Howmet Aerospace Inc

NYSE:HWM

Q2-2025 Earnings Call

[Operator]

Good day, and welcome to the Second Quarter 2025 Howmet Aerospace Earnings Conference Call. [Operator Instructions]. 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.

[Paul Luther, executive]

Thank you, Megan. Good morning, and welcome to the Howmet Aerospace Second Quarter 2025 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, 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. Reconciliations 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 year-over-year basis.

With that, I'd like to turn the call over to John.

[John Plant, executive]

Thank you, PT, and welcome, everyone. The results for the second quarter were strong. Revenue growth increased 9% year-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. Revenue growth enabled us to carry out the cost of the additional headcount as we prepare for the new capacity coming on at the end of 2020, notably for turbine air foils and the IGT build-out during 2026 and 2027.

EBITDA margins were healthy at 28.7%, up 300 basis points year-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 enables 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 $0.12 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 $0.91, an increase of 36% year-over-year.

In terms of business segment commentary, Forged Wheels continues to do well with a 27.5% 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 about 60% year-over-year.

I'll now pass the call to Ken to comment specifically on market sector performance and provide business segment commentary.

[Ken Giacobbe, executive]

Thank you, John. Good morning, everyone. In the deck, you'll notice that we've added Slide 5, which gives you a quick snapshot of the first half performance. But we're going to move to Slide 6 now to talk about the markets. So end markets continue to be healthy with total revenue up 9% year-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. Defence aerospace growth continued to be robust, creating 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 year-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%. And within helmets 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 I 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 7. 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% year-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 $0.91, which was up a healthy 36% year-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% year-over-year.

About 70% of the first half CapEx investment was in our Engines business as we continue to invest for 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 paydown will reduce annualized interest expense drag by approximately $4 million. Net debt to trailing EBITDA continues to improve to a record low of 1.3x. 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 paydown and quarterly dividends. In the quarter, we repurchased $175 million of common stock at an average price of approximately $142 per share. Q2 was 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 year-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've announced an increase in the Q3 quarterly stock dividend by 20% from $0.10 per share to $0.12 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 head count, which has a 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 and commercial transportation, which represents about 13% of Fasteners 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 to healthy 360 basis points year-over-year to 29.2% 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 destocking and product rationalization and was essentially flat sequentially. Defense Aerospace was up 49%, primarily driven by the end of the destocking 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 21.4% as we continue to optimize the structures 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 on 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.

[John Plant, executive]

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 destocking in certain product areas. This growth starts with passenger miles flown, which has been solid in Europe and relatively higher growth in Asia Pacific while flat in North America.

Aircraft backlogs are extraordinarily high due to prior period under bills and the need for modern fuel and emissions efficient aircraft to replace the increasingly aided fleet. There have been positive signs for narrow-body bills with Boeing achieving a recent 38 per month build rate for the 737 MAX. We also believe Airbus has achieved 60 bills per month for the A320/321 with some 60 A320s being gliders at this stage, awaiting engines.

Widebody builds 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, defense aerospace and IGT industrial, have increased by some 40% year-over-year and were at 20% of total revenue. This result is positive with the continued first half rate of being 20% of total revenue currently. Defense revenue was up 21% and has seemed to continue to exhibit the strength during the balance of the year.

IGT, oil and gas and industrial strength in the quarter was exceptional at 17%, with IGT up some 25%. Growth for the combined IGT oil and gas and industrial markets is expected to be high single digits for the year. And within the combined number, the IGT market is expected to be significantly higher.

Moving to Commercial Transportation. Within our Wheels segment, revenue was below 2024 by only 1%. However, metals and tariff recovery are now included in that number. Volume was down 11%, with continued softness expected in the second half.

In terms of general outlook is that we expect to see continued strength in commercial aerospace, defense aerospace IGT, oil and gas and an offset only in the commercial truck segment, which continues throughout this year. In 2026, the commercial truck market should stabilize, and hence, the overall picture for Howmet 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 of $580 million, plus or minus $5 million; EPS of $0.90, plus or minus $0.10. 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 $0.20 to $3.60 plus or minus $0.04.

Free cash flow has been increased $75 million to $1.225 billion, plus or minus $50 million. Revenue, EBITDA and EBITDA margin have 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% within -- 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'll now move to your questions.

[Operator]

[Operator Instructions]. Our first question comes from Myles Walton with Wolfe Research.

[Myles Walton, analyst]

John, you did comment on the rationalization of products within structures. How meaningful is that? Is it going to be to the margins as well as maybe any headwind to departing from some lines of businesses or products.

[John Plant, executive]

The majority of the rationalization has already occurred on this on, Myles. And so if you go back to a commentary provided in the 2 prior earnings calls, I mentioned the sale of one business within structures and also the closure of another manufacturing plant, which is in Europe. And those 2 combined with us probably possibly being a little 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 continued to be healthy and grow, and margins are signified. And I quite like, again, the team conversation doing a revenue increase and margin enhancement, which has played well for the company. The total revenue, which in that structure 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, I'll say, distribution markets where some orders have been cut, I think as -- I think Boeing in particular, decided to do some destocking throughout the supply chain.

So I'm not expecting significant further rationalizations that we always remain alert for anything where it doesn't really contribute in a significant way to improve in the business, then we'll always take a hard look at it.

[Myles Walton, analyst]

So should we expect the margins seen year-to-date to persist for the second half within structures at these new levels?

[John Plant, executive]

Well, that was our goal for the second quarter. I will say, yes, we did achieve it. And 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 our margin outlook of EBITDA above 28%. So that assumes that we'll achieve that objective.

[Operator]

Our next question comes from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, analyst]

John and Ken, crazy good results. So -- can you hear me, by the way, my voice is a little hoarse.

[John Plant, executive]

Yes. No, I can hear you well. Thank you for the compliment. Crazy good.

[Sheila Kahyaoglu, analyst]

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 1? Are those sites dilutive to the segment? How do we think about pricing expected volumes? And just what are the key pacing items for those coming online?

[John Plant, executive]

Okay. So we've got 2 complete new plants, which are being or have been built in the Engine segment and 2 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 our Michigan facilities. And I'm expecting some outputs from that that's salable output 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 airports market.

And that's supported by the extension that we have done in 1 of our Tennessee plants. So that covers that one. The other 2 are aimed at the industrial gas turbine market. Again, these are large -- to the large industrial gas turbines 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 to serve [indiscernible] in the first quarter, probably going into the second quarter of 2026, and therefore, hope for output in the second half of 20 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 in in the second half of 2026 and then with them both coming on full ball for 2027. So that gives the picture across, say, the aerospace business and the gas turbine business. So quite a lot going on too.

[Sheila Kahyaoglu, analyst]

And how do we think about the profitability profile of those coming online?

[John Plant, executive]

I'm expecting that any cost that we incur and we've been incurring costs each quarter you're seeing another headcount increase in the second quarter of just under 400 net new jobs into our engine business.

Clearly, we're carrying those those employees today and essentially, let's say, training and getting ready for production. And so the drag associated with that has really been offset by the leverage of the volume of 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 the 2026, particularly in the second half and in 2027, those can really get better, will enable us to hopefully produce an improved outlook for the business, which is also a pretty high today.

So that's the expectation. And it's a combination of hopefully reduced labor cost 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.

[Operator]

Our next question comes from Seth Seifman with JP Morgan.

[Seth Seifman, analyst]

John, you talked about the strength in the defense end market this quarter and expect continued strength going forward. I guess if you could talk a little bit about the contribution of F-35 in defense overall this year and how you think about setting up for the future in F-35 given some concerns about future production rates.

[John Plant, executive]

Yes. So this year, I'd point to just on the F-35, I think, generally, the defense business has been strong with the legacy programs as well. But specifically for the F-35, we received, I think, 2 volume inputs, which have been quite welcome.

One is that we appear to have arrive at a tipping point when 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 2 or 3 years. It looks as though at that moment has arrived. And with the increased build was assume 150 aircraft per month -- say, per year for the next few years through the end of the decade, means that the fleet will continue to expand from its 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 F-35 volume has been during 2023 and 2024, I noted that [indiscernible] provision from our structures business. We were receiving input orders well below the Lockheed production rate as inventory was burned off on the excess supply relative to their COVID impaired builds back in 2020 and 2021. And so as that inventory was depleted, we're now running at a 1:1 rate, we believe relative to Lockheed's production.

And we are also optimistic that with the large input of new orders that have been into Lockheed for the I'll say international programs for that Pfizer aircraft that we'll see solid 150 per year rates through to the end of the decade and beyond.

[Operator]

Our next question comes from David Straus with Barclays.

[David Strauss, analyst]

John, I think you talked about your forecast for MAX through the year. If you don't mind running through your assumptions on your other key programs, 87, 350, so on. And then a quick one for Ken. Just if you could quantify, Ken, the amount of the tariff drag in Q2.

[John Plant, executive]

Okay. So in terms of underlying assumptions, the major shift from previous commentary was that max average of 28 per month for the year to 33, and that basically assumes that we'll consistently maintain rate 38 for the balance of the year and having cut 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'd say, during the third quarter or by end of third quarter, achieving a solid rate 7 on a consistent basis. On MPSA350,it's the same 6 that we understand more about some of the relief of the few large constraints there. And the other bright spots, which is not really computed at this stage is while A320, the builds have been solid.

We're still unclear about where that build will be maintained, and that's also really subject to the supply of engines because of the state of aircraft in the quantity of aircraft with no engines at this point in time. So that covers the major part of it. And I'll cut a tariff rather than break the call out. It's -- we gave you some metrics around the gross and net effect of $80 million and $50 million on the last call.

Since then, tariff drive, we think, has probably gotten better. So we asked to name it today would be going a net effect below $15 million, but again, I said it wasn't going to be material for our year. So you say if it was reduced, which it is, it's not significant. So that's been good. And tariff rate for the second quarter was, which is the -- probably the biggest quarter of drag, but can consort everything is sorted out was below $5 million. Significant 45 million in the quarter. And as you said, you would stand the timing of us incurring the cost and us receiving compensation from our customers.

[Operator]

Our next question comes from Doug Harned with Bernstein.

[Douglas Harned, analyst]

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?

[John Plant, executive]

Okay. So let's start with the margin 1 first is that IGT and Aero are very comparable in terms of margins. So there's no dilution at all from that currently relatively higher growth rates that we see. So that's encouraging.

And then in terms of agreements, we've now have agreements with I will say 3 of the 4 majors completing with the other 1 in terms of the gas turbine area, I guess the big gas turbines. We've also just completed agreement with, let's call it, the not ever derivatives, but something like that with gas turbines in the up to 35, 38 megawatts taking out. But and so our 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, which is designated for oil and gas or aero derivatives and then those derivatives going to, whether it's the, I'll say, marine market or other military bases or oil and gas or indeed IGT. But the the growth rate of aero derivative type of the size of turbines is certainly becoming very significant.

That we see it, it's going to be a really important part of data center build-out of energy supply over the next few years.

[Douglas Harned, analyst]

Is there any way to say when you structure these agreements how soon that growth will come from an individual agreement?

[John Plant, executive]

Yes. So an individual agreement, we know pretty well the growth that we'll see. Obviously, it's always dependent upon the complete supply chain. It's not just what Howmet does in terms of revision of that served by airfoils. But assuming that everybody is on stream for those programs and those new product introductions, then we have a pretty good idea of when the increased requirements are there. Any sense line with my commentary that I provided earlier in the call, Doug, where we are putting capacity in, and we're seeing increments of that capacity currently, but with the majority of it to come on stream early second half of 2026 and into 2027.

There's no major step function this year for sure. Our capacity because when we stepped it up last year, even again, it takes a full 12 or 18 months for us to begin 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 in the -- for this year. So it's significant outlay that we believe will give us good results and good growth into the future.

[Operator]

Our next question comes from Robert Stallard with Vertical Research.

[Robert Stallard, analyst]

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

[John Plant, executive]

Well, not really. I can't call the commercial market precisely because we're not sure where any, I'll say, volume points we may have seen from the additional emissions requirements for 2017 would result in security volumes in the next 12 months. We don't know whether those emissions rigs will continue to apply it on what the new administration do ultimately decide or basically everybody is now prepared for those emissions by way of equipment for the truck. So that's 1 where it's difficult to be uptiertain.

We've tried to be on the cautious side of those assumptions. And so thinking that similar to '25, but could be better. So that's 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 that appear to be pretty solid in commercial area given the backlog we fender on budget patio Europe are going up. F-35 is to us seems solid, and we know we've got enhancements coming from the block for coming in 2028 and as that's delayed another year or so. So that is looking help for them the IGT or aero derivatives for the data center is all sold. So I mean I still have my -- I'm always -- I think I'm worried I'm paid to worry about things and providing idea, then you don't have to.

[Operator]

Our next question comes from Peter Arment with Baird.

[Peter Arment, analyst]

Nice results. 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 faster this quarter adding 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.

[John Plant, executive]

I think our productivity numbers for 3 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, I'll say, future capacity this underlying protein adding in those gross numbers of maybe 1,500, 1,800 people over the last 12, 18 months. 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 will say, 2 or 3 years, albeit now with slightly pausing on the automation given our capital really for capacity. And so where we're putting new equipment in, we're trying to ensure that 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, I'll say, free cash flow yield, substantiative net income, but 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 and further productivity opportunities that we have. So our pass-through is currently, let's build a focus on the capacity and share and then we'll go back and map up in a couple of years' time, any remaining productivity opportunity that we know we have, which we just currently focus on at the moment.

[Operator]

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

[Kenneth Herbert, analyst]

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. And 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 you sort of the inventory or destocking risk over the next few quarters?

[John Plant, executive]

So one of the things I noted from this quarter was in some of the other aerospace companies that have reported that they had some, I would say, is high single digit or maybe low double-digit reduction and drawdowns in the OE business for commercial aerospace. And one of the things I thought was particularly good for Howmet was that despite are facing the same customers and saying, I'll say, inventory reductions or underlying growth was sufficient. That our commercial aerospace business, we're still in positive in growth territory despite that.

And then when you layer in the additional business of spares, et cetera, -- and we produced what I think was pretty solid growth for the quarter, which is 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 inventory 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 the -- some destocking as we go into the third quarter while still producing positive growth in our 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, say, 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.

[Operator]

Our next question comes from Scott Deuschle with Deutsche Bank.

[Scott Deuschle, analyst]

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? Is that just tariff recovery lag as you referenced earlier? Or was that something else?

[John Plant, executive]

And the majority of any -- first of all, I thought 29-point-something was pretty good actually got. So it's not exactly a number. I will say crying about. Having said that, the -- if you look at the tariff drug that we experienced for the company, then, in fact, the highest area of tariff drag was in a faster business.

Again, we are expecting recovery as we go through the year is more of a timing issue. But if you adjust for a tariff drag then it's easier to get to a number starting with a 3. And so I don't think that's anything to be concerned about at all. I could go on to say, well, there's FX and this and the other. But there's no point really. The answer is it was a pretty good margin step-up year-on-year. Very sensible in terms of a sequential movement given that Piedra I mentioned to you.

[Operator]

Next question comes from Noah Poponak with Goldman Sachs.

[Noah Poponak, analyst]

I wondered, is there any framework for -- when we're looking at the upward revision of CapEx each of the last 2 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 tailwind and when does CapEx become to free cash as you get through that?

[John Plant, executive]

Yes. So right now clearly, we would not be investing and the CapEx with 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 increase that number.

And if we've increased the number, it's going to take a full year loss for that capital to be deployed -- and so that's more going to affect '27 % and what the increase you just put through on this one Noah. And then in terms of profile, I think we should be in that 4% zone. And 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 '27 into '28, and then we'll have more, I'd say, optionality around investment for the automation and further productivity. So compared to where we've been, which was underspending depreciation, we're now overspending 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 where and how we deploy that capital. And just to 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 to the company, and that's maybe 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, the organic growth and stepping up CapEx is really good for us, and it will be good for the future. means it's great if you think about it, that we have those opportunities to deploy the capital.

I've 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 '26 and positive revenue growth into '27. And so we're actually really pleased to deploy the capital and have more opportunities than we're actually capacitizing for.

[Operator]

Our next question comes from Gautam Khanna with TD Cohen.

[Gautam Khanna, analyst]

Great results. I was curious if you could opine on pricing expectations next year and perhaps thereafter if you expect any change to kind of the rate of net increases you've had.

[John Plant, executive]

I haven't really talked much on the pricing front, except to say that we maintain the process that we've been going through, looking at wherever we renew our long-term agreements, what the movement in speed is by way of volume and variety and those parts, which have gone from OE to supply or OEM service just to service supply, and so we're following that discipline as we've done now for the last 6 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 word that I use statin 2025 and -- and my expectation is we'll continue to process set could be a similar picture going forward into '26 and into 27. So just that consistent movement gate in terms of price. Nothing has changed for us by way of process, nor by way of annual expectation.

[Operator]

Our next question comes from Scott Mikus with Melius Research.

[Scott Mikus, analyst]

Industrial policy is a big priority for this administration. We're in a pretty big ramp on both the commercial aero and defense side. And when we look at the forging assets in the country, there's only 4 presses that are over 35,000 tons in the U.S., dated back to 40s and 50s and you happen to own 2 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.

[John Plant, executive]

There has not been skied, i.e., have we missed something when you asked that question. And it's certainly interesting because that capacity and that scale is unique for us. I think it's only one of the maybe press in the world that can do in that slot, I think, in Russia.

So yes, those are pretty important assets and are certainly absolutely critical to supplying the componentry that will be required for, let's say, the new apply to jet, the 47 and presume for the F-55 as well, as there's 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 Boeing 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.

[Operator]

Our next question comes from Kristine Liwag with Morgan Stanley.

[Kristine Liwag, analyst]

John, 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-up. What do you monitor as potential canaries in the coal mine?

[John Plant, executive]

It's very difficult for us to see through the complete supply base of what might occur. I think there's probably other people better placed to do that and maybe including yourselves. The one area which I think to be really important for the industry for -- in the commercial area for the second half and going into 2026, is the build-out of narrowbody engines.

I commented earlier that bus 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 Pratt 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, where we are intimately in the first few [indiscernible], there is a relatively good position way of overall inventory to produce. The strike that would happen 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 ramps of everybody, then is that supply going to be sufficient for everybody, including spare engines, et cetera, et cetera. So that's the one area which I'm sort of trying to look at more close it's closer to home and elsewhere, it's difficult for me to really see. I mean I can't monitor laboratories or seats or AB system. It's just too difficult.

[Kristine Liwag, analyst]

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

[John Plant, executive]

Okay. So I think PCC is trying really hard to maintain as much production as possible with movements to plants in California. They've also been moving a lot of equipment that was still functioning. We're able to functional from [ Jan Kinston ] to a local facility let's say, I believe, something a several hundred piece equipment have been moved. But at the same time, the complete picture can we service by just standalone.

In the last call, I commented that we moved to about $25 million of orders for that sudden -- we're still bidding out several hundred part numbers. The picture today is that we've moved much closer to $40 million. And therefore, it's good. We are still building -- bidding out a lot of part numbers. So we're sort of gradually moving towards what we said as an internal target for us for that business and a healthy increase in revenue for the company as we begin to supply those not massively today, but increasing here over the next 12 months.

[Operator]

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