Howmet Aerospace Inc. (HWM) March 17, 2026 Conference Transcript

Hey, 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 Helmet 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. um maybe we start with uh just timely last week um you all hosted an investor event in white hall um are 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 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, say, improving those facilities and expanding in the investments that we had made and 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 Hamlet. 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 plan. So I thought it was something that was worthwhile doing, especially given the change of an improvement of manufacturing process, while at the same time producing, you know, extraordinary increases in the technical performance of the parts, you know, all at the same time. And so that's what we were really trying to get across and convey last week of how we're moving the goalposts once again in terms of increasing the moat around the helmet 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 turbines are 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 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 going to be the ability to get people, what's the counter to that in terms of automation. and uh and so the the principle is exciting but you have to be cautious and careful because you're you're building you know cost into your business which you have to have return on per today and also in particular over the coming years so that's an interesting part of the uh the equation and then also you have to consider the end markets that you're serving not your your direct customer what indeed what's happening to those end markets and you know 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 defense aerospace customers And two, it's a land-based gas turbine customer, so they have different characteristics, different levels of, I will say, historical cyclicality and, say, security around them, and also the volume and variety considerations. So you're trying to take all of those facts 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 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 into commercial. why don't I start with industrial gas turbine?

How are you thinking about that?

I mean, it does seem like maybe four or five 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 ed 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'll 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 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 US, also it seemed to change again because 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 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 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 build-up which has been going on for some time and so every aspect of what we were looking at whether it was the 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 in the same for also natural gas in terms of an energy provision and the ability of the U.S. to provide LNG tankers across to Europe as, again, commencing with energy security, it became far more interesting for us. And then, of course, you had not just the underlying data center buildup, 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 six 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 had changed again. And you saw certain of, I'll say, the hyperscalers announcing the investment increase from $135 million to $185 million. I think that was maybe Microsoft, and then you had Amazon come 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 of our immediate customer being the gas turbine manufacturers, as 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 three 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 not just for large utilities, but also for mini and micro grids, which are providing electricity sources for other industrial complexes, where maybe fundamental electricity supply won't be sufficient. So there's a lot of things to think about, both in the US, 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 being 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 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 mid-sized 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, you know, 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 five years, which will be a lot higher quantity than the last five 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. You know, 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 five years so it gives us a level of repeatability which is quite different for Hamet compared to just the basic consideration of the OE level of demand and so you've got all of those considerations to to build into it as well and then also how does the mini and I'll say you know let's say average smaller land-based gas turbine How does that play into the demand pattern over the decade of 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.

Gotcha. Gotcha.

And maybe transitioning to commercial aero, you mentioned the big backlogs.

And, you know, for example, in 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 backlogs, 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. 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. So that's a good starting point. You know, more is better. and um and so we're prepared and capacitized to and will invest to be able to produce more um but at the same time uh we we've always maintained a fairly cautious stance over you know where should we guide uh in terms of the uh the hammer uh 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 you know where we guide to and where we can produce to may be different so should an aircraft manufacturer 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 a 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 a 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 you know previously purchased the same where other manufacturers promised let's say a rate 38 or something and struggled and eventually gets there But, you know, so you have to take account of all of those inventory cycles of, you know, over ordering, you know, reductions of inventories or not increasing because they allow those images 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. It's been a good equation for us because of the quality and delivery that Hamlet has been able to produce has stood us in really good stead in our arrangements with the customer. The company's 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 to say can we meet if if Boeing gets a 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 can we support them getting to rate 65 75 or higher or the answer is yes but then if you to stack everybody's on top of each other And if you add all of the demand for narrow body of, let's say, an A220, an A320, a Boeing 737, and no one, 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 new rates come to be I'll say to be or to into fruition what the moment we would have if 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 a hundred 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 engine program probably yes but if i suspect if you scan the whole supply base and said can you produce 50 percent 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 as Whitehall 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 posited that every one of our end markets is growing, then I'll say places and capacities that machine tool manufacturers are becoming very tight. And so, you know, we've been trying to make sure that we can reserve capacity in the answers 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.

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? I've I've heard things like autoclaves can take two years.

Yeah, it really depends on type of equipment. But you're getting at that two years and more than two 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 three months when you need it because of the capacity in the industry needs to place 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 in production of dyes which is extraordinary if you think about it just to to double that and more and not everybody not every company has the even the financial capacity to do that whereas at least with Hamet you know 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 you know with it with the supplier that can yeah 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's become a little bit easier than it was in the immediate years after COVID, gaining, I'll say, labor in gestation, 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 into that and trying to reduce our our employee turnover and you know what you know that's been additional routines through our recruitment processes we've actually built out additional training centers so that we can train people you know for a long period of time before we put them into you know this is for real in terms of those are production requirements and And obviously, because of the interlinking, let's say 40 or 50 processes that some of our parts go through, you know, 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, you know, 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, not in aerospace, where it was one robot now for every two 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, say, machine input versus 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. It's an hour by hour, never mind shift by shift. And so automation and machine input is there for quality purposes more than it is for labor cost purposes.

Gotcha. And we didn't talk about aftermarket demand. So if you've got all these OE programs, where's the aftermarket fit in all that? Because that's even, that's growing too, right? It's a fleet growth.

Yes. I mean, we're seeing demand for the aftermarket growth for, you know, fleet growth for sure. You know, the build-out of both commercial aircraft given the very low scrappage rates that we've been experiencing the last few years. You see it also in some of the major military programs where if you take the F-35 as an example, there's always a lag between producing that new aircraft and then what's the spares demand they're going to with what the duty cycle is of 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 you know 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 five years by another you know 150 plus aircraft per year for the five years so there's another 800 aircraft then if 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 you know through those through those decades and so that's an important part. But 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 atomize the fuel and gain more fuel efficiency. And that in itself produces a 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 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 reach the level now where we can consciously and deliberately accelerate the airflow or we can decrease it according to where you want those those cooling parts to be on the turbine blade where we exhaust the air from it and the holes and at which you know what type of hole what shape of hole and then now how we're trying to control the 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 for us and so 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 CFM 56 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 five years ago. So now we have, 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 five 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 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 only 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 and 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 stacking it, as I said, according to what we think the OE level 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, you know, risk and reward go together. Or maybe it's reward with risk.

And then with, you know, 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 other other new potential opportunities for helmet and 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 the performance of the engine on an F F-35 or you could say what's what is going to be the engine of choice or the F-47 or the is the Navy going to get a plane and what will be that engine of choice. So we we try to position ourselves well for those I mean the next thing which is quite exciting and 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 is it two is it five is it 25 you know we don't yet understand what that end demand will be and maybe it'll 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 be like one of the existing difference 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 with an example so it's not just the structural parts or the fasting systems which those CCEAs will require but also you know 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 engines like so engine selection so the last three 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 you know let's say a five thousand pound thrust or a eight thousand north fifteen thousand 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 it's another chip will 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, two or three years. And 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 the hammock business, but you know, it'll be an interesting Increasing demand for us over the next few years And just kind of 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?

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 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'll be a combination according to what the mission is required a time so some will come back and some won't and you know we don't know we just humble parts manufacturers for I was referring to reusable rockets where some of those oh we mean for like space rockets like origin or something yeah we do some of that stuff as well um you know we 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 space explorer origin or any of the others uh the name usc or something i don't know um it's 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 you know 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 you know 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 what you can do with 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 seven years it becomes more investable and therefore the considerations around capital deployment become different.

And then maybe as a last question, your own supply chains, do you worry about them? I mean, how tough has that been to manage given your 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. But it's only like 5% to 8% of our business. It's invested space metal. So we're buying from, I'll say, traders or you know smelters directly so it's metal input has not been an issue for us that's all you know I right now given the build out I'd be more worried about machine tool capacity than I am base metal capacity now do I have to think about what the overall picture is so is there enough alloy or being prepared for all well under the right circumstances of the right commercial arrangements yes we could but that's not really a normal business you know we we only supply to a degree to our internal requirements so we will alloy ourselves some base metal for for example our turbine blade business but for our rings business we'll access just part of the market so up to maximum of eight percent of uh material input from other alloy manufacturers well i think we're out of time john thank you very much that was a lot of thank you yeah nice to talk to you, Ron.