HWM Q1 Earnings Call: Spare Parts Demand and Margin Expansion Offset Uncertainty in Commercial Transportation

Aerospace and defense company Howmet (NYSE:HWM) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 6.5% year on year to $1.94 billion. On the other hand, next quarter’s revenue guidance of $1.99 billion was less impressive, coming in 0.7% below analysts’ estimates. Its non-GAAP profit of $0.86 per share was 11% above analysts’ consensus estimates.

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StockStory’s Take

Howmet’s first quarter results reflected momentum in commercial and defense aerospace as well as industrial markets, with management pointing to particularly strong demand for engine spares and higher-margin product segments such as Fastening Systems and Structures. CEO John Plant credited process improvements and operational discipline for the significant margin expansion, noting that “the improvement in scrap has been extraordinary,” especially within the company's aircraft wheels and titanium melts operations. Management also emphasized the role of spares sales, which reached 20% of total revenue—a milestone achieved a year ahead of schedule.

Looking ahead, management reconfirmed annual sales guidance but signaled a cautious stance for the near term, citing macroeconomic and geopolitical uncertainty, particularly in North American commercial transportation and the impact of evolving tariffs. While the company raised its full-year adjusted EPS and EBITDA outlook, Plant highlighted that “the near-term is rather more uncertain,” pointing out potential softness in commercial truck builds and the need to closely monitor tariff impacts and labor expansion as Howmet invests in capacity across global regions.

Key Insights from Management’s Remarks

Management attributed Q1 performance to a combination of demand for spares, operational improvements, and margin expansion across key segments. The following points summarize the main business drivers discussed:

• Engine Spares Growth: Demand for commercial and defense aerospace engine spares increased sharply, with spares revenue rising 33% and now comprising 20% of total revenue. This was driven by aging airline fleets and the need for more fuel-efficient aircraft.
• Operational Efficiency Gains: Significant improvements in process control, scrap reduction, and productivity—especially in aircraft wheels and titanium operations—contributed to higher margins. Management cited detailed plant-level reviews and targeted yield improvements as key levers.
• Segment Margin Expansion: Fastening Systems and Structures both showed notable year-on-year margin increases due to a combination of cost control, favorable product mix, and pricing actions. Management highlighted the exit of underperforming businesses and ongoing process optimization as supporting factors.
• Capacity and Workforce Investments: The company accelerated capital spending, particularly in Engines, and hired 500 new employees in the quarter to support growth. Additional footprint expansions are underway in Japan and Europe for industrial gas turbines (IGT), backed by long-term customer agreements.
• Tariff and Supply Chain Management: Management described a proactive approach to managing new tariffs, using trade programs and force majeure letters to mitigate impacts. They estimate a net tariff cost of less than $15 million for the year after mitigation, with most increases passed to customers on a lagged basis.

Drivers of Future Performance

Management described a mixed outlook, with continued strength in aerospace and industrial spares tempered by caution around commercial transportation and tariff impacts.

• Aerospace Build Rates Influence: Higher production rates for Boeing 737 MAX and sustained spares demand are expected to drive commercial aerospace revenue, while defense programs like the F-35 remain a growth area.
• Tariff Pass-Through and Margin Effects: Tariff costs are expected to be largely passed through to customers over time, but management anticipates a temporary margin drag due to timing lags and working capital requirements.
• Labor and Capacity Scaling: Ongoing investments in plant expansions and workforce growth are set to support future demand, but management noted potential risks from slower commercial transportation markets and the ramp-up costs associated with hiring and training new employees.

Top Analyst Questions

• Seth Seifman (JPMorgan): Asked how much global air traffic growth matters for Howmet’s outlook. CEO John Plant replied that large backlogs protect near-term demand, but long-term confidence depends on air travel and freight trends.
• David Strauss (Barclays): Inquired about progress on turbine airfoil upgrades and certification timing. Plant confirmed production is ahead of engine manufacturer needs, with remaining certifications expected by year-end.
• Doug Harned (Bernstein): Probed drivers and sustainability of improved margins in Fastening Systems and Structures. Plant emphasized process control, scrap reduction, and favorable business exits, stating the margin gains are “absolutely solid.”
• Ron Epstein (Bank of America): Sought details on tariff mitigation and pass-through. Plant outlined the use of trade programs and contracts, estimating a net cost below $15 million in 2025, mostly from timing lags.
• Scott Deuschle (Deutsche Bank): Requested a breakdown of spares growth by end market and asked about destocking in engine products. Plant said commercial and defense spares grew over 40%, with IGT and oil and gas up mid-teens, and noted some remaining destocking in LEAP engine parts.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the pace of commercial aerospace production increases, especially for the Boeing 737 MAX and wide-body aircraft, (2) Howmet’s ability to sustain margin improvements in Fastening Systems and Structures as hiring and plant expansions accelerate, and (3) the effectiveness of tariff mitigation efforts and the timing of cost pass-throughs. Progress on long-term customer agreements for IGT and updates on spares growth will also be key signposts.

Howmet currently trades at a forward P/E ratio of 45.6×. Is the company at an inflection point that warrants a buy or sell? Find out in our free research report.

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