get started? I'm Doug Harned, Bernstein Global Aerospace and Defense Analyst. And I am thrilled to have with us, again, John Plant, Chairman and CEO of Howmet. Okay. Yes. Well, but just to start, John, why don't you just give us a little overview about Howmet and how you're looking at market opportunity?

I think all the things I talked about on the recent earnings calls, hold up in the, I think, if anything felt a little bit more confident in the narrow-body production, particularly from Boeing being a little bit better than I previously considered, at the same time, still being fairly cautious about it.

The spares business has been running well. And if anything, we achieved our mark probably a year earlier than we've been talking about. And between content growth, the general, I will say, increase in share plus spares and pricing, I mean, everything was working well for us. And really, the only, it's call a blot on the landscape was that the -- my previous assumption around the wheels business for commercial truck was a little bit weaker as I saw it going into the second half of the year, essentially coming off a little bit of uncertainty and taking account of what we saw in the West Coast ports as a result of some of the tariff dialogue that's been going on.

Well, actually, just to get this out of the way, tariffs. So can you give us a little bit of an update on -- it's obviously a moving target here, but how you're now seeing tariffs impacting Howmet?

We gave ranges in terms of what the gross impact might be if the tax also to snap back to previous level after the 90 days. And also then what the net effect was. Of course, it's almost, as soon as you say, this is it, then things change. So whatever I said then and what I'd say today might be a little bit different given that maybe now there is some possibility of rough mark with China, although you read articles yesterday about the COME situation, and you say what's happening here. But because we've given the outer limits of what we saw, I think those still hold. If anything, given the fact that we've probably got another quarter of probably slightly lower input costs, therefore, slightly lower drag as we seek to recover those input costs as a result of the tariffs.

The net probably is a little bit lower than I'd said I put -- I'd put it out to a boundary of $15 million for the year, but it's probably trended better than that in the intervening period, based on actions we've taken and also the fact that 145% for China got rolled back to, was it 30%? And Europe's it's bounced around a bit this month. And like what's the latest exemption? It's difficult to -- I find it difficult to be cogently about it each day.

I mean you've spoken before about mitigation strategies. There was that well-publicized force majeure that got out there. I mean...

Yes, I thought you might bring that up.

So how is that? How do you -- maybe you can refresh us on your strategy there for mitigation?

Well, we employ, and have employed and do employ many different strategies, first of all, to address the gross effect for the company. And so whether it's trade agreements, exemptions, what's the code you import things under or indeed just some limited degree, move a little bit of production. But again, that's fairly limited. It doesn't strike me as a sensible thing to have wholesale changes of manufacturing strategy given the climate that we're in.

So we do all of that. We were also very clear as we examined each one of our commercial agreements, which I thought and do think are pretty strong. But some of them didn't call out tariff loan, which per se so as an input, let's say, materials costs, if you didn't call it out then I didn't feel as though it was right to be exposed and felt that if we did have the emergency that's -- that was quoted as the reason for them, then it was justification to say this is clearly the force majeure situation.

And we were -- you can't do that selectively. You say it is or it isn't, and therefore, we did issue a letter. Obviously, it was leaked. And I guess you and many others enjoyed reading it. And it did have quite a trending population of scrutiny for a while. And I thought it should quiet down. But the way it was necessary, I felt, we have using -- I said there were 2 of our divisions that were a little bit more exposed. And one of them, we used it effectively to get where we need to be to have full new agreements in place that covered us. And so we wouldn't risk that exposure for the company and our shareholders. So the answer is yes, I did. And would I do it again? Absolutely.

Yes. I -- well, obviously, we're going to see how this whole situation progresses, and it seems to change every day. But if we just go over -- just go to the engine products side right now, Boeing -- so Boeing finally appears to be on somewhat of an upward path in terms of production rates on the MAX. I've been waiting for that a long time. And I would think in principle, if we were in what was once a normal environment, you would be, say, delivering into CFM, CE at a rate that will allow them to deliver to Boeing to parallel the production rate and all of those would sort of move together.

Right now, we're in a situation where Boeing's got a lot of LEAP-1Bs sitting around. GE is sort of producing at a rate that all in total is a little bit less than they had previously estimated, although they haven't broken that out between engine types. How do you think about your production now as it relates to Boeing given that they're starting to come back?

At the highest level, and I'll try to break that down for you. If you look at the aggregate production of parts, and of course, we supply not only the turbine airfoils, but also structural castings, et cetera. If I look in aggregates, then we are producing today as we were last year, well ahead of the industry. So the -- how many engines are produced is not gated by Howmet. There's a choice, of course, on where parts are used either in the aftermarket or OE production. But right now, I know that the comment I made I think is maybe it was November of last year, where I said on the newly upgraded, for example, the 1A we were -- we already put 500 engine sets into inventory and we've continued to build on that. And so...

I'm sorry, that's a 500 engine set so with the new blade. Yes.

Yes. I didn't use that term, but I understand. I never use that word.

Okay. I did and you could take it for whatever.

Yes, I understand what you mean. It seems we make them. But, yes, we've been in a good situation. And if anything, given the production of the total package of engines last quarter, which was closer to $300 million than $400 million. I'll give you the exact numbers should you need it. But clearly, we've been running ahead. And so I think we're in a really good situation. You got to be more specific because, as you know, the 1B has not changed to the new configuration yet, and that's sort of a date yet to be determined. And at the moment, I don't think that there's any shortage of engines available for Boeing production. And so I assume that the comments made by Boeing yesterday, which were obviously really good in terms of their expectation of production for this month and next quarter and potentially after that. It was -- that means there's a great availability of parts, and so everything is good. So that gives me a lot of optimism.

Well, because historically, you deliver a lot of airfoils that are used in OE production. And right now, we're not really -- you don't really need to ramp up on that I'm assuming for Boeing right now. But this -- where is the point that you're looking at where you may have to take production up for those LEAP-1Bs if Boeing stays on a trajectory that they've described?

I think we're going to have to take production up this year is my feeling. So my thought is that the trend of increase in spares that we saw on the 1A last year, which was clearly very positive, and we're going to see some of that this year for the IB, and therefore, that requires more parts. I think the -- notwithstanding the inventory of engines in -- at Boeing, I do think the production rates have to come up. And indeed, one of the really good things is that if you achieve the increase in production of LEAP, let's say, plus 15%, 20%, there's a 60 -- 50, 60, 90 sort of area or more then clearly, the rate of production is going to increase substantially into the 400 or 450 or even more to achieve that annual number. And therefore, that means the vector is one of increased requirements.

And so when you look at sort of what's occupying my mind at the moment is, with all of the, let's say, hopeful build increases for narrow-body and maybe wide-body as we go into next year, plus the spare situation, plus all the other things we're doing, for example, IGT and both large turbines plus aeroderivatives and in new small turbines, which are being brought into play, then one of the things which is occupying in my mind is really increasing overall production. And so what do I think about? I think at the moment, I've got to make more. I'm not saying we're not making enough, I'm just saying we need to make more. And if you look at -- we've recently increased capital expenditure in guided numbers for 2025, and that's indicative of what we are looking at more.

Can you talk about both for the LEAP and for the geared turbofan as you've gone to on each of them, new configurations for the -- for HPT blades? Can you comment on your market share, how that's changing going to those new blades and the types of agreements you have, which as you've said before, you've had these long term -- you've set up these long-term agreements on these narrow-body engines.

So answering point you make about geared turbofan first. We -- while the GTF advantage is certified, we all know that, but I know also that we are not yet in mass production of the newly improved parts. Yes, we're making them, and I can see that we're going to have to make a lot more of them, particularly as we go through this year. But today, in terms of the grand scheme of like the total engine that's required plus providing parts to the service market then it's not yet at that point. In other words, first off was the LEAP-1A, my view is the story for 2025 will be the release of mass production tools is occurring, but not yet there. Well, yes, we're making so many engine sets a month, but that's yet to come. And then next year, it's going to be another large increase of requirements.

On market shares, we don't ever talk about them. So I don't feel as though it's appropriate to do so. But if you look in aggregates of both where we are for the buying blades, relative market share, they've clearly been increasing and I'd be willing to say that and particularly even more so in the hot section of the turbine. And we're seeing all of those theses played out as the technology becomes more exact thing. And indeed, some of the things that we're doing, for example, you use GTF because we're in the midst of getting ready to do mass production, I mean those are really sophisticated products taking some of the technologies that were used in some of the military applications to raise the thermal performance of the parts so you could withstand the actual temperature seen in the engine.

So it's long way of saying it's good, happy. We've got to produce more, but I'm shying away from just saying what the market share is.

Well, when you look at producing these new configuration blades that are going to ramp up over time, can you give us a sense of how -- you're still producing the, I guess, I would call them the legacy ones or the traditional plates as well. How long should we see sort of 2 parallel lines running for the LEAP and the geared turbofan?

I think it's going to be longer than everybody expects. In that, I mean, you've got a changeover occurring or has occurred in part on the 1A, but I'm also clear that we'll still be producing legacy parts through this year and next year. And it's also a feature of where an engine comes into an MRO shaft, the question is, do you replace all the turbine blades and therefore, your choice is, you go all the way to the new one? But if the choice by the MRO shop or by the owner of the engine is, I can get away with replacing 25% of the blades or 50%, then you can't mix and match on the same disk. You have to have all of the same. So if you want to economize yourself still got life left in the old blades, therefore, you got to put old blades on to, to do, even though then you have to have an economic equation about how long they'll last for? What's the overall -- when will it come back in for the next shop visit?

So it's something which we don't determine. We just say we know we're going to be supplying both all the new. And it's a glide path over time, more and more of the new and less and less of the old. And then we'll do the same thing for the GTF. Today, it's mainly legacy reduction that we're doing. But by -- maybe by the end of the year, we have crossed over to the majority being new. And then it will go around the same sort of path through '26 into '27. And then there's the 1B, which is date uncertain at this point in time, but expected end of this year or end of next year, sometime we don't determine that. It's FAA and the engine maker.

Well, and when you look at this, one of the things that's been significant to us when we look at Howmet is that because the LEAP, your turbofan, because you've had shorter lifetimes for these early blade designs is an aftermarket demand as these come in and need to be replaced, can you comment on when you go to these new designs, should we see -- do you expect to see the life expectancy up comparable to what we've had on CFM56 on V2500s?

I think the question is probably the best answered by the engine manufacturer because they know the exact conditions that those turbine blades are going to face, the effectiveness of the solutions being put in place, the effectiveness of, let's say, particulate or dust collection, I will say, mechanisms on the engine and also, indeed, the robustness of the airflow and consistency. So there's a lot of stuff to be worked through, which we knew we can only provide margins of performance within, we can engineer to whatever you want by way of bandwidth. So first, we accept that. But my thought is, when I look at the narrowbody because I think that's really what you're referring to, then I think the current legacy blades will continue at a very high level and probably haven't peaked for another couple of years. And you may be a very gradual reduction for CFM56.

So I think that's currently still growing. Clearly, there's 2 effects going on with the new engine blades. The fundamental, I think, Vector talked about is, whenever you run engines at a higher temperature, higher pressure then the life expectancy of parts is -- always tends to be a little bit less. No different to like a car engine is that if you pressurize it, then you will -- it's not like extending the life of your oil, you're going to a mineral-based oil, then if you're putting in, say, sodium fill valves, you're putting a lot of more pressure in the engine, and higher temperatures then generally speaking the parts wear more. And so I think there's a long-term effect where it's difficult to see at the moment that the current generations will have the same numbers of cycles in the long term.

So my thought is the newer engines are going to see higher frequency of shop visits than the predecessor. I'm not saying that they won't be better than they are today because they -- clearly improvements are being made. So I refer to it, there's a long-term trajectory of increase of service parts. And so I think that we will see increases in the number of parts for delivery that will go into engine overhaul every year for the next decade, long-term trend upwards because of what I've talked about.

Bear in mind, I said also the CFM hasn't quite peaked yet. And then you've got one other effect, what I call the bubble effect, which is the here and now because the life experience by the current engine blades, which is one of the reasons why we've gone from an improvement in fuel efficiency objective to -- for this generation to more of a robustness solution, is that's producing a very high demand for the next 2, 3, 4 years. Again, we don't determine that.

But -- so I think the only thing we are arguing, will argue, but sees that the angle of increase will be, I think, a little bit higher in the short term. We'll continue to grow every year, but the angle of increase will begin to soften. So you can imagine if you have to graph it out, I draw a sharper slope in the near term and continue the slope upwards, but bend it down a bit, the angle would be slightly lower as the new improved blades come in, but still require higher frequency compared to the old, but not the high frequency because of the problems on the current one.

So that's not going to be right away. That's going to be a while?

Yes. But I mean, I'm just trying to get -- this is how I see it. It's the best way I can describe it. So I think myself, shares are going to increase every year that I can see at the moment. You look at the build-out of MRO shops, it's being built as they know they've got to come in for more services over the next decade or 2. And it's just the angle of increase with a call. Maybe it's unfair to call it a bubble at the moment, which is that you know certain countries, because of the blocking of holes, let's say, in combustors with particulates has produced engine temperatures way higher than was envisaged, therefore, that has to be replaced at far more frequent intervals than ever considered. And now we're engineering to a higher cylinder performance, even though they say things are being done to prevent some of those blockages, but either which way those new things are going to be, have higher content in them, greater performance.

Can you -- I know when you deliver a blade, say to GE, you don't know if it's going to go into aftermarket or OE. But can you give us a rough sense now of how large your aftermarket is on engine products?

Yes. We've -- as a percent of Howmet would say, we've got on this March from 2019, we're about 11% of our total revenues. We've achieved, I think, 17% by the end of last year. I said doing 25%, 26%, going to go to 20% and heck we got there in Q1.

That's an engine part?

No, that's total Howmet. If I then, of course, apply that percentage to engine products and you've got a much higher percentage because, I mean, very approximately, if engine is probably -- I use loosely 50% of the revenue, and therefore, if it's 20% of the company, it's 40% of engine, that's about right. And I can always rely upon Ken, who's in the audience do correct me, necessary. But then that breaks out because I'm just giving you the totals for commercial aero, defense aero, IGT, oil and gas the whole lump there. But if you look at the situation, which we described in '19, which was $400 million for commercial, $400 million for the defense and industrial markets, then if you just think about 11%, 20%, that's essentially revenues growing as well. So it's double. Yes. And it's pretty much still the same mix today, not quite 50% commercial aero, maybe just under the 50%, maybe 48%, but very loosely, it's 50-50.

And then it comes down to actually there's fewer military jets on the same time. They have a higher duty cycles because performance required and therefore, shop visits are more frequent until you go into all of that.

You've been able to bring margins up over time, which we would assume is both a combination of pricing and operating leverage. Can you comment at all on what's been driving your margin improvement, and where you expect to go in engine products?

If -- we did a recent West Coast, we participated with someone to do like a West Coast to move to one of our plants like a rings plant, an engine plant. And I didn't actually attend that one. So -- but I did enjoy the summary of it, which was not only a great plant, let's say, so clean, so good. But those like top-level descriptors. But the thing, which I felt, was really good was that we're producing more parts now in 2025 than we did in 2019, but with approximately half the people.

And so the whole thrust that we've had by way of improving our processes, improving process control, and therefore, improving yields, the theme of automation, it has played out for us very well. And put with that the additional volumes, you've got volume leverage, you've got productivity and you've got some price as well, then that's a good cocktail to have. And so if I could use that as a poster child for every one of our operations, that'd be great. I'm not saying they're all that good, but they will -- I hope they all will be.

it did seem that the Whitehall facility, when I was there, you've got automation, the reduced dispersion of output and improves your yields. So my assumption is that this is playing out at many of your facilities. Is that correct?

Yes. I really do believe that what we showed, maybe 2 years ago, by way of the visit, we only probably do it once a decade, showed a level of sophistication with automation, which I believe is breathtaking because the one thing you note is the lack of people. But it's not per se and knock on the use of humans in the process, or it's not just for the economics of wages, but essentially, it's for the absolute need for the control and tolerances and quality to achieve the throughputs and yields, particularly as we've gone to increased air passages through turbine blades, which gives you far thinner wall sections and the control of those both in high-volume production, but also, I will say, all moving to the most sophisticated level of alloy you could use.

And so it takes a lot for them to do that with manual processes, it's -- and I just don't think it's possible to have it economically viable. And so that's part of what we do. And just now, we've just -- in that same site, we've just built a new plant, the roof is on, some equipment has arrived. We have recruited. We're on our way to recruiting a few hundred people this year. And, I mean, today, it's just as I say, just bits of pieces of equipment. So if you visit were to do 1 there today, then you'd say you see a few, let's say, transfer presses. You'd see some early core production, but nothing where all the processes are joined up yet. And all we're producing is scrap.

We don't just train on it, we chop it up and then make sure nobody can see what it is because we try to protect the IP. And that really won't come on stream to back end of this year into next year. And as the requirements have gone up, we're actually having to make further increases in investment in that facility and that will be at a level above in terms of, again, automation that we envisage to do. So we are determined to take it to a level above what you saw a couple of years ago. So the theme goes throughout the company. And if I look at one of our fastener plants as an example, we -- if we've got, let's say, 10 processes to produce something, then with use of latest equipment capabilities or making sure we use all the capabilities of existing equipment, if we can delay 4 or 5 process steps and still produce the part to the highest quality, that's what we're doing.

Talking about fasteners...

By the way, I did get it quite carried away on the -- I think in response to your question on the last earnings call, well, I think I was getting to the point where I was boring you about what we're doing on aircraft wheel control. And I thought, I think Doug's had enough of this already.

Okay. So we'll switch topics. So -- but fasteners what you just touched on. So we've been expecting this wide-body ramp to occur on the 787 and the A350. It's been a little behind schedule in terms of production at Boeing and Airbus. But once that happened, our expectation was, this is going to really help margins in your fastener business, but margins, you just reported, you're up 400 basis points and this hasn't -- this effect hasn't kicked in yet. Can you talk about what is taking your margins up there, and how we should look at this over the next couple of years?

Well, we could have got a little bit carried away with ourselves last quarter. That's possible. I hope not. It did turn out, I think, as good as we could have imagined. That's probably code for saying maybe better than we thought. But that's good because we always try to achieve at least our own expectations, if not yours. And so I do think that's the, I say the majority of that has been achieved without the benefit of fundamental mix emanating from the widebody and composite aircraft. That's yet to play. It's an unusual situation because we -- most of our plants are multiproduct, multipurpose and customer agnostic, and it makes for much more even production.

But in the case of the fasteners for the composite aircraft, they are concentrated in a couple of plants, and therefore, they're still what I think underloaded. And therefore, theoretically, should volumes ever increase, and the order book is so high for wide-body demand is so he thinks it's got to increase at some point. So there will be the 787 goes to 7 a month from the last several years at 1, 2 to 5. Now, I think it's moving on to 5, or it's the A350 at probably 5.5 months this year or something. I'm expecting the problems of -- to get more production will be solved. And, therefore, it will play out into higher production maybe 2026, 2027.

And, therefore, again, it should be positive for us, particularly because we say we're slightly unbalanced at the moment between, I'll call it metallic and fasteners to go to a metallic type of aircraft to composites. And therefore, I keep thinking good things. We've never happened yet, but it's going to happen.

Well, one other thing here on fasteners. Can you give us any kind of an update on this SPS fire and the impact that it may have on you?

Yes. We -- you looked at the situation, considered the revenue going through that plant, how much might be moved to existing PCC facilities. And it's difficult to get an exact number, but say, if there was $150 million, possibly $200 million rather, let's use $150 million coming out of plant, I think half gets redeployed to other PCC plant is my guess, particularly into California. And then there's a balance, and we have quoted a lot of parts. We have now booked some healthy orders. I'm trying to remember the number I gave you on the last call. So I'll -- I don't quite remember, but I'm thinking like $25 million, yes $25 million to $30 million was that sort of area with the prospect of it going up further because we've still got hundreds of part numbers to quote.

We've seen, as you always get this, you have some people move faster than others, probably according to their need and availability and what images they're carrying. So for example, Boeing were fast out the gate on this one. And we put a huge team behind and we've been in a supportive situation to do that in 1 or 2 special applications to ensure that production continuity could occur, for example, on the 737. So that -- we're doing that, working with them very well. And it's less of an Airbus type of play from that plant, but the some. And then the rest is into both distribution and to the engine makers and we have lots more to bid. We've got 3 customers already where we have production orders for as soon as we can make them, not this month, but hopefully, towards the back end of the year into next year, we'll be making some more of these parts.

And as I said, as inventories dwindle, more and more orders. What the total is eventually, I don't know, hopefully, north of 30, it can't be more than 70, so it pick somewhere between 40 or 50, who knows.

But if we go back to another area, which is when you not too long ago said that now you're becoming an AI company as well...

No, I didn't say we get an AI, I just said that AI is giving us this extraordinary opportunity. And I think if you throw AI into any earnings call, it's worth $10. That's a joke, just in case.

I'm not really wanting to put that.

But it was electricity demand for us. If you do ChatGPT search, 10x electricity to Google search, so please use any form of those, what you have graphical capacity or something? I can't keep up with all the names. But there's lots of them use that and then more electricity, more data centers, you're increasing anyway and therefore, more electricity, and therefore, AI is good.

So you talked about -- I guess, you've gotten an agreement in Japan now on IGT related to this. And I know you talked about discussions with some of the other big players, Renova. Can you give us an update on how you expect that IGT trajectory to go? I believe IGT is about 10% of revenues.

A little bit less than that, but you're in the ballpark, $500 million, $600 million, that sort of area of revenue last year. I'm hopeful it will be more this year. But again, it's one where we're building capacity like crazy to also to be able to meet what our customers want.

we are bottleneck breaking. We are addressing yields -- and there's also, particularly with some of the newer turbines, there's again the same trajectory of changeover in more solid blades to cord rates, which is, again, value that we see in both quantity increases and sophistication increase, therefore, content. And yes, in fact, we, in the, let's say, IGT network. And let's say, we've got really 3 plants aimed at that. They're supported by some other, let's say, core operations then we're building a new one in Japan. So it's not just dedicated to the Mitsubishi Heavy, it also suppliers into other customers. So we do supply all customers. And we're also expanding in Europe, and we've put capacity by way of additional machine tools into -- being put into our plant in the U.S., but we're not expanding footprint there.

And so there's a lot of good things happening. And also, we made that small technology acquisition last year, which is also giving us a level of capability on tooling to produce these very large blades, which have extreme, I will say -- I'll say, extremes of where you're relieving the tension in the parts because of the length with the level of, I'll say, thermal energy we're putting into it during the casting process, and therefore, we're actually using tools with servo motors to adjust as we mold cores and so it's a bit of a PR thing saying what a great technology.

Okay. Moving to engineered structures. This is another one where you took margins up a lot. And can you comment on -- you had 18.4% margins? I know you've changed leadership there a little while back. I mean, a lot has been going on. I mean, what should we think of that business terms of margins going forward?

If I look at that business, first of all, well, if I look at the allocation of my time, it was 1 where I probably paid more attention, look, over the last few years, first of all to engine and to fasteners and wheels and maybe didn't pay as much attention. Well, maybe it's like most things I do, I think so where do you have the most impact, focus where you can be really, really good.

And also in that business, it was more one of triage because we had the COVID down draft, 40% volume disappeared. Then you had a wide-body titanium, which is inside that business, that's more of a wide-body play than a narrow-body play. And then add to that the fact that, I'd say, our customer for big structural parts. So I think bulkheads for F-35s as an example. And Lockheed had underbuilt over several years during, let's say, COVID and beyond and hadn't really achieved the, I'd say, 150 rate that was talked about. And so there's a large inventory of those parts to burn off as well. So a lot of things which were going on, but we're still being done and improved. Everything we did was just holding where we were, let's say, a 14% margin business, which in a structures context, isn't bad. In fact, sometimes that business is better than some other coal companies. Our dog, if you want to call it that, some sort of BCG analysis was still pretty good. But I always felt that with a bit more love, care and attention, it could do a lot better. And that's why I wildly went out and said, I think this could be a high-teens business.

I don't often do that because I don't -- I'm not sure that's really a margin predicting just like feeling, and I felt this could be a high teens margin business. And we did move up, and we've done a lot of really good things. So yes, we've done some change of leadership. Yes, we've spent more time and attention. Yes, for example, on that long-winded answer I gave you about aircraft wheels, which is also inside that business. I was telling you about process control improvements just because using that as a poster child for a lot of things we were doing there. And I could give you yields in melt shops on titanium production and all the rest, if you want to, what weight we use in terms of the electrode production, things which would bore you, I'm sure.

No, we can do that. I'm happy to do that.

Okay. Any time you want to do it, we would spend the rest of our time today if you want to. But there's a lot of things that have been happening and I think the team has been doing great. And so we did the 18%. So it was getting towards high teens. And then we went crazy and broke the 20% number. And then we did a few other things like got rid of a couple of bad businesses, sold one, closed one, all within that, and yet you didn't really notice it because revenue continued to climb, which is the best time. Let's deal with those things while revenue is going up and -- but still be very laser-focused on what you're really good at. And increasingly, we are again spending time looking at what are we really good at in that business because we'd like to stay ideally with a 2 handle on the number rather than my underachieving high teens, but it's only a quarter. It's...

Good quarter.

But a good quarter, and I don't like going backwards.

Okay.

That's part of my DNA.

Okay. Okay. That's good. So in terms of going forward, free cash flow this year to guide to $1.15 billion. When you look at that, what factors are out there that could take that higher or lower when you look at the variables involved?

It's going to come down to final cash tax bill, guessing at that. The first capital that is high and then our ability to thrift production to be more working capital efficient. So those are the main things. There could be a tiny bit issue in terms of -- we're always looking for opportunities to relieve our gross liability on pension. So we always like fine, can we do something there? But essentially, it's the main things which are going to be, I'll say, the big drivers are between those 3, work capital, fixed capital and obviously, profitability as well, but I'm taking that forgiven because we've told you what that number is guided as 2.1 something. Again, we got quite carried away.

Can you give us a sense in this, just sort of the CapEx outlook because there is -- I know you're thinking about a lot of potential investment needs here as you ramp up in different areas.

The best deployment of capital for us is organic growth. If you look at the return profile of the company, it's really good and superior to buying our shares back. I just mean to say you shouldn't buy your shares back. I'm just saying that it's a return on capital of that marginal dollar then I prefer to put fixed capital. At the same time, I also think you have to respect the things like conversion ratios. So I don't think -- even though I think could we spend more, yes. But I do think it's -- a high-quality company should be converting their net income. I mean, I use 90% as the long-term metric for us. We had some years above 100%, probably in that just after COVID. We've had several years now like 88%, 89%, but we've blended out somewhere in 90% to 100%, probably 100%. And so I just think so, maybe we'll end up around that 90%, but with the first capital, if I put another $10 million or $20 million or $30 million fixed capital, that might be a really good thing. But I also don't want to go too far because I do think, again, good companies convert net income into a high conversion ratio. It's part of what you should do.

Well, I think we've got to wrap up here. But John, I want to thank you for joining us today. This has been great. We'll have that yield discussion another time.

Okay. Thank you.