Howmet Aerospace Inc.

Good day and welcome to the second quarter 2025 Helmet Aerospace Earnings Conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 Helmet Aerospace second quarter 2025 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer, and Ken Giacobbi, 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. Reconciliation 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 -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% -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. The revenue growth enabled us to carry out the costs of the additional headcount as we prepare for the new capacity coming on at the end of 2025, notably for turbine airfoils and the IGT buildout during 2026 and 2027. EBITDA margins were healthy at 28.7%, up 300 basis points -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 enabled 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 12 cents 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 91 cents, an increase of 36% -over-year. In terms of business segment commentary, forged wheels continue to do well with a .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 above 60% -over-year? I 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 five, which gives you a quick snapshot of the first half of performance. But we're going to move to slide six now to talk about the markets. So end markets continue to be healthy, with total revenue up 9% -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. Since aerospace growth continued to be robust, printing 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 -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%. Within Helmet's 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 to 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 seven. 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% -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 91 cents, which was up a healthy 36% -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% -over-year. About 70% of the first half CAPEX investment was in our engines business, as we continue 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 pay down will reduce annualized interest expense drag by approximately $4 million. Net debt to trailing EBITDA continues to improve to a record low of 1.3 times. 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 pay down, and quarterly dividends. In the quarter, we repurchased $175 million of common stock at an average price of approximately $142 per share, due to 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 -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 have announced an increase in the Q3 quarterly stock dividend by 20%, from 10 cents per share to 12 cents 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 headcount, which has a new 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 commercial transportation, which represents about 13% of Fasters 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 a healthy 360 basis points year over year to .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 de-stocking and product rationalization and was essentially flat sequentially. Defense aerospace was up 49%, primarily driven by the end of the de-stocking 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 .4% as we continue to optimize the structure's 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 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 de-stocking in certain product areas. This growth starts with passenger miles flown, which has been solid in Europe, a relatively higher growth in Asia Pacific, while flat in North America. Aircraft backlogs are extraordinarily high due to prior period underbills and the need for modern fuel and emissions-efficient aircraft to replace the increasingly-aided fleet. There have been positive signs for narrow bodybuilds, with Boeing achieving a recent 38 per month build rate for the 737 Max. We also believe Airbus has achieved 60 builds per month for the A320-321, with some 60 A320s being gliders at this stage awaiting engines. Wide bodybuilds 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, defence aerospace and ICT slash industrial have increased by some 40 per cent -over-year and went 20 per cent of total revenue. This result is positive with a continued first half-rate of it being 20 per cent of total revenue currently. Defence revenue was up 21 per cent and is seen to continue to exhibit this strength during the balance of year. ICT, oil and gas and industrial strength in the quarter was exceptional at 17 per cent, with ICT up some 25 per cent. Growth for the combined ICT, oil and gas and industrial markets is expected to be high single digits for the year and within the combined number, the ICT market is expected to be significantly higher. Moving to commercial transportation, within our wheel segment, revenue is below 2024 by only 1 per cent. However, metals and tariff recovery are now included in that number. Volume was down 11 per cent with continued softness expected in the second half. In terms of general outlook, we expect to see continued strength in commercial aerospace, defence aerospace, ICT, oil and gas and an offset only in the commercial truck segment, which continues throughout the year. In 2026, the commercial truck market should stabilise and hence the overall picture for Hamet 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, 580 million plus or minus 5 million. EPS at 90 cents plus or minus a cent. 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 20 cents to $3.60 plus or minus 4 cents. Pre-cash flow has been increased 75 million to 1.225 billion plus or minus 50 million. Revenue, EBITDA and EBITDA margin have been 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% and 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 will now move to your questions.

We will now begin the question and answer session. To ask a question you may press star then 1 on your telephone keypad. If you are using a speaker phone please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question please press star then 2. We ask that you please limit yourself to one question only. At this time we will pause momentarily to assemble our roster. Our first question comes from Miles Walton with Wolf Research. Please go ahead.

Thanks, good morning. I was wondering if John you can comment on the rationalization of products within the structures. How meaningful is that? Is it going to be to the margins as well as maybe any headwind to departing from some clients, businesses or products?

The majority of the rationalization has already occurred on this one Miles. So if you go back to commentary provided in the two prior running schools, I mentioned the sale of one business within structures and also the closure of another manufacturing plant which was in Europe. Those two combined with us possibly being a 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 continue to be healthy and grow and margins are solidified. I quite like again the conversation doing a revenue increase and margin enhancement which is played well for the company. The total revenue which in our structures 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 distribution markets where some orders had been cut. I think Boeing in particular decided to do some destocking throughout their supply chain. So I'm not expecting significant further rationalizations but we always remain alert for anything where if it doesn't really contribute in a significant way to improvement in the business then we'll always take a hard look at it.

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 and I will say yes we did achieve it. 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 margin out of the block of EBITDA above 28%. So that assumes that we'll achieve that objective. All right, thanks. Thank you.

Our next question comes from Sheila with Jeffreys. Please go ahead.

Good morning John and Ken. Crazy good results. Can you hear me by the way? My voice is a little hoarse. Yeah,

I can hear you well.

Okay, thank you. And by the way,

thank you for the compliment. I like the word 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 one? Are those sites diluted 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 two complete new plants which are being or have been built in the engine segments and two 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 Michigan facilities. And I'm expecting some outputs from that that's available 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 air force market. And that's supported by the extension that we have done in one of our Tennessee plants. So that covers that one. The other two are aimed at the industrial gas turbine market. Again, these are large, they're for the large industrial gas turbines rather 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 facilitation in the first quarter, probably going into the second quarter of 2026 and therefore hoped for outputs in the second half of 2026. 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 into the second half of 2026 and then with them both coming on full bore for 2027. So that gives the picture across say the aerospace business and the gas turbine business. So quite a lot going on Sheila.

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've seen another headcount increase in the second quarter of just under 400 new jobs into our engine business. Clearly we're carrying those employees today and essentially it's a training and getting ready for production. And so the drag associated with that has really been offset by the leverage of the volume, the 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 2026, particularly in the second half of 2027, that those really get better and enable us to hopefully produce an improved outlook for the business which is also pretty high today. So that's the expectation and it's a combination of hopefully reduced labor costs, 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.

Got it. Thank you.

Thank you.

Our next question comes from Steph Season with JP Morris. Please go ahead.

Thanks very much and good morning everyone. Good morning, Seth. I guess, morning. John, you talked about the strength in the defense and market this quarter and expecting continued strength going forward. I guess if you could talk a little bit about the contribution of F35 in defense overall this year and how you think about setting up for the future in F35 given some concerns about future production rates.

Yeah. So this year I'd point to just on the F35, I think generally the defense business has been strong with the legacy programs as well. But specifically for the F35 we've received I think two volume inputs which have been quite welcome. One is that we appear to have arrived at a tipping point when our 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 two or three years. It looks as though that moment has arrived. And with the increased build, let's assume 150 aircraft per month, sorry, per year for the next few years through the end of the decade means that the fleet will continue to expand from its 1,000, 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 F35 volume has been during 2023 and 2024 I noted that bulkhead provision from our structures business, we were receiving input orders well below the lock-in production rates as inventory was We were able to compare COVID impaired builds back in 2020 and 2021. And so as that inventory was depleted we're now running at a one to one rate we believe relative to lockage production. And we're also optimistic that with the large input of new orders that have been there to interlock it for the international programs for that fighter aircraft that we'll see solid 150 per year rates through to the end of the decade and beyond.

Excellent. Thank you very much. Thank you.

Our next question comes from David Strauss with Barclays. Please go ahead.

Thank you. Good morning. Hi David. Hey John. So I think you talked about your forecast for max for the year. If you wouldn't mind running through your assumptions on your other key programs, 8, 7, 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 shift from the average of 28 per month of the year to 33. And that basically assumes that we'll consistently maintain rate 38 for the balance of the year, having come 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'll say during the third quarter or by end of third quarter achieving a solid rate 7 on a consistent basis. On end by say 350, it's the same 6 until we understand more about some of the relief of the fuselage constraints there. And the other bright spot, which is not really computed at this stage, is while A320, the builds have been solid, we're still unclear about whether that build will be maintained. And that's also really subject to the supply of engines because of the state of aircraft, the quantity of aircraft with no engines at this point in time. So that covers the major part of it. And I'll cover Tyre's rod and break the call up. We gave you some metrics around the gross and net effects of 80 and 15 on the last call. Since then, Tyre's drag we think has probably gotten better. So we asked to name it today, we'd be going a net effect below 15. But again, I said it wasn't meant to be material for a year. So if it was reduced, which it is, it is not significant. So that's been good. And Tyre's drag for the second quarter was, which is probably the biggest quarter drag, and the clock shows that everything's sorted out was below 5 million. Just significant below 5 million in the quarter. And that's essentially was down to timing, us incurring the cost and us receiving compensation from our customers.

Great. Thanks, Sean. Thank you.

Our next question comes from Doug Harndt with Bernstein. Please go ahead.

Good morning. Thank you. 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 just do with the margin one first, is that IGT and aero are very comparable in terms of margin. So there's no dilution at all from that currently relatively high growth rate that we see. So that's encouraging. And then in terms of agreements, we now have agreements with I would say three of the four majors completing with the other one in terms of the gas turbine area, the big gas turbines. And we've also just completed agreement with, let's call it the not aero derivatives, but something like that with gas turbines in the up to 35, 38 megawatt type of outputs. And so 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, that which is designated for oil and gas or aero derivatives. And then those derivatives go into whether it's the, I'll say, marine market or other military bases or oil and gas or indeed IGT. But the growth rate of aero derivative type of size of turbines is certainly becoming very significant. And the way we see it is 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, from an individual agreement we know pretty well. The growth that we'll see obviously is always dependent upon the complete supply chain. It's not just what Hamit does in terms of the turbine air foils. But assuming that everybody is on stream for those programs and those new project reductions, then we have a pretty good idea of when the increased requirements are there. And essentially it lines up with my commentary that I provided earlier in the call, Doug, where we're putting capacity in and we're seeing increments of that capacity currently. But with the majority of it to come on stream, we're in the second half of 2026 and into 2027. There's no major step function this year for sure, by way of capacity. Because when we stepped it up last year, it takes a full 12, 18 months for us to be gone. And 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 for this year. So it's a significant outlay that we believe will give us good results and good growth into the future.

Very good. Thank you. Thank you.

Our next question comes from Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Rob?

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 three months ago. But I was wondering if there's anything else on your worry radar that we should be worried about?

Well, not really. I mean, I can't call the commercial clip market precisely because we're not sure whether any, I'll say, volume points we may have seen from the additional emissions requirements for 2017 would result in the security volumes in the next 12 months. We don't know whether those emissions rates will continue to apply depending on what the new administration ultimately decides. All these are the game that is now prepared for those new emissions by way of equipment for the truck. So that's one where it's difficult to be absolutely certain. We've tried to be on the cautious side of those assumptions. And so thinking that 26 is similar to 25, but could be better. So 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 appear to be pretty solid in commercial area given the backlog, the defense arrow budget for Europe are going up. F35 to us seems solid. And we know we've got enhancements coming from the Block 4 coming in 2028, and that's delayed another year or so. So that is looking helpful. And then the IGT or error derivatives for the data center, this is all solid. So I still have my – I'm always – I think I'm paid to worry about things. And providing I do it, then you don't have to.

That's sensible. All right. Thanks for us, John. Thank

you.

Our next question comes from Peter Arment with Bayard. Please go ahead.

Good morning, John. Nice results. Hey, 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 Fasteners this quarter added 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. Thanks.

So I think our productivity numbers for three 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 – for I'll say future capacity. Yeah, there's underlying productivity adding in those gross numbers of maybe 1500, 1800 people over the last 12, 18 months is 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'll say two or three years. Or be it now we're slightly pausing on the automation given our thirst for capital really for capacity. And so where we're putting new equipment in, we're trying to ensure that's 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 and I'll say free cash flow yields, the percentage of net income where 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 for the labor productivity opportunities that we have. So our path through is currently let's build and focus on the capacity and share and then we'll go back and mop up in a couple of years' time any remaining productivity opportunities that we know we have which we just can't currently focus on at the moment.

Appreciate the call. Thanks John. Thank you.

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

Good morning John. 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. 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 use 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 reported that they had some I'll say high single digit or maybe low double digit reductions and drawdowns in their OE business for commercial aerospace. And one of the things I thought was particularly good for her math was that despite us facing the same customers and I'll say inventory reductions, our underlying growth was sufficient. Our commercial aerospace business was still in positive and growth territory despite that. And then when you layer in the addition business of spares, etc., then we produced what I think was pretty solid growth for the quarter, which was 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 imagery 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 some of these stockings. We go into the third quarter while still producing positive growth in that 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 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.

Thanks, John. Thank

you. Our next question comes from Scott Doeschel with Deutsche Bank. Please go ahead.

Hey, good morning. 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? And is that just tariff recovery lag as you referenced earlier or is that something else? Thank you.

The majority of any, first of all, I thought 29. something percent was pretty good actually, Scott. So it's not exactly a number I'll say crying about. Having said that, if you look at the tariff drag that we experienced for the company, then in fact the highest area of tariff drag was in our faster business. Again, we're expecting recovery as we go through the year. It's more of a timing issue. But if you adjust for tariff drag, then it's easy to get to a number starting with a three. And so I don't think that's anything to be concerned about at all. I could go on and say, well, there's FX and this, that, and the other, but there's no point really. The answer is it was a pretty good margin step up year and year, very sensible in terms of sequential movement given that tariff drag I mentioned to you. Okay, thank you. Thank you.

Our next question comes from Noah Poppenick with Goldman Sachs. Please go ahead.

Hey, good morning, everyone. I wondered, is there any framework for, you know, when we're looking at the upward revision of CAPEXE to the last two 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 tail end and when does CAPEX become to free cash as you get through that?

Yeah, so right now, clearly we would not be investing and keeping up the CAPEX without 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 increased that number. If we've increased the number, it's going to take a full year plus to put that capital to be deployed. And so that's more going to affect 2027 than what the increase has just put through on this one, Noah. And then in terms of profile, I think we should be in that 4% zone. 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 2027 to 2028, and then we'll have more, I say optionality around investment for the automation and further productivity. So compared to where we've been, which was under spending depreciation, we're now over spending 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 of where and how we deploy that capital. And just to re-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 in the company, and that's really 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 that the organic growth and stepping up CapEx is really good for us, and will be good for the future. And it's great if you think about it that we have those opportunities to deploy the capital. I'm 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 2026, and positive revenue growth into 2027. And so we're actually really pleased to deploy the capital and have more opportunities than we're actually capitalizing for.

Understood. Thank you.

Thank you.

Our next question comes from Gautam Khanna with TD Cohen. Please go ahead.

Yeah, John and Ken, great results. I was curious if you could opine on pricing expectations next year and perhaps thereafter if you expect any change to 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 and looking at wherever we renew our long-term agreements, what the movement has been by way of volume and variety, and those parts which have gone from OE to supply or OE and service, just to service supply. And so we're following that discipline as we've done now for the last six 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 words that I used on it, in 2025 and 2024. And my expectation is we'll continue to process and there could be a similar picture going forward into 2026 and into 2027. So just that consistent movement, Gotham, in terms of price, nothing's changed for us by way of process nor by way of annual expectation. Thank you.

Thank

you.

Our next question comes from Scott Micus with Melius Research. Please go ahead.

Good morning, John and Ken. Industrial policy is a big priority for this administration. We're in a pretty big ramp on both the commercial arrow and the defense side. When we look at the forging assets in the country, there's only four presses that are over 35,000 tons in the US. They date back to the 40s and 50s, and you happen to own two 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, Scott. I think we have missed something when you asked that question. And it's certainly interesting because that capacity and that scale is unique for us. I think there's only one or maybe the press in the world that can do that sort of thing in Russia. So, yeah, those are pretty important assets and certainly absolutely critical to supplying the componentry that will be required for, let's say, the new fighter jet, the F-47, and presumably for the F-55 as well, as those 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 by way of 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.

All right. Thank you.

Thank you.

Our next question comes from Christine Luwag with Morgan Stanley. Please go ahead.

Hey, good morning, everyone. John, you know, 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 ups, 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 that are placed to do that, maybe including yourselves. The one area which I think is going to be really important for the industry, for the commercial area, for the second half and going into 2026, is the build out of narrow body engines. I commented earlier that Airbus 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 Crackle 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, we're intimate particularly in the first few blades of those turbines, there's a relatively good position, a way of overall inventory to produce. The strike that happened 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 wraps of everybody, then is that supply going to be sufficient for everybody including spare engines etc. etc. So that's the one area which I'm trying to look at more closely, closer to home and elsewhere. It's difficult for me to really see. I can't monitor lavatories or seats or AV system. It's just too difficult.

Thanks John. And maybe if I could have a follow-up there on fasteners. Precision cast parts had their facility accident in the first quarter. Are you seeing the orders materialized from customers to make sure that they can meet all of those products? 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?

So I think PCC is trying really hard to maintain as much production as possible with movements to their plants in California. They've also been moving a lot of equipment that was still functioning or able to be functional from Jenkins Town to a local facility. So I believe something in the range of several hundred pieces of equipment have been moved. But at the same time, the complete picture cannot be serviced by just them alone. In the last call, I commented that we moved to about $25 million of orders for that and we're still bidding at several hundred part numbers. The picture today is that we've moved much closer to $40 million. And therefore, that's good. We're still building, bidding at a lot of part numbers. So we're sort of gradually moving towards what we said is an internal target for us for that business, a healthy increase in revenue for the company as we begin to supply those, not massively today, but increasing over the next 12 months.

Great. Thank you.

Thank you.

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