Executive Summary / Key Takeaways

• Howmet Aerospace, a pure-play leader in lightweight metals engineering, is strategically positioned to capitalize on robust aerospace aftermarket demand and emerging growth in the Industrial Gas Turbine (IGT) market, offsetting near-term volatility in OEM aircraft production and commercial transportation.
• The company delivered a record Q1 2025, with revenue up 6% year-over-year to $1.94 billion, driven by strong performance across aerospace and industrial segments, translating to significant EBITDA and EPS growth ($0.86 diluted EPS, up 44% YoY).
• Operational excellence and technological differentiation, including advancements in turbine airfoil production and process control, are driving margin expansion (Q1 2025 EBITDA margin 28.8%) and enabling capacity investments ($119M CapEx in Q1 2025) to capture future market share, particularly with a second engine manufacturer and in IGT.
• Management provided strong full-year 2025 guidance, raising the EBITDA baseline to $2.25 billion (+/- $25M) and Free Cash Flow to $1.15 billion (+/- $50M), supported by increased Boeing 737 MAX build assumptions (average 28/month) and spares growth, while acknowledging uncertainty in commercial truck and potential tariff impacts.
• A fortress balance sheet (Net Debt/EBITDA targeting 1.1x by year-end 2025) and disciplined capital allocation strategy, including a 25% increase in the quarterly dividend ($0.10/share) and substantial share buyback authorization ($1.97B remaining), underscore confidence in future cash generation and commitment to shareholder returns.

Forging Ahead: Howmet Aerospace's Strategic Ascent

Howmet Aerospace Inc. ($HWM-P), a global leader in lightweight metals engineering and manufacturing, stands at a pivotal juncture. Born from the strategic separations from Alcoa Corporation (AA) and Arconic Corporation (ARNC), Howmet has honed its focus into a pure-play entity serving critical needs in aerospace, commercial transportation, and industrial markets. Its core strength lies in innovative, multi-material products crafted from nickel, titanium, aluminum, and cobalt – components essential for performance, fuel efficiency, and durability in demanding applications like aircraft engines and industrial gas turbines.

The company's strategy is clear: outgrow its markets through operational excellence, technological leadership, and disciplined capital allocation. This approach has yielded tangible results, with Howmet consistently outpacing its respective markets in recent years. While the aerospace industry navigates complex dynamics – from record aircraft backlogs and the push for lower emissions to persistent supply chain constraints and quality control challenges at key OEMs like Boeing (BA) – Howmet's narrative is increasingly defined by the resilience of its aftermarket business and the emergence of compelling new growth vectors.

In the competitive landscape, Howmet operates alongside diversified giants like RTX Corporation (RTX), GE Aerospace (GE), and Honeywell International (HON), as well as specialized players like Safran (SAF). While competitors like GE and RTX boast broader portfolios and larger R&D budgets, Howmet carves out its niche through specialized process control, cost efficiency in certain segments, and deep customer relationships. For instance, its proprietary manufacturing processes enable faster production cycles for specific structural parts, and its focus on cost leadership in areas like fastening systems appeals to price-sensitive markets. In the critical IGT turbine blade market, Howmet holds a leading global market share, supporting major players like GE Vernova (GEV), Siemens (SIE), Mitsubishi Heavy, and Salto. While direct quantitative comparisons across all niche products are challenging to ascertain, Howmet's ability to drive significant productivity gains and yield improvements, as evidenced by extraordinary improvements in scrap reduction in areas like aircraft wheels business, underscores its operational competitive advantage. Its strategic investments in automation and advanced manufacturing techniques, including the use of AI in testing, aim to further enhance consistency, quality, and scale, positioning it to capture additional market share, particularly with a second engine manufacturer and in the burgeoning IGT market.

Technological Edge: The Foundation of Performance

Howmet's differentiated technology in casting, forging, and specialized materials is fundamental to its competitive moat. The company's expertise in producing complex investment castings, such as turbine airfoils capable of withstanding extreme temperatures and pressures, provides tangible benefits to its customers – enabling more fuel-efficient engines with lower emissions. While specific quantifiable performance metrics for every technology are not detailed, management highlights the strategic intent behind R&D and capital investments: to enhance product robustness, improve durability, and increase efficiency in manufacturing.

Recent technological advancements and R&D initiatives are focused on supporting the next generation of aircraft engines and capitalizing on new industrial demands. This includes progressing along typical learner curves for new turbine airfoil production for platforms like the LEAP-1A and GTF Advantage, with the LEAP-1A changeover to a new, improved blade version completed in Q1 2025. The company is also building tens of thousands of parts for future engine improvements, currently held in inventory awaiting certification. The strategic goal is to provide more robust components that address issues like time on wing, ultimately benefiting both engine manufacturers and airlines.

Furthermore, significant capital is being deployed to build out new capacity, particularly in the Engines and IGT segments. These new facilities are designed with a focus on high levels of automation and sophistication, leveraging advanced manufacturing techniques to achieve the consistency and yields necessary for high-rate production of complex parts. This investment is not just about volume; it's about enhancing the technological capability to meet the stringent requirements of future aerospace and IGT applications. The "so what" for investors is clear: Howmet's continuous investment in and refinement of its core technologies directly translates into products that are critical for customer performance, supporting pricing power, enabling market share gains, and underpinning the company's long-term growth trajectory in high-value markets.

Performance Reflecting Strategy: Q1 2025 Highlights

Howmet's strategic focus and operational execution translated into a strong start to 2025. First quarter revenue reached a record $1.94 billion, a 6% increase compared to Q1 2024. This growth was primarily fueled by strength in the commercial aerospace (up 9% YoY), defense aerospace (up 19% YoY), and industrial and other markets (up 10% YoY), including significant growth in engine spares. Favorable product pricing, exceeding material and inflationary cost pass-through, also contributed. The only segment experiencing a year-over-year decline was Commercial Transportation (down 14% YoY), reflecting the expected market slowdown, although it saw a sequential uptick.

Profitability demonstrated impressive leverage. Cost of goods sold as a percentage of sales decreased, driven by higher volumes, favorable pricing, and productivity gains, despite increased headcount in the Engine Products segment to support future growth. Operating income surged to $494 million, up from $369 million in Q1 2024. Net income reached $344 million, resulting in diluted earnings per share of $0.84, a substantial increase from $0.59 in the prior year period.

Segment performance underscored the broad-based strength:

• Engine Products: Delivered a record quarter with $996 million in sales (up 13% YoY) and $325 million in Segment Adjusted EBITDA (up 31% YoY), achieving a 32.6% margin. Growth was robust across all engine markets, including a significant increase in engine spares volume.
• Fastening Systems: Also posted a record quarter with $412 million in sales (up 6% YoY) and $127 million in Segment Adjusted EBITDA (up 38% YoY), resulting in an impressive 30.8% margin. This margin expansion was driven by commercial and operational improvements, including headcount reductions, and growth in commercial aerospace.
• Engineered Structures: Continued its performance improvement trajectory with $282 million in sales (up 8% YoY) and $60 million in Segment Adjusted EBITDA (up 62% YoY), reaching a 21.3% margin. Growth in defense aerospace (F-35 program) and productivity gains, coupled with prior footprint optimization efforts, were key drivers.
• Forged Wheels: Faced market headwinds with $252 million in sales (down 13% YoY) and $68 million in Segment Adjusted EBITDA (down 17% YoY). Despite the volume decline, the team maintained a healthy 27.0% margin by flexing costs and reducing headcount.

Overall, the company's EBITDA margin expanded significantly to 28.8% in Q1 2025, up from 23.7% in Q1 2024, demonstrating excellent incremental flow-through.

Liquidity and Capital Allocation: A Fortress Balance Sheet

Howmet's financial position continues to strengthen, providing both resilience and flexibility. As of March 31, 2025, the company held $536 million in cash and cash equivalents. Cash provided from operations was robust at $253 million in Q1 2025, a significant increase from $177 million in the prior year period, driven by higher operating results and improved working capital management.

The balance sheet is characterized by low leverage, with Net Debt to trailing EBITDA at 1.4x as of the end of Q1 2025, and management targeting a further reduction to 1.1x by year-end 2025. This strong financial health is recognized by credit rating agencies, with Fitch upgrading Howmet's debt ratings in Q1 2025 to BBB+ Stable, citing deleveraging, conservative capital allocation, and strong free cash flow generation. The company maintains ample liquidity with a $1 billion undrawn revolving credit facility and a $1 billion commercial paper program.

Howmet's capital allocation strategy is focused on funding growth investments while returning value to shareholders. Capital expenditures totaled $119 million in Q1 2025, a 45% increase year-over-year, primarily directed towards capacity expansion in the Engine Products segment to meet future demand and secure new market share. For the full year 2025, CapEx guidance has been increased by approximately $15 million, reflecting continued investment in growth projects, including building out capacity for IGT in Japan and Europe.

Shareholder returns are a key priority. The company increased its quarterly common stock dividend by 25% to $0.10 per share in Q1 2025, doubling the dividend from Q1 2024. The 2025 dividend policy targets a payout of 15% (+/- 5%) of net income excluding special items. Share repurchases continue to be a significant use of cash. In Q1 2025, Howmet repurchased $125 million of common stock, and an additional $100 million in April 2025. The company has approximately $1.97 billion remaining under its share repurchase authorization and expects total buybacks in 2025 to exceed those in 2024. Debt paydown is expected to be muted in 2025 compared to the significant reductions achieved in 2024, allowing the company to direct more cash flow towards growth and shareholder returns.

Outlook and Risks: Navigating Growth and Uncertainty

Management's outlook for 2025 reflects confidence in continued growth, albeit with acknowledgment of near-term uncertainties. The company raised its full-year guidance, projecting revenue of $8.03 billion (+/- $150 million), EBITDA of $2.25 billion (+/- $25 million), diluted EPS of $3.40 (+/- $0.04), and Free Cash Flow of $1.15 billion (+/- $50 million). This represents a significant increase in the EBITDA and Free Cash Flow baselines compared to prior guidance.

The updated guidance incorporates key assumptions: continued strong spares demand across aerospace and industrial markets, and a slightly more optimistic view on Boeing 737 MAX production, with the internal assumption raised to an average of 28 aircraft per month for the year. However, the guidance range was widened to reflect market uncertainty, particularly around the timing and pace of OEM build rate increases (influenced by supply chain constraints and Boeing's quality control oversight) and the expected recovery in the Commercial Transportation market in the second half of 2025, which management views as less certain.

Emerging growth drivers, particularly the increasing demand for IGT turbines and spares fueled by data center and AI electricity needs, are expected to contribute more significantly starting in 2026 and beyond, supported by Howmet's strategic capacity investments. Defense aerospace is also expected to provide steady growth, with F-35 spares demand becoming increasingly important.

Key risks to the outlook include potential delays or volatility in OEM aircraft production rates, particularly at Boeing, which could impact revenue and product mix. Ongoing changes in trade policies and tariffs pose a risk, although Howmet expects to pass through costs, potentially with a temporary drag on margins (estimated net impact <$15M in 2025). The Commercial Transportation market remains a source of uncertainty. While legal and environmental contingencies exist, management believes their disposition will not have a material adverse effect based on current facts. The execution of significant capacity expansion projects and the successful integration of new hires also present operational challenges that must be managed effectively.

Conclusion

Howmet Aerospace is executing a focused strategy that leverages its core technological strengths and operational discipline to capitalize on favorable long-term trends in aerospace and industrial markets. The company's record performance in Q1 2025, driven by robust spares demand and strength across most segments, underscores its current momentum. With a fortified balance sheet, increasing dividends, and a significant share repurchase program, Howmet is demonstrating confidence in its ability to generate substantial free cash flow, even as it accelerates investments in future growth.

While near-term uncertainties persist regarding OEM build rates and the commercial truck market, the strategic positioning in high-value engine components, the increasing importance of the spares market, and the compelling long-term opportunity in Industrial Gas Turbines provide a clear path for continued value creation. Investors should monitor the pace of the Boeing production ramp, the recovery in commercial transportation, and the successful execution of Howmet's capacity expansion projects as key indicators of the company's ability to realize its full potential and deliver on its promising outlook.