Q1 2026 Earnings Call Transcript

Good day, and thank you for standing by, and welcome to the Howmet Aerospace First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Please go ahead.

Thank you, Chris. Good morning, and welcome to the Howmet Aerospace First Quarter 2026 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Patrick Winterlich, Executive Vice President and Chief Financial Officer. After comments by John and Patrick, 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 the factors that could cause 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, adjusted operating income and adjusted EPS. As noted in today's materials, we have removed the term excluding special items from the titles of non-GAAP financial measures as well as simplified the definitions of adjusted EBITDA and adjusted EBIT.

While the titles and definitions have been simplified, current and prior period calculations have not changed. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP 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.

Thanks, PT, and good morning, everyone. Welcome to the Howmet first quarter earnings call. Let's move to the highlights on Slide 4. Howmet had a very strong start to 2026. We delivered in many ways. Sales were $2.31 billion, EBITDA of $740 million and earnings per share of $1.22. The EBITDA margin rate was 32%, and this margin was an increase of 320 basis points over the equivalent quarter last year.

Cash generation was $359 million, reflecting strong earnings and continued improvement in working capital efficiency. This enabled share buyback of $300 million during the quarter and a further $150 million in April. Capital expenditure continued at a high rate, supporting the future organic growth rate of the company. Brunner acquisition was completed in February from cash on hand.

The CAM acquisition closed on the 6th of April using $1.65 billion of new debt and part of the proceeds of the disposal of the Savannah U.S. disk operation at the end of March. The sale of Savannah tidied up another part of the Structures portfolio, which was an isolated U.S. disk operation for which there were no plans of expansion given its market position. The acquisition of CAM expands our reach and our portfolio of offerings to the nontraditional fasteners, such as fluid fittings, couplings, heat shields and additional latches. This acquisition investment in the Fasteners business reflects our strong philosophy of allocating capital to the better performing areas of our business.

Excluding the $1.8 billion used to fund the CAM acquisition, we entered the second quarter with just over $600 million of cash on hand, having completed these portfolio moves and with a resulting net leverage of 1.6x. This leverage, we expect to bring down significantly as we move through the balance of 2026. Patrick will provide further color on markets and the individual business segments in the following -- this part of the discussion. Meanwhile, the comment I would make is that margin performance of each business unit showed progress sequentially from the fourth quarter of 2025. I'll now pass across to Patrick.

Thank you, John. Good morning, everyone. Please move to Slide 5. Another solid quarter for Howmet with most end markets continuing to be healthy. We are well positioned for the future and continue to invest for growth.

Revenue was up 19% in the first quarter, an acceleration from the 15% growth rate in the fourth quarter. Commercial Aerospace growth was strong at 20%, driven by accelerating demand for engine spares and underpinned by the record backlog for new, more fuel-efficient aircraft with reduced carbon emissions. Commercial Aerospace engine spares were up 48% in the first quarter with both legacy and next-generation engine spares contributing. Defense Aerospace growth continued at 10%, including healthy spares activity.

Commercial Transportation revenue was up 13%, driven by the pass-through of higher aluminum costs and tariffs. On a volume basis, wheels was down 11% as the market down cycle continued into the quarter. We continue to outperform the market with Howmet's premium products. Gas Turbine growth remained very strong with revenue up 39%.

Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers. Within Howmet's markets, we had a robust spares growth. The combination of Commercial Aerospace, Defense Aerospace and Gas Turbine spares was up 36% to approximately $520 million in the first quarter. Spares revenue continues to grow and represents a larger portion of our overall revenue now at 23% in the first quarter of 2026 versus 21% in the full year 2025 and 11% in the full year 2019. In summary, continued strong performance in Commercial Aerospace, Defense Aerospace and Gas Turbines with all markets up double digits and the Commercial Transportation market beginning to improve.

Moving to Slide 6, starting with the P&L. First quarter revenue, EBITDA, EBITDA margin and earnings per share were all above the high end of guidance. On a year-over-year basis, revenue was up 19%, the strongest quarterly growth rate for the company since the first quarter of 2023. EBITDA continued to outpace revenue growth, up 32%. EBITDA margin increased 320 basis points to a record 32%.

Incremental flow-through of revenue to EBITDA was solid at 49% year-over-year. Earnings per share were $1.22, up a robust 42% compared to the first quarter of 2025. Now let's cover the balance sheet and cash flow. Our strong balance sheet provided the foundation for the CAM and Brunner acquisitions that we closed during the first half of the year. The quarter end cash balance was $2.4 billion.

This included $1.65 billion added through debt issuance to fund the CAM acquisition as well as proceeds from the $230 million sale of the Savannah Disk Forging Facility. I will speak more about these transactions momentarily. Free cash flow was $359 million, a record for a first quarter. Net debt to trailing EBITDA continued to improve to 0.9x prior to the CAM acquisition that we closed on April 6. Howmet's improved leverage and strong free cash flow profile were reflected in Fitch's Q1 upgrade from BBB+ to A-, now 4 notches into investment grade.

Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program. The commercial paper program was utilized for the first time in the first quarter of 2026 to support the CAM acquisition with $450 million being drawn as of March 31. Turning to capital deployment. CapEx was $94 million. The majority of CapEx was in the Engine Products segment as we continue to invest for growth in the aerospace and gas turbine markets.

Investments are backed by customer contracts. In the quarter, we repurchased $300 million of common stock at an average price of $230 per share. We repurchased an additional $150 million in April at an average price of $246 per share. Q1 was the 20th consecutive quarter of common stock repurchases.

As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $1.05 billion. We continue to be confident in strong future free cash flow. We paid a first quarter dividend of $0.12 per share. We expect the dollar value of dividend distributions in 2026 will be higher than 2025. Finally, turning to M&A.

We completed 2 transactions in the first quarter and 1 early in the second quarter. First, we acquired Brunner, a Fastener business based in Wisconsin for approximately $120 million in cash on February 6. The integration process is on track. Second, we sold our Disk Forging operation in Savannah, Georgia for $230 million in cash on March 31. We expect this divestiture to be margin accretive to the Structures segment. Third, we closed the previously announced CAM Fastener acquisition on April 6 for approximately $1.8 billion.

To finance the CAM acquisition on March 3, we issued $1.2 billion of new notes in addition to $450 million in borrowings from our commercial paper program. The proceeds from the Savannah divestiture also supported the CAM purchase. The weighted average cost of debt for the CAM transaction is approximately 4.2%. Now let's move to Slide 7 to cover the segment results for the first quarter.

The Engine Products team delivered another excellent quarter for revenue, EBITDA and EBITDA margin. Revenue increased 29% to $1.25 billion. Commercial Aerospace was up 31% and Defense Aerospace was up 13%. The gas turbines market was up 39%.

Demand continues to be strong across all our engines markets with very healthy engine spares volume. EBITDA outpaced revenue growth with an increase of 44% to $458 million. EBITDA margin increased 400 basis points to 36.6%, while absorbing approximately 235 net new employees in the quarter, positioning us well for continued growth. Please move to Slide 8. Fastening Systems had another strong quarter.

Revenue increased 14% to $471 million. Commercial Aerospace was up 17% and Defense Aerospace up 21%. Commercial Transport which represents approximately 11% of revenue was down 4%. EBITDA continues to outpace revenue growth with an increase of 18% to $150 million despite the modest recovery of wide-body aircraft builds, along with the weakness in Commercial Transportation.

EBITDA margin increased 100 basis points to 31.8% as the teams continued to drive commercial and operational performance. Moving to Slide 9. Engineered Structures operational performance continues to improve. Revenue decreased 3% to $294 million as we continue to rationalize products and focus on higher margin and stronger return opportunities. Segment EBITDA was flat at $66 million.

EBITDA margin increased 40 basis points to 22.4% as we continue to optimize the Structures manufacturing footprint and product mix to maximize profitability. Finally, Slide 10. Forged Wheels delivered another solid quarter. Revenue was up 17% as an 11% decrease in volume was more than offset by higher aluminum cost and tariff pass-through and favorable foreign currency impacts. EBITDA was strong at $90 million, an increase of 32% despite a challenging market.

EBITDA margin increased 350 basis points to 30.5%. The unfavorable margin impact of lower volumes and dilutive higher pass-through was more than offset by flexing costs, a strong product mix driven by premium products and favorable foreign currency. Lastly, before turning it back to John, I want to highlight a couple of items. One, in the first quarter, we moved the titanium alloy production operation from the Engine Products segment to the Engineered Structures segment for better operational alignment.

The comparable periods for Engine Products and Engineered Structures have been recast to reflect the new alignment. You can find these figures on Slides 20 and 21. Two, in April, we issued our annual environmental, social and governance report, highlighting the meaningful progress we made in 2025 sustainability. The full report is available in the Investors section on our website. Now let me turn the call back to John.

Thanks, Patrick, and let's move to Slide 11. Let me turn to the outlook for the company and firstly note that we have ongoing uncertainty in relation to the situation in Iran. The outcome and consequences have yet to be fully determined. Having said that, the oil price shock is rippling around the world, along with other fossil fuel impacts. Clearly, the case for higher inflation is set, although its rise and forward trajectory is yet to be determined, along with the effects on global interest rates and currency exchange rates.

While acknowledging all of this, we do see a clear path to an improved economic outcome in 2026 for Howmet and future growth of revenues into 2027. The details of our updated 2026 guide will be set out momentarily. First, let's discuss Commercial Aerospace. Both narrow-body and wide-body aircraft build rates are planned to increase. And this is expected to be the case throughout the year, although the trajectory going into 2027 is yet to be determined.

Airline traffic has held up well through April, although some airlines have drawn up lower volume contingency plans. The large aircraft backlog should help to underpin current build rates. The outlook for spares continues to be strong as MRO slots are also backlogged, though again, there may be an effect to be felt from the Iranian conflict. Aircraft retirements, unused serviceable material and the longer-term effects are being considered, but the outlook remains for continued strong growth and that persists into the future.

Defense sales continue to be healthy for both new aircraft and spares, especially given the recent escalation of aerial operations in the Middle East as well as the part supplies to missiles. At the same time, we're expanding efforts on new programs, most notably in the drone and collaborative combat aircraft programs. Naturally, this does not really affect much by way of revenue in 2026, but it's very important for the future years. The gas turbines market is also very active.

Sales are expected to grow both in 2026 and into the future. We provided a sales demand outlook during the last earnings call for a doubling of demand in the 3- to 5-year period. We are not updating this currently, although the picture continues to look very bright. The update today relates to customer contract provisions where the negotiations regarding demand and capital investment have now been finalized for 6 out of 7 customers, which is an increase from the 4 I commented on in the last earnings call.

At the same time, further new orders and increased projected volumes are possible, dependent upon all of the other componentry that's required for a full IGT installation, and this is for both small, medium and indeed large IGT builds. Starting in the second quarter, the commercial truck market has begun to strengthen despite the diesel price increases, albeit our outlook remains cautious until we see an improved and more stable macroeconomic outlook. Moving to specific numbers. Commercial aircraft build rates are seen to be increasing, but we remain slightly behind projected rates.

We have the rate for the 737 at an average of 42 per month for the year, on the 787 currently 7 per month, rising to 8 per month by the fourth quarter. On the Airbus A320, 62 per month and the Airbus A350 at 6 per month. The past few months were very active regarding the Howmet portfolio and the guide we provided reflects these changes. We closed 2 transactions in the Fastener segment, namely CAM and Brunner, and we also divested the U.S.

Disk business in Savannah, which is part of the Structures segment. These transactions followed our stated strategy of allocating capital to the businesses that demonstrate higher growth potential and higher margin potential. The net effect of these transactions will add approximately $275 million of revenue to the remainder of 2026 and about $60 million of EBITDA. The EPS effect in 2026 is insignificant due to the increased interest expense.

There is expected to be a positive earnings per share impact starting in 2027. Our Q2 guide numbers are revenue of $2.4 billion, plus or minus $10 million; EBITDA of $765 million, plus or minus $5 million; earnings per share of $1.23, plus or minus $0.01, and these are incrementals of just about 51%. Our full year guide numbers are revenue of $9.65 billion, plus or minus $75 million; EBITDA of $3.06 billion, plus or minus $35 million; earnings per share of $4.94, plus or minus $0.06 and free cash flow of $1.75 billion, plus or minus $50 million, and that's after increasing our capital expenditure once again.

It's noteworthy that our full year economic -- sorry, our full year revenue growth guide, excluding the impact of M&A, rises from 10% to 14%. So again, an increase over and above that, which we said in February. In summary, we started 2026 in a very healthy fashion, and the guidance numbers reflect that increase in confidence for the year. And at the same time, we do recognize the increased uncertainties around the macroeconomic outlook.

I'll stop now and turn the meeting over to questions.

[Operator Instructions] And today's first question comes from Scott Deuschle with Deutsche Bank.

John, can you walk through in a bit more detail as to what factors drove the step function change in the Commercial Aerospace growth at Engine Products in the quarter? And then related to that, is Engine Products currently seeing much growth benefit from GTF Advantage/Hot Section Plus or LEAP-1B Maverick shipments? Or is that all still largely in front of you?

Okay. So first of all, the Engine revenue increase is above aircraft build in the first quarter for sure. Some of it clearly reflects that we need to be ahead of future volume increases. And as you know, that the aircraft manufacturers want to raise rates during the course of the year.

So there's some anticipation of that. I think the second point would be there's been very little by way of available inventory in engine build. I think everything was thrown at increasing both LEAP and GTF production in 2025 and so there was very little. And so for us, then again, seeing strong demand to some degree, catch up.

In addition to that, I'd point to there is some share increase. I'd point to the fact that there is some price increase. And then finally, it shouldn't be underestimated that the Spares business was very strong. So whereas the overall Spares increase for the company was 35% plus, it was actually 45%, more like 48%, in fact, in the first quarter.

So if you put strong spares along with the aircraft build, the anticipated build, the share, the price, there's a lot of very positive things happening for us in the Engine business. In terms of the question or the part of the question you asked regarding GTF and then the changeover for the LEAP from Turkey to Maverick, let me deal with, say, the GTF first. In the first quarter, there was a fairly small amount of GTF production. I think during last year, I commented that we're running at about 6 engine sets a month in the second half.

That's increased during the first quarter, but it's going to increase again significantly as we go through the balance of this year. So my expectation is that we'll be providing a full production of the legacy GTF product and then increasing GTF Advantage products as we go through this year. And I think as you know, Scott, those will have a higher content and then therefore, higher value. That production rate increase will actually continue into 2027. So 2027 is going to be a much bigger year, I think, for the GTF Advantage than 2026. But you are going to see a steady climb throughout this year as we bring further rate building to bear.

And as you know, the GTF Advantage has now had both certifications at the customer and from the regulatory agencies. In terms of the Maverick, that production is just starting for the LEAP-1B. So it's underway. Again, volumes will be increasing during the second quarter and then more in Q3 and Q4, but it won't be changed over until the second half of the year with, again, a date to be determined for the exact month of changeover.

But we do see, say, the LEAP-1B changing in the back end of the year and certainly, I think before the turn of the year into 2027. So for the first part, we'll be doing the existing turbine blades and then increasingly make that changeover such that by, let's say, Q3 and certainly by Q4, we'll be fully changed over is my expectation.

And the next question is from Ron Epstein with Bank of America.

So John, a big picture question for you. How should we think about -- how IGT is going to go for you all over time, kind of given the contracts that you're signing, the CapEx that is being invested, the hyperscaler spend? And then ultimately, how does that compete with your Aerospace business? Because it seems like the hyperscalers are competing against the engine guys for similar assets and supply chains.

How are you thinking about that?

Okay. IGT is a big subject at the moment, a big subject for us for sure and trying to, I'm going to say, feel our way through to the right outcome for the company. It's clearly an opportunity to deploy capital for increased organic growth. At the same time, we just want to make sure that we're not getting ahead of ourselves.

And we do see a continuing bright future for it such that we don't end up with a period of overinvestment and over-capacitization because that would not be a good outcome for us. So what we've been doing is to truly understand as best we can the market dynamics of what the hyperscalers are really needing and paying close attention to build-out of data centers and just the underlying growth anyway, excluding AI, which is just a function of just fundamentally a huge increase in data and data storage required around the world. And then on top of that, the increased use and use cases for the application of artificial intelligence, which is you know there's a huge amount of money, maybe $700 billion being invested this year.

I am trying to assess when all of that is required and what capacities will need to be brought online. And indeed, what are the alternatives for electricity production as we go through the next few years. Our assessment is that natural gas is fundamental to that build-up because of the, I'll say, ability to have fast acting and to underpin any form of renewable energy and also as a baseload provision as well. So we're confident that for the next 3 years, 5 years that, that growth is clearly there.

The tick up of investments by the hyperscalers. I mean you see numbers, let's say, going from maybe Microsoft saying they're going to go from $125 billion to $185 billion or then Google matches it, then Amazon talks about $200 billion. And so clearly, the amount of investment is enormous and probably still not yet reflected in the current demand pattern that we're seeing through our IGT customers. At the same time, for us, we have to consider what happens to 2030 through the balance of this decade into the following decade and having really detailed meetings with those large IGT customers of what turbines that they expect to make and that -- which they want to invest in new products compared to making more of the same, which is a very live topic at the moment.

And indeed, what their own capacities are and what the demand pattern looks like through, let's say, 2032, 2034, et cetera. And so -- and while we're evaluating all that, we're also looking at the smaller and midsized turbines, which are also required because sometimes data center installations cannot get electricity sufficiently from utilities or indeed from their own large-scale gas turbine availability. So banks of smaller and midsized turbines are required. And so evaluating all of that and then also the fact that it's probably likely that insufficient electricity production will be provided in the, let's say, the decade as we see it beyond 2030. So for major industrial complexes, we see stand-alone microgrids being required for, say, small- and medium-sized turbines.

So again, a very healthy demand pattern. And everybody, basically the word of the -- I was going to say, month, quarter, you could call it year, the answer is more. And so we are trying to meet that demand, not necessarily trying to add everybody's demand together and say because everybody expecting all of it to result in those market shares but also to invest at a rate that makes sense to us and also underpin that with commercial agreements, again, which makes sense and trying to provide, I'll say, corridors of security for the Howmet investors. So there's a lot going on.

You've seen the kickup in capital expenditures. I mean, if we were, I don't know, $450 million, plus or minus last year. We've talked about, I think, the last earnings call, a midpoint of $470 million, but trending towards the top end. We're seeing more like now this year, $500 million of CapEx, and those increases really do reflect the increased investments that we're making in the gas turbine market.

And my current expectation is that 2027 is going to go higher. But at the same time, we're not spending this money and trashing our cash flow at all is that we have already guided to a higher CapEx and a higher cash flow number and still maintaining our long-term commitment to that 90% conversion of net income. So we're trying to do everything. And I think I maybe said something quite bold on the last call, which is we're trying to do it all.

And at the moment, I say we do have the cash flows to largely do it all between maintaining really a great leverage position, increasing our CapEx and also meeting the -- some of the exciting parts of the market demand picture of which gas turbines is particularly active at the moment. And you heard me say on the call earlier in my remarks that we've now reached agreements with 6 of 7 major customers and -- with one more to go, which is a very significant customer to -- so hopefully complete during the balance of the second quarter. So it's interesting, exciting, but at the same time, we're not trying to get carried away and do something which would not put us in a good position.

And we've been very clear on that in the discussions with our customers.

The next question is from Robert Stallard with Vertical Research.

John, you've given a pretty interesting growth outlook here for several of your end markets. But I'm wondering how you feel about the ability of your supply chain to deliver sufficient material, especially on, say, things like rare earths and also the outlook for staffing, whether you're getting enough quality people.

Okay. Let me deal with input materials broadly and then rare earth specifically before moving on to human capital. For the most part, we -- the metals that we use in our Turbine-blade business and Structural-casting business and the Structures segments, we get the base metal. So we're buying from smelters and traders so that we will buy the base nickel or cobalt or whatever.

And so we feel fairly secure of that and have a pretty good view of country of origin and security stocks around all base metals. So I feel quite comfortable there. During last year, I gave a picture about -- I think I called out 3 rare earths and tried to describe the fact we had a year supply of 2 of them plus inventory held outside of -- producing territories outside of China. So we had inventory both in the U.S. and Europe to provide us with security.

And I think I called out the third rare earth, which is about a 10-year secure supply. It's something that I've returned to again in the first quarter of 2026 and being really focused and have our procurement operations focused on gaining increased security. So right now, we have in hand and despite an improved inventory efficiency, we actually have increased the inventory of rare earths such that we're fully covered through '26 and I think we're like 90% of 2027 and some products now well through the end of the decade. So it's been a major push to increase security around rare earths such that with, again, some uncertainties around the geopolitical situation, even though we recognize there's a major political summit coming up between America and China, we want to make sure that we're able to be secure and supply our customers for a very extended period of time with the product we've got, which is essential, particularly for some of our defense applications to provide that supply security.

If you take the Savannah disposition, then that was 1 of the 2 operations where we buy alloy metal from somebody else, which is, let's say, was about 5% input of metals into the company. So let's assume now we have -- that 5% is down to 3.5% [indiscernible] 40% is supplied from our in-house operations in Europe. And so we're down to like a very tiny percentage of, I'll say, of metals that we rely on the alloy third-party suppliers and have very solid security stocks around rare earth. So I think we try to protect the company in a very significant way.

I think the second part of your question was around human capital. We've continued to recruit, I think, about 230, 250 people net in the first quarter of this year. We're still anticipating well over 1,000 people of adds during the course of this year. So similar, maybe slightly higher number than we had in 2025. And I've also spent a lot of time trying to improve all the, I'll say, methods that we have by way of recruitment and training and trying to reduce our employee turnover.

So we did make major strides during 2025 and the trajectory during the course of the year. So far in 2026, employee turnover has been pretty stable with the fourth quarter of 2025, but with, again, plans to, again, provide additional efforts to provide, I'll say, the training that we provide employees showing the people the workplace, looking at spans of control within our plants, looking at the basic recruitment practices itself and obviously, pay rate benefit programs and all the rest of it as well. So trying to provide a good work environment and at the same time, also automate. And in fact, when I was in Japan last week looking at our new manufacturing plant there, which was mainly focused on the Gas Turbine business, again, spent a lot of time talking about the recruitment of people in Japan, which is actually more difficult than, say, the U.S. or Europe and also the importance of trying to find additional areas of automation such that we can put it more in our control than it is in something which is difficult to control, which is can you get sufficiently qualified and good people into your production operations.

So a lot of efforts going in, Rob. And at the moment, I'm pretty convinced that we'll execute 2026 in a satisfactory way and still show further improvements in our employee retention.

And our next question comes from Kristine Liwag with Morgan Stanley.

So John, you've done a few deals lately with buying the Fastener businesses and then also divesting the Disk Forging business. When you look at the portfolio today, where are there additional areas that you want to expand? Or are there areas that you want to prune, especially as we start seeing more industrial gas turbine demand come through?

We pretty much have the same stance today on the portfolio as we've had for the last few years. So we examine acquisition opportunities as they arise. Obviously, it takes a willing seller as well as a willing buyer to transact. And we've also been very selective on those that we wanted to proceed with or potentially proceed with.

So if you go back to the, let's say, the CAM acquisition, it wasn't the only one that had come up, but it was the only one that we ever got beyond expressing an interest in to actually showing the willingness to move quickly through to execution and signed the share purchase agreement. So we want to be very selective in deploying that capital and be convinced that it adds something to us that passes all of the gates that we want to have with revenue synergy, which is always possibly most difficult to get, but we're convinced we will have revenue synergy as well as cost synergies and a good solid business where we can improve margins.

And so it passed all of those. And I could say, likewise, obviously, a much smaller acquisition in Brunner but solid operations, which we've got very clear plans again through those types of synergy, including the opportunity of improving its top line. So I can say we'd be discerning. At the same time, we always do look at our leverage to make sure that we're in a good zone and excluding CAM, we got ourselves to below 1 in terms of net leverage.

Now it's 1.6, but it's going to decay rapidly to -- back towards the 1 level during the course of this year. So we are still very open to considering further acquisitive steps. And we're positive about it, but again, be very discerning. So if something comes up that doesn't stretch ourselves too far and maintains our ratings and our debt ratings is that we'll certainly give it a good look, but without getting what I call deal fever.

And at the same time, we think that we'll be able to maintain our share buyback program and also relook at the dividend. So we're in a good zone where we are deploying a lot of cash for capital expenditure for organic growth, which is always the best source of returns for us, both for margin and for return on capital. Then obviously, we have the opportunity of buying back our shares, and you've seen another, I'll say, great execution buying in the first quarter at $230 per share. I think today, we're well ahead of that.

So again, a very accretive position for shareholders. And I think that beyond that, acquisitions are also something that we should give very active consideration to where we can see both revenue improvement and margin improvement as we go through and still able to continue with both buyback and improve our dividend payout. So I think it's all good at the moment, Kristine.

And the next question is from Myles Walton with Wolfe Research.

John, could you comment on where you are relative to capacity on the gas side? I think the first half of this year, I think you're pretty capacity constrained. And so is the growth we're seeing purely price related? And then at the whole portfolio level, I know you won't give us the specifics on price anymore, but how would you compare it to last year?

And do you see a year when price -- year-on-year price increases don't grow?

Okay. So the increase in revenue in the first quarter was, I'm going to say, very good. I mean maybe it's more for you to say than me, but I thought 39% was outstanding. And as you know, we invested at a higher rate in gas turbines in 2024, but it's very modest, like maybe $30 million more than normal.

We kicked that up in 2025 and so saw some modest increase in capacity. But essentially, for the first half of this year, it was going to be more -- that which we could obtain from yield improvement. Bear in mind, we've also improved our yields and so we're able to increase our total revenue from the Gas Turbine segment in the second half of last year. So the outcome for this year, which was a lot of volume, but some price in that 39% was great.

And in fact, again, if I just refer to what we saw in Japan was to see our new manufacturing plant and the first piece of equipment arriving there. And those are now being assembled into like working casting furnaces, which will be, I'd say, ready by the, I'd say, July-August time frame and starting to have their first production by the fourth quarter. So capacity is coming on, and that will help as we go towards the back end of the year. But between now and then, it's -- again, it's going to come mainly from that yield focus that we have.

The other thing which is happening and it will happen progressively and it is already happening as the volumes have been increasing, it's also given us the opportunity to consider moving -- increasingly move from batch production to flow production and with takt time. And so with that increase of repeatability and flow production, then that in itself is an opportunity where with the application of a lot of engineering effort, again, our yields are increasing. And in our guide, we've just been a little bit cautious about when exactly the capacity will come on, what yields we can really drive further in the next few months because the comps get harder given the production increases we achieved in the second half of last year.

So we're a bit cautious about it. But at the same time, positive that our total gas turbine production will increase progressively during each quarter during 2026. And then again, we'll see increases in '27. And we and -- in fact, both we and our customers are highly focused on '27 and '28 for further production increases because that capacity is really -- I mean almost desperately needed. And then with another wave of investment that we're doing now, which will really only begin to affect the back end of '28 and going into 2029. So that's the shape of the, I'll say, what we're doing by way of yield, flow production, takt time, capacities that we committed to an investment last year flowing into this year and then what we've been investing in this year and continue to invest in 2027 which will come in to benefit our production in the back end of '28 to 2029. So there's a lot going on, and that's what has given me confidence when I think about all those bricks in the wall that we're placing to bring those capacities and therefore, future revenue on.

That's why I talked about us doubling or even more than doubling our revenue from this particular segment.

And the next question is from David Strauss with Wells Fargo.

John, within the 14% organic growth for this year, could you kind of break that out what's baked into that for aero, defense and IGT and I guess, transportation wheels, kind of what builds up to that? And as we think about '27 with the incremental additional capacity coming online, GTF Advantage, LEAP -- full year of LEAP-1B, IGT, is it possible that organic growth accelerates in '27 relative to the 14% you're now calling for in '26?

That's a big one. I think I'm happier talking about 2026 than 2027 at the moment and essentially down to, I'd say, the conviction over the aircraft manufacturers now truly poised to increase their production to the rates they want and also the macroeconomic outlook and probably the effects of inflation on the consumer. So there's a lot to be determined before you can be precise about a 2027 growth rate. I'm pretty clear that it's going to be positive for us.

The exact angle of growth yet, I don't think I want to go there until we know more, and I guess we'll know more as we go through the balance of this year and as you -- I'm sure, you probably more than most appreciate, we're all subject to that daily news cycle of global agreements or not or maybe it's 2 or 3 times a day versus new cycle currently rather than a daily news cycle, and that seems to weigh heavily on our lives. But dealing with this year, if I look at the guide we've given, I think we're going to see commercial aero in that 20% range, maybe defense in the 10% range, gas turbines somewhere 25%-ish, 30% not that it's a fundamental deceleration, but more just the year-on-year comps.

And I want to be cautious on how much we can get by way of yield in the next, let's say, 5 to 6 months before that capacity comes on stream. And then with a very cautious assumption around Commercial Transportation at the moment regarding that business because, I mean, freight rates have increased and that's good. On the other hand, diesel fuel has gone up a lot, and we're all subject to what will happen to GDP and growth rates for the economy and therefore, the amount of transportation required, both in North America and Europe in the back end of the year. So while I could believe that commercial truck customers are scheduling more and they are without doubt.

And there is evidence of some prebuy from the 2027 regs change in North America. At this point, we've taken a very modest below 5% assumption on the commercial transportation market, even though our customer schedules are significantly ahead of that. And we just want to see that play out, David.

And the next question is from Seth Seifman with JPMorgan.

I wanted to ask, in terms of the legacy aftermarket and the potential exposure there to the macro environment, I think -- and correct me if I'm wrong, I don't want to put words in your mouth, but I think, John, you've kind of talked before about the expected endurance of the legacy fleet. And I assume that it's early to be making any judgment about that, but wondering if you can comment a bit further and talk about some of the things that you're looking for there. And also what proportion of the spares is that kind of legacy fleet?

Yes. The essential picture is pretty similar to what I've talked about in the past, where we see -- if you take the CFM range of engines starting off with the CFM56, we expect that production will increase during 2026 and 2027. So I have no concerns about that. And should it peak in 2028 or is it 2029, it's all going to depend upon a new aircraft build. It seems as though any decay will be very modest.

So it's going to be a really good program going forward for many years. So we're clear that that's going to be a growth program for us. The -- if you can now go to the LEAP range of engines that we also see that the Spares business for that is going to grow continuously every year for the next probably 8, 10 years, and I don't want to call it beyond that. And initially, it's probably higher level due to durability issues.

And then on the GTF, I think that is exactly the same is that we will be supplying full production level of the existing GTF throughout '26 and a lot into '27, while also preparing for the GTF Advantage. And so we're going to be raising rate and a lot of that is going to be destined for the MRO market well beyond the total engine sets that I expect that we will be producing, for example, in 2027 at full rate. My expectation is that the majority of those are actually going to go into the MRO network on a refit compared to OE build, even though there will be increased OE build as well. So it's a pretty healthy picture overall for spares.

And my expectation for commercial aero is that we're going to see growth every year for the balance of this decade and then beyond. The only thing we're going to be debating is what's the angle of growth. I think we're going to see more in the first 2 or 3 years or the first couple of years now than we will see in the latter 2 years of the decade. but still growing every year. So it's a really positive part of the portfolio.

And I think -- I mean, Patrick already gave you the numbers for the total company, it's risen again from 21% of revenues, which was again higher than we said to you last year. We said getting it to about 20%. We were at 21% and first quarter was at 23%. And we don't know yet, but I mean, it wouldn't surprise me that we sustained 23% through this year.

And then depending on OE build, I suspect it could even go higher next year while also seeing a higher OE build. So -- but again, you've got to bake in -- is there, I'll say, any macroeconomic upsets. But at this point, it looks okay for us. And certainly, the guide we've given you is -- I don't believe it's going to be blown off course by any agreement or lack of agreement in -- with the Iran situation that we have in terms of what spares are going to be required for this year because of the enormous backlogs that we have.

And this concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect.