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Howmet Aerospace posts record Q2 results with strong margin expansion, robust aftermarket growth, and raised guidance, positioning HWM for continued outperformance and capital returns.

# Howmet Aerospace Delivers Record Q2 FY2025: Margin Expansion and Aftermarket Growth Drive Upbeat Guidance

---

## Executive Summary

- **Howmet Aerospace (HWM) delivered a standout Q2 FY2025, beating on both revenue and EPS.** Revenue reached **$2.05B** (up 9% YoY, above consensus), and adjusted EPS was **$0.91** (vs. $0.80–$0.87 consensus). The beat was driven by robust organic demand, especially in the high-margin spares/aftermarket segment.
- **Earnings quality was strong, with significant margin expansion.** Adjusted EBITDA margin rose to **28.7%** (up 300 bps YoY), and operating income margin hit **25.4%** (up 420 bps YoY), reflecting effective cost controls and pricing power. Free cash flow set a Q2 record at **$344M**.
- **Management’s tone was bullish,** highlighting record revenue, margin gains, and proactive capital allocation (including $175M in share repurchases and a 20% dividend hike). The balance sheet is robust, with net debt/EBITDA at a record low of **1.3x**.
- **Guidance was raised across all key metrics,** with full-year revenue now expected at **$8.13B**, adjusted EBITDA at **$2.32B**, and adjusted EPS at **$3.60**—all above prior expectations. Management’s confidence is underpinned by sustained demand and strategic capex focused on high-growth segments.
- **Risks include macroeconomic volatility and potential cost pressures,** but the market may be underestimating the transformative impact of the spares/aftermarket business and the sustainability of margin improvements. **Short-term catalysts** include continued aftermarket growth and further capital returns.

---

## Performance Snapshot

| Metric                | Reported | Consensus      | Surprise | YoY Change |
|-----------------------|----------|---------------|----------|------------|
| Revenue               | $2.05B   | ~$2.00B       | +$50M    | +9%        |
| Adjusted EPS          | $0.91    | $0.80–$0.87   | +$0.04–0.11 | +~20%      |
| Adjusted EBITDA Margin| 28.7%    | —             | —        | +300 bps   |
| Operating Margin      | 25.4%    | —             | —        | +420 bps   |
| Free Cash Flow        | $344M    | —             | —        | Q2 record  |
| Spares/Aftermarket Rev| 20% of total | —         | —        | +40% YoY   |

---

## Earnings Quality

Howmet Aerospace’s Q2 results reflect **high-quality earnings**. Revenue growth was broad-based, with the spares/aftermarket segment now accounting for 20% of total revenue (up from 11% in 2019). **Margin expansion** was driven by improved pricing, disciplined cost management, and operating leverage. The company’s record free cash flow and increased capital returns underscore the sustainability of its cost structure and profitability. There was no evidence of one-off gains or unsustainable cost cuts; rather, the improvement appears structural, supported by ongoing demand and operational execution.

---

## Management Commentary & Guidance

Management’s tone on the call was **decisively bullish**. They highlighted record quarterly revenue, significant margin expansion, and a robust balance sheet. Capital allocation remains a priority, with $175M in Q2 share repurchases and a 20% dividend increase for Q3. **Guidance was raised** across all major metrics: full-year revenue is now forecast at $8.13B, adjusted EBITDA at $2.32B, and adjusted EPS at $3.60. These upgrades are based on continued strength in both commercial and defense aerospace, as well as aggressive but targeted capex (up 60% YoY in H1, with 70% directed to Engine Products and IGT capacity).

---

## Key Risks

- **Cost inflation and supply chain pressures** could impact margins if not managed proactively.
- **Macroeconomic volatility** remains a risk, particularly if defense or commercial aerospace demand softens.
- **Execution risk** around aggressive capex and capacity expansion, especially if demand moderates.

---

## Expected Market Reaction

Analyst and investor sentiment is **overwhelmingly positive**. With the stock at all-time highs, the market is likely to reward the company’s record results, margin expansion, and confident guidance. The strong free cash flow and capital returns should support further upward momentum, though some profit-taking is possible given recent gains. The market may not yet fully appreciate the recurring, high-margin nature of the aftermarket business.

---

## Final Takeaway

**Howmet Aerospace delivered a robust, high-quality quarter, with structural improvements in both revenue mix and profitability.** The market may be underestimating the long-term impact of the spares/aftermarket segment and the sustainability of margin gains. **Upcoming catalysts** include continued aftermarket growth, further capital returns, and potential upward revisions to guidance if current trends persist. This is a strong quarter that positions Howmet Aerospace for continued outperformance in the aerospace and defense sector.

HWM: Record Margins & Aftermarket Drive Upbeat Outlook

Howmet Aerospace is poised for Q2 upside, driven by strong Engine Products momentum, record commercial aerospace backlog, and resilient margins, despite ongoing weakness in Forged Wheels.

# Howmet Aerospace Inc.: Engine Momentum and Margin Resilience Set the Stage for Q2 Upside

## Executive Summary

We are **bullish** on Howmet Aerospace Inc. (NYSE: HWM) heading into the upcoming quarter, driven by robust performance in the Engine Products segment and management’s confident guidance. **Q1 2025 revenue of $1.94B** and an **adjusted EBITDA margin of 28.8%** set a strong foundation, with Q2 guidance targeting **$1.98B–$2.00B in revenue** and **EPS of $0.85–$0.87** (vs. consensus $0.81). The market may be underestimating the operational leverage embedded in working capital expansion, which—supported by a record commercial aerospace backlog—could drive further margin gains if execution remains disciplined. However, persistent weakness in Forged Wheels and macro headwinds remain risks to monitor.

## Recent Trends Signal What’s Next

Howmet’s last two quarters have demonstrated accelerating revenue and margin expansion, led by Engine Products. **Q1 2025 revenue grew 9% YoY** to $1.94B, with adjusted EBITDA margin up **120 bps YoY** to 28.8%. The Engine Products segment posted **13% YoY revenue growth** and a **450 bps margin expansion**, while Forged Wheels saw a **13% YoY revenue decline** and a **150 bps margin contraction**. The company’s guidance for Q2 2025—**revenue of $1.98B–$2.00B** and **adjusted EBITDA margin of 28%–28.3%**—implies continued sequential improvement.

### Key Financials Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024      | 1.81         | 23.5             | 17.2                 | 10.1          | 0.72    |
| Q3 2024      | 1.87         | 24.1             | 17.8                 | 10.5          | 0.76    |
| Q4 2024      | 1.90         | 24.7             | 18.3                 | 10.8          | 0.80    |
| Q1 2025      | 1.94         | 25.2             | 18.8                 | 11.2          | 0.83    |

**Trend:** Steady sequential growth in revenue and margin, with EPS rising each quarter.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary was notably upbeat, emphasizing both demand strength and cost control. CEO John Plant stated, **“We’re seeing record backlog in commercial aerospace and healthy growth in Engine Products, which positions us well for the coming quarter.”** The team also highlighted effective tariff pass-through and operational discipline, noting, **“We remain confident in our ability to offset input cost pressures.”** This is a marked shift from the more cautious tone in Q3 2024, when management described the environment as “uncertain” and focused on “cost containment.” The current language signals increased confidence in both demand visibility and margin protection.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q2 2025 are:

- **Commercial Aerospace Backlog:** Reached a record high in Q1, supporting sequential revenue growth.
- **Inventory and Receivables:** Inventories rose **$49M QoQ** and receivables increased **$189M QoQ**, indicating strong demand and potential revenue acceleration.
- **Segment Revenue Growth:** Engine Products up **13% YoY**; Forged Wheels down **13% YoY**.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Engine Products Revenue ($M)| 820     | 900     | 927     | +13%       | +3%        |
| Forged Wheels Revenue ($M)  | 320     | 295     | 278     | –13%       | –6%        |
| Commercial Aero Backlog ($B)| 5.1     | 5.6     | 5.9     | +16%       | +5%        |
| Inventory ($M)              | 1,020   | 1,065   | 1,114   | +9%        | +5%        |
| Receivables ($M)            | 780     | 820     | 1,009   | +29%       | +23%       |

**Implication:** Backlog and working capital expansion support revenue growth, while Engine Products’ outperformance is likely to drive margin and EPS upside.

## Missed by the Street

A key overlooked signal is the **positive operational leverage** from working capital expansion. While rising inventories and receivables often raise red flags, in this context they are backed by a record backlog and targeted headcount increases in high-growth segments. As management noted, **“We are investing in capacity to meet sustained demand in aerospace,”** suggesting that these investments could yield higher productivity and margin expansion in coming quarters—a nuance not fully captured in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Adjusted EBITDA Margin (%) | Key Assumptions                                      |
|----------|--------------|---------|----------------------------|------------------------------------------------------|
| Bull     | 2.00         | 0.87    | 28.3                       | Engine Products outperforms, tariffs fully passed     |
| Base     | 1.98         | 0.86    | 28.0                       | Steady execution, moderate tariff impact              |
| Bear     | <1.98        | <0.85   | <28.0                      | Forged Wheels weakness, macro headwinds persist       |

**Most Likely:** The **Base case** is most probable, given current backlog, management’s confident tone, and recent execution. However, upside to the Bull case exists if Engine Products momentum accelerates and cost pass-through remains effective.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) | Adjusted EBITDA Margin (%) |
|--------------|--------------|---------|------------------|----------------------|---------------------------|
| Q2 2024      | 1.81         | 0.72    | 23.5             | 17.2                 | 27.2                      |
| Q3 2024      | 1.87         | 0.76    | 24.1             | 17.8                 | 27.6                      |
| Q4 2024      | 1.90         | 0.80    | 24.7             | 18.3                 | 28.0                      |
| Q1 2025      | 1.94         | 0.83    | 25.2             | 18.8                 | 28.8                      |

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Engine Products Revenue ($M)| 820     | 900     | 927     | +13%       | +3%        |
| Forged Wheels Revenue ($M)  | 320     | 295     | 278     | –13%       | –6%        |
| Commercial Aero Backlog ($B)| 5.1     | 5.6     | 5.9     | +16%       | +5%        |
| Inventory ($M)              | 1,020   | 1,065   | 1,114   | +9%        | +5%        |
| Receivables ($M)            | 780     | 820     | 1,009   | +29%       | +23%       |

### Key Management Quotes

1. **“We’re seeing record backlog in commercial aerospace and healthy growth in Engine Products, which positions us well for the coming quarter.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Strong demand visibility supports revenue guidance.*

2. **“We remain confident in our ability to offset input cost pressures.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Margin protection likely despite inflationary risks.*

3. **“Tariff conditions remain fluid, but our pass-through mechanisms are working as intended.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Tariff risk is being actively managed.*

4. **“We are investing in capacity to meet sustained demand in aerospace.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Working capital expansion is strategic, not a red flag.*

5. **“Forged Wheels continues to face headwinds in commercial transportation.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Segment drag could limit upside if not stabilized.*

6. **“We expect sequential improvement in both revenue and margin in Q2.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Management is guiding for continued operational momentum.*

7. **“Short interest has increased, but we see this as a function of heightened market attention rather than deteriorating fundamentals.”**  
   – Q1 2025 Earnings Call  
   *Interpretation: Volatility risk, but not a fundamental concern.*

---

**Conclusion:**  
Howmet Aerospace enters Q2 2025 with strong momentum in its core Engine Products business, a record aerospace backlog, and management’s clear confidence in both demand and margin outlook. While risks remain in Forged Wheels and macro conditions, the company’s operational leverage and cost pass-through mechanisms position it for continued outperformance. The market may be underestimating the positive earnings impact of these dynamics in the near term.

Howmet (HWM): Engine Strength Drives Q2 Upside