Good day, and welcome to the Howmet Aerospace Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this 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, Chloe. Good morning, and welcome to the Howmet Aerospace Second 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. 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.
Thank you, PT, and good morning, everyone, and welcome to the Howmet Q2 earnings call. Let's start with the highlights on Slide 4. Howmet completed a successful second quarter.
Headline revenues were up 24% year-over-year with strong incremental margins of 46%, and that was after some impact from the CAM acquisition. Excluding all the M&A activity this year, organic growth was very healthy at 21% for the quarter and 20% for the first half. EBITDA margin in Q2 was 32.1%, an increase of 340 basis points year-over-year, including the absorption of CAM starting in April. 2027 is a focus year for our CAM optimization plan to begin to drive noticeable synergies.
Operating margin was 28.8%. Second quarter free cash flow was just under $0.5 billion and free cash flow totaled approximately $840 million for the first half. Earnings per share were $1.33, an increase of 46% year-over-year.
A total of $600 million in shares were repurchased in the first half of the year with $300 million being made in the second quarter. We continue to repurchase shares in July for a further $200 million, which resulted in repurchases in 2026 already greater than in 2025. In addition, a further $186 million of debt was retired.
I'll now pass the call to Patrick, who will set out the end market growth percentages and provide some segment commentary.
Thank you, John. Good morning, everyone. Please move to Slide 5.
It was another strong quarter for Howmet with all end markets growing. We are well positioned for the future and continue to invest for growth. Total revenue was up 24% in the first quarter (sic) [ second quarter ].
Excluding the net impact of the 3 transactions we completed this year, revenue was up 21% year-over-year, an acceleration from the 19% organic growth rate in the first quarter. Commercial aerospace growth was strong at 28% with organic growth of 26%, driven by demand for both new builds and spares. We continue to see higher spares demand on both legacy and next-generation engines.
Defense aerospace growth continued to be solid at 11%, with organic growth of 7%, reflecting healthy spares activity as well as higher legacy fighter demand. Commercial transportation revenue was up 12%, driven by the pass-through of higher aluminum costs. On a volume basis, wheels was down 8%.
However, on a sequential basis, wheels volumes were up 7% as the North American market began to recover. Gas turbine growth remained very strong with revenue up 38%. Gas turbine growth is driven by the increased demand for electricity generation, especially from natural gas for data centers.
Growth in other market of 39% was largely driven by the Brunner fastener acquisition completed in February. Within Howmet's markets, spares growth remained robust. Total spares revenue across the commercial aerospace, defense aerospace and gas turbine markets was up 37% to approximately $560 million (sic) [ $460 million ].
Spares represents a greater portion of our total revenue than historically, now at approximately 22% through the first half of 2026. In summary, continued strong performance in commercial aerospace, defense aerospace and gas turbines with the commercial transportation market recovery is underway. Moving to Slide 6, starting with the P&L. Second quarter revenue, EBITDA, EBITDA margin and earnings per share all exceeded the high end of guidance.
On a year-over-year basis, revenue was up 24% and 21% organically, the strongest quarterly growth rate for the company since the first quarter of 2023. EBITDA continued to outpace revenue growth, up 39%, the strongest growth in EBITDA since the third quarter of 2021. EBITDA margin increased 340 basis points to 32.1% despite a modest headwind from the CAM acquisition.
Incremental flow-through of revenue to EBITDA was healthy at 46% year-over-year. Earnings per share were $1.33, up 46% year-over-year. Now let's cover the balance sheet and cash flow.
The balance sheet remains strong with a quarter end cash balance of $564 million. Free cash flow in the quarter was excellent at $479 million. Net debt to trailing EBITDA finished the quarter at 1.4x following the completion of the CAM acquisition.
During the quarter, we paid down our $186 million Japanese Yen term loan due November 2026. In addition, during the quarter, we entered into a cross-currency swap to synthetically convert our $300 million note due 2028 into a Japanese Yen liability. The combined effect of these 2 actions saves approximately $12 million in annualized interest expense.
Liquidity remains strong with an undrawn $1 billion revolver complemented by a $1 billion commercial paper program, $450 million of which was drawn to support the CAM acquisition. Turning to capital deployment. CapEx was $104 million in the quarter.
The majority of our capital spend continues to be in the Engine Products segment as we continue to invest for growth in both the aerospace and gas turbines markets. Investments are backed by customer contracts. In the quarter, we repurchased $300 million of common stock at an average price of $251 per share.
We repurchased an additional $200 million in July at an average price of $277 per share. This brings year-to-date repurchases to $800 million at an average price of $248 per share. As of today, the remaining authorization from the Board of Directors for share repurchases is approximately $700 million.
We continue to be confident in strong future free cash flow. We announced an increase in the Q3 quarterly stock dividend of 17% from $0.12 per share to $0.14 per share, payable this August. Finally, turning to M&A. We completed the previously announced CAM fastener acquisition on April 6 for approximately $1.8 billion, and the integration is on track.
Now let's move to Slide 7 to cover the segment results for the second quarter. The Engine Products team delivered another excellent quarter for revenue growth, EBITDA and EBITDA margin. Revenue increased 32% to $1.37 billion.
Commercial aerospace was up 37% and Defense aerospace was up 17%. The gas turbines market was up 38%. Demand continues to be strong for both original equipment and spares.
EBITDA outpaced revenue growth with an increase of 51% to $517 million. EBITDA margin increased 470 basis points to 37.7%, while absorbing approximately 485 net new employees in the quarter, positioning us well for future growth. Please move to Slide 8.
Fastening Systems had another solid quarter. Revenue increased 37% to $589 million, including the impact of the CAM and Brunner acquisitions. Commercial aerospace was up 39% and Defense aerospace was up 45% Commercial transport was flat year-over-year.
Excluding the impact from acquisitions, total fasteners growth was double digits. EBITDA outpaced revenue growth with an increase of 40% to $177 million. EBITDA margin increased 90 basis points to 30.1%, reflecting continued operational execution.
As expected, margins declined sequentially, driven by the addition of the CAM business in the second quarter. Moving to Slide 9. The Engineered Structures team continues to drive improvement in the business.
Revenue declined 13% to $269 million due to the divestiture of the Savannah disk forging facility on March 31. Excluding the impact of Savannah, revenue growth was approximately flat. We continue to focus on higher margin and stronger return opportunities in the business.
EBITDA margin increased 170 basis points to 23.8% as we continue to optimize the Structures segment to maximize profitability. Finally, please turn to Slide 10. Forged Wheels delivered another healthy quarter.
Revenue was up 14% as an 8% decrease in volume was more than offset by higher aluminum pass-through. Volumes rose 7% from the first quarter as the North American market began to recover. EBITDA was $88 million, an increase of 16% despite lower volume.
EBITDA margin increased 30 basis points year-over-year, but declined 270 basis points sequentially, reflecting the dilutive effect of sharply higher aluminum cost pass-through. Higher metal pass-through diluted margins by approximately 360 basis points year-over-year, but had no material impact on EBITDA dollars. This dilutive impact on margin percentage is likely to continue at least for the next couple of quarters.
EBITDA dollars were largely unchanged sequentially. We continue to outgrow the market, driven by our premium products. Now let me turn the call back to John.
Thank you, Patrick, and please move to Slide 11. Let me turn to the outlook. First, as you can see, the first half target outcomes have been achieved while also facing a turbulent economic and political backdrop.
The tailwinds experienced have reflected more robust build rates for commercial aircraft and also for the positive order intake for commercial truck builds. In addition, IGT demand has been extraordinary. Moving specifically to commercial aerospace.
The ongoing conflict in the Middle East has resulted in increased volatility of jet fuel and gasoline prices, and has impacted recent commercial air traffic activity. Howmet has not experienced any changes in customer demand. Throughout the conflict to date, air freight volumes have continued to strengthen.
At the same time, interest rates have climbed, reflecting higher inflationary signals and the outlook for near-term rate cuts has dimmed. Despite the issues in the Middle East, orders for new aircraft have continued to grow and the overall backlog has increased. This bodes well for future aircraft build rates with increases being seen for the balance of 2026 into 2027 and beyond.
The business jet segment also continues to be strong with increases both in new aircraft build and spares. Defense sales also continue to be strong, especially for spares and legacy aircraft with the F-35 OE build continuing to be solid. The near-term outlook for our missile business continues to strengthen, with demand increases being either seen or signaled for the PAC-3, THAAD, Tomahawk and some classified programs.
The focus on engines for large missiles, drones and collaborative combat aircraft continues with growth expected in the medium term. Turning to gas turbines. We have completed negotiations with the last of our 7 major customers, though the overall picture continues to expand with some customers already wanting to revisit and add to their demand outlooks.
This gas turbine demand growth, both for large, small and medium-sized turbines is further supported by new gas turbine blade applications and also increased new product technology introductions, and these will help Howmet to outgrow its current market share. Our capital expenditure requirements continue to increase. And while this year, we are now likely to exceed $500 million in capital spend, we are already seeing the need to further increase this in 2027.
This increased level of capital expenditure provides support to our future organic growth expectations. The outlook for free cash flow conversion and net income is maintained at our 90% target conversion throughout the period. The resultant cash flows to date have enabled us to deploy capital for organic growth, execute share buybacks and support dividend growth while also absorbing a significant acquisition.
Continued healthy cash generation should allow us to return our leverage level back to approximately 1x net debt-to-EBITDA by year-end, the same level that we exited 2025. Given the level and the high level of our capital expenditure, plus our acquisitions of almost $2 billion and the share buybacks of an amount already exceeding 2025, our leverage level is very comfortable and allows us to consider all paths of optionality going forward. Moving now to the commercial truck wheels business.
The results are strong even after coping with extraordinary increases in the aluminum LME and Midwest premiums. Growth into the second quarter accelerated and the outlook for the balance of the year looks healthy with external forecasters now envisaging an even stronger 2027. Moving to specific numbers for the guide and reflecting the typical third quarter seasonality, including European vacations, our numbers are: revenue in the third quarter of $2.75 billion (sic) [ $2.575 ] billion, plus or minus $10 million; EBITDA of $830 million, plus or minus $5 million; earnings per share of $1.35, plus or minus $0.01.
For the full year guide, this has increased again to revenue of $10.05 billion, plus or minus $50 million, EBITDA of $3.23 billion, plus or minus $20 million, earnings per share of $5.27, plus or minus $0.04. Free cash flow is seen to be $1.9 billion, plus or minus $50 million. These guide increases are across the board given our growing confidence in the year.
In closing, the Howmet team delivered a solid first half performance with prospects for further growth and a robust second half as outlined. In November, at our Q3 earnings call, we expect to provide our first sighting of the 2027 revenue, which we expect will be an increase over 2026. And with that, we'll now move to the Q&A session.
[Operator Instructions] The first question today comes from Sheila Kahyaoglu with Jefferies.
John, you noted IGT customers continue to revise upwards their demand outlook, and I don't blame them, who wouldn't want more. You're talking about higher CapEx for the foreseeable future. What are you seeing in the competitive dynamics at play in the IGT market in terms of the technology advantage you have, the scale which you could produce?
And how are you thinking about your own ability to support these ramps as a few of your peers also seek new business there?
Thanks, Sheila. Let's deal with scale first. And I think I'll start off with saying it's important to note that Howmet has a market share in excess of 50% globally for turbine blades in the IGT market.
And therefore, the growth of that market is dependent upon our willingness to invest, which we're doing. And we've already commented in previous calls about the new plant we built in Japan, the major expansion in Europe, you can always call it a new plant and also building out the capital in our existing footprint in Virginia in the U.S. In addition to facilitization that with very substantial investments in new capital equipment, we have created additional space in our Virginia plant by exiting some or moving some nickel alloy work such that we can either make additional IGT componentry or if not some additional titanium castings. And I guess we'll deploy that space on a first come first serve basis and see expansion.
Bonding for sure, it's going to be sold out very quickly. We're also seeing, as I commented in my earlier remarks that we have several new applications for existing technology. And also, we have several new product introductions that we have to make over the next 2 or 3 years.
And that leads us to believe that our market share will further increase. To date, the market is roughly split equally for turbine blades between Equiax and directionally solidified parts with single crystal still being a fairly minor part of the overall turbine blade topology at sort of less than 5%. So when you think about our technologies, first of all, for the movement through the normal sequence through turbine blade applications, we see the opportunity of further moving from Equiax to directionally solidified and then to single crystal, albeit at the moment, the demand is such that customers really just want whatever we can make.
And so for the next couple of years, I expect the demand increase to be roughly split between Equiax and directionally solidified. In terms of where does this go in the future? Clearly, we're going to move to an increased use of cored blades to allow air flow through them.
And again, that plays very much to the Howmet strength and our capabilities in very large core blade capabilities, and we'll see that increasingly be deployed as we go through towards 2030 and beyond. So I feel as though both for the applications -- new applications we're seeing, the technology movement and/or drift that will go on and the capacitization that we have, a fairly good situation for us, plus the elevated CapEx. So we have CapEx being significantly deployed in 2026.
And in my comments about the future direction is that we will see another significant step up in 2027, which will be both for the industrial gas turbine market, but also for commercial aerospace. And I certainly don't want to forget commercial aerospace because as recently as last week, I signed off, in fact, the building of a new plant in that area as well. So my expectation is we will continue to meet market demand.
We'll grow with the market, and I think we'll also grow with those new product introductions beyond the market and increase our overall share. I'll just digress for a moment because I do want to cover something which has been topical of late, and that is, is there a threat for data centers in space. And so I'll just speak very briefly to that because it is something which has been raised.
Clearly, conceptually, the opportunity of getting more direct access and using solar arrays is possible. And it's a big solution to solve what may be a permitting problem at the moment. But there's a lot of technical things which have to be overcome, I mean, starting with, if you're going to put a gigawatt of capacity into space, then maybe you've got to lift 20,000 tonnes and what sort of rockets and frequency of launches do you need to get that?
And so I imagine to do one data center using -- the current rocket technology is going to be 1,000 launches or maybe it's 150 or 200 starship launches. And that's obviously a lot more than we have today. And I mean, the benefit is you don't need to get permits, but the issues of maintenance of replacement of GPUs every couple of years and also the sheer scale of the solar arrays and the issue of space debris and how do you fix them once it's been hit with debris over, let's say, 4 square kilometers of unit.
Those are big things to overcome. So I think we're looking at really sometime in the 2040s or maybe in 2050s to consider this as a likely outcome. So I just felt I'll try to give that perspective while talking about the overall current market as well.
The next question comes from Doug Harned with Bernstein.
Just, John, continuing on the IGT path here, as you've talked about, the demand is extraordinary. And you've talked about a number, 6 or 7 new agreements that you've signed. And what -- I'm trying to understand here is how quickly can one respond to demand in terms of sort of signing a deal and then actually delivering products on that.
And I say it because your reference to SpaceX, I mean, this week, they talked about adding at least 15 gigawatts of terrestrial capacity over the next 18 months. I mean is it possible to respond to this kind of growth since you're the leading player on blades?
So I'll start with 2026, Doug. And our, let's say, 30% -- 35%, 38% increase in revenue has actually exceeded what I thought we would possibly do. And that's been mainly from achieving yield improvements on the existing asset base, albeit if you go back and look at the comments I made towards the back end of '24, where we're talking about making some investments in IGT, which was, let's say, notable because we've not really talked about it before.
And then what we've talked about in 2025, especially given the consequences of the new administration and their fossil fuel focus. Then, we do have the benefit of some of that capacity coming on stream. So we witnessed the delivery of our first new large casting machine into Japan and another one is going to follow in the second half.
And in fact, that new plant that I -- in fact, I visited that in April is going to be -- it's already essentially fully spoken for. We have one casting pit left, but I think that capacity is going to be gone. So we have a progressive build-out of what we've already committed by way of significant investments.
But for the new, I will say, gigawatts of capacity coming on, then really we're looking at 2028, 2029 and even the more recent ones, '29 into 2030. So what I expect is that we will see growth throughout the next 4 or 5 years. And we've installed some of that already.
Some of it's already logged to come in, in '27, but with another major step into '28 and '29. I suspect that we may not have finished yet because as I said earlier, we are seeing some of the demand patterns revisited. And so I think there's more at play to come, which we haven't built into our future plans yet because until it's more certain, then we'll just hold off on that and be clear.
So it's not a single item, which equals capacity in next. But if we started now, you can assume that it's a brand-new new commitment, let's say, August of '26. You can say it's earliest August of '28, if you just like say, okay, what's the next piece of machine equipment that we could build or we can get from our machine tool suppliers.
And we've had to book capacity at some of those on the expectation of some of this coming through just to make sure we can be responsive to our customers.
The next question comes from Robert Stallard with Vertical Research.
John, I was wondering if you could give us an update on what you're seeing on aerospace OEM and the wide-body market, how those rates are progressing and whether you think Howmet has enough capacity in place for the targeted rates or even beyond that?
Okay. So first of all, by way of capacity, essentially, the majority of our manufacturing equipment -- that equipment does not know whether it's building parts for a narrow-body aircraft or a wide-body aircraft. So it will have, I'll say, similar casting machines, similar transfer presses and going through similar, I'll say, continuously moving heat treatment furnaces or kilns.
And so for us, it's more a question of the overall market rather than wide-body per se. We do feel as though wide-body will increase over the next, I'll say, a couple of years. And there are demand increases signaled at both Boeing for the 787 up to Rate 10 until the South Carolina plant is further expanded and then maybe opportunities to go significantly higher after that expansion.
And then also Airbus, which has probably struggled on the A350 over the last 2 or 3 years, and now seem to be entering a period where there's some confidence that their, let's say, Rate 5 or 6 will move to 8 or 9 over the next year. And we're getting increasingly confident that with the freighter plus additional A350 demand that, that will also move up significantly in the future. So we do expect on a percentage basis, large increases in the wide-body market and build rates over the next, say, 2 or 3 years.
But also, we're going to see, I think, increases in the narrow-body market also for the 737 for the A320. And so we are poised with additional capacities we've already prepared. And I think I just referenced a new plant that we committed to last week, at a major expansion and building out of one of the sites we have to create the opportunity for that further expansion that's going to be required.
The next question comes from Scott Deuschle with Deutsche Bank.
John, is today's commercial aerospace growth in Engine Products seeing any benefit from shipping these newer, higher-value multi-chemistry coatings? Or is that transition to multi-chemistry coatings still largely in front of you? And then I was wondering if you could help contextualize the scope of the growth opportunity that, that provides.
Okay. So we have, first of all, again, been increasing our coating capacity over the last 2 or 3 years and indeed coat both our own turbine blades and also those of others in the industry. So that expansion has continued with, let's say, what are called new coating guns and pits.
And in fact, we have just completed the last available space in our Whitehall facility, pending the decision about whether we again expand the footprint of that. And that is facilitized for multi-chemistry and also the opportunity to put all of the coatings on at the same time. So today, we already put on more than one type of coating, but if you're talking about some of the exotic coating capability, we actually do not do separate batch runs through that capacity.
We're able to deposit all of the different chemistries all at the same time and do it on both the external surfaces and also the internal surfaces of the turbine blades. So there are some very small orifices that need to be -- have this chemical deposition at nanoparticle level of, I'll say, technology deposition on a very consistent basis because you cannot afford to block any of the airflow passages. And so a short answer is, yes, we're capacitizing, facilitizing.
We're just building out the ability to do multiple depositions all in one. And we're actually facing the decision now, do we actually expand the plant. And it's probably more likely than not given, I'm already very predisposed to actually buying the advanced equipment for that, which -- in extremis because we tend to get ahead of these things.
It's a 3-year lead time for some of that very exotic equipment.
The next question comes from Seth Seifman with JPMorgan.
I wanted to ask about the ramp on commercial aero sales in the engine business. It was a pretty, I think, about 10% sequential growth in the quarter, assuming that that's driven in large part by new capacity that you've added. In terms of that new capacity that started coming online at the end of last year, how far -- I guess, how far are you towards the utilization of that new capacity?
And how do we think about that continued kind of sequential trajectory from here?
Yes. So first of all, we still have some of the machines that we have installed coming up to full rate. And we've also been building out the employee base that is necessary to go along with that build-out across all the shifts.
And from the existing major capacity expansions, we signaled there's still some equipment still to flow in during the second half of 2026. But it's not like one and done, Seth. It's going to be additional equipment that we have to install from what we've already committed to and contracted either with external machine tool manufacturers or if not our own, for example, building of our own casting machines that we do.
And we have a very active program of doing that over the next, I'll say, 2 or 3 years, both for commercial aerospace and the IGT market. And when we're looking at it right now, we do need to make further investments beyond what we have today to be able to achieve the stated rates that our customers will want as we go forward. So I mean the only question we have is what's the total size of the narrow-body market, total size of the wide-body market and then the -- add them together because for us, it's less a question of is it this aircraft platform or that aircraft platform, but it's the aggregate of all of them put together, plus in addition to that, the spares demand.
And as you've seen, spares growth has also been very substantial. And we expect that to continue to be positive because we've still got the transition for the LEAP-1B and then some, I'll say, retrofit on that plus, say, while we've started the GTFA for Pratt & Whitney, there's a very large increase to be achieved in the second half of this year and even larger into and through 2027.
The next question comes from Ken Herbert with RBC Capital Markets.
I wanted to just follow up on the aerospace capacity theme for a minute. Boeing and Airbus are talking about getting to production rates that are 25% to 30% higher than where they peaked pre-pandemic. You've got a lot of moving pieces on the engine side in particular.
But where do you think you and the industry are in terms of supporting those rates 3 to 4 years from now? And ultimately, what's the interest to put capacity and to support those rates when you're going to be hitting those rates, right, when you're likely talking about new narrow-body clean sheet aircraft?
It's very difficult to predict the date of entry into service of a new narrow-body, and it's probably even more difficult to predict what form the engines are on those, let's say, aircraft platform selections, particularly because some of the options are mutually exclusive in terms of wing design. And therefore, it's going to depend upon more fundamental questions of sourcing strategy, whether you go single source or dual source and your preparedness to do so and what risks are involved. So that's one big topic to be considered around a date uncertain picture.
I think more pertinent is probably what is the true demand pattern over the next, let's say, 3- to 5-year horizon and its sustainability because, again, we don't want to certainly invest for a singular year peak and then face, I'll say, demand destruction thereafter. So we have to be continually monitoring the aircraft backlogs and surety around those in terms of what's the propensity for cancellation and how many are real orders versus options and therefore, what's the true demand pattern. And so when we look at things like narrow-body previous highs, which may have got to about 100 between Boeing and Airbus, the 737 and A320 in 2019, then if you look at today's and add those 2 aircraft platforms plus the A220 and what do they peak out at?
And the question is, is that a combined 125 versus the 100 peak -- prior peak? Or is it 150? And what's the ability of the whole supply base to be able to support those levels of demand and then what's the sustainability thereof.
So I think it's reasonable to say that we're clear, we're going to make more. The degree to which we have to make more is really yet to be determined. And I suppose it's, to some degree, also same as we view, let's say, rate increases where we think they're likely.
But when we see numbers maybe spike for a moment, then we'll let inventory deal with that while we recruit the workforce to be able to operate and produce those parts inside our capacity envelope. So it's a very live topic, and you also have to look at not just what can Howmet produce, but also what's the ability of the whole industry to march in lockstep and what's the weakest link in that chain of overall build rate increase. And there's been a lot of commentary in recent years about those weak links and the supply base, as you know, has been held as responsible for much of the build rate issues.
Again, whether that's justified or not, that's not a question for Howmet.
The next question comes from Myles Walton with Wolfe Research.
I was wondering if you could touch on fastener operations below the surface of the acquisition. And in particular, are you, John, starting to see the pull on the wide-body yet? Or is this the commentary more positive at this point?
We are beginning to see the pull. So if you were to say, are we anticipating getting to, let's say, Rate 9 or even Rate 10 towards the back end of 2027 for the 787, then yes, we begin to see demand fill in for those increased rates above the, let's say, level of 6 or 7 last year and possibly now production of 8. So, yes, we are beginning to see that.
Of course, it's still ways away from the prior peak in 2019 of 13 a month achieved on a few months and still well short of the anticipating numbers, which are well in excess of 13, which as I said earlier, requires the capacity expansion in South Carolina to be done to achieve that. So, yes, we're seeing it. It's just part of the overall demand increase in -- for our fasteners business.
So we are seeing increased demand across not just, I'll say, today's commercial aerospace platforms, but also for defense platforms and also for, I would say, some of the larger drones and also working with some of the, I'll say, the newer -- let's call it the new tech defense companies as well where we're seeing our first orders from those as well. So we have a very broad-based increase in demand. And our issue right now is being able to -- to be able to cope with all of that, those increases.
But again, we are putting investment into fasteners business, the legacy fasteners business. And also, we are providing additional capital to the new CAM acquisition as well.
Can you update us where you are in the cutovers of the LEAP-1A/1B and GTF Advantage?
Well, the 1A/1B cutover to the new technology blade has not yet occurred. Now we have pulled a lot of it, not all of it, and we'll see increased builds during the second half of 2026. So I expect we'll do the same as we did on the LEAP-1A and have a few hundred engine sets ready in either our or our customers' inventory such that the cutover, which I think will probably more likely be the first half of -- first quarter of 2027.
But again, date not fixed, we'll be in a good supply situation for that cutover. And then there will be demand not just for the OE build, but also, I'll say, to refit some of the existing fleet with that more robust solution. On GTFA, similarly, we are building and each month, we are lifting our output, albeit it's nowhere near the rate that needs to be achieved currently.
And that applies to both the turbine blades and vanes for that aircraft engine. And what I see is that the back half of this year, I think that we'll probably be supplying the full volume of the legacy blade with still a very large aftermarket demand because that's the only one that's truly available as a complete suite of upgrade for the engine. And so it's going to be the legacy blade at pretty full volumes for the balance of this year, us building out increased production each quarter for the GTFA ready for some time in 2027 to be fitted to aircraft engine, which arrives at customers, plus also then the retrofit program, which I think is going to be an even bigger program for us than the -- on the 1B.
The next question comes from Scott Mikus with Melius Research.
Turning to the defense side, the F-35 fleet has seen heavy utilization in Iran (sic) [ Israel ]. Just curious about how you're thinking about the uplift to defense spares in the second half of this year and in 2027 as well beyond what you're initially expecting? And is that also driving the need for incremental CapEx at Engine Products?
I guess the -- that question, Scott, needs to be widened out a little bit beyond just F-35 because of the other aircraft being flown and also use of missiles as well. And so the very precise answer to are we seeing a demand increase currently from all the additional missions flown and missile stocks utilized, the answer to that is no. We are not.
But in discussions with our engine customer, as recently as the air show last month, both of us are expecting to see a significant increase in spares demand coming from that. And I think we'll see it on aircraft from F-18s, F-22s, F-35s, et cetera, plus the parts we supply to some of the stealth bombers, et cetera, et cetera. So I think there's going to be -- I know it's -- there's an anticipation of some bubble of demand coming.
But I don't necessarily think it's, like, it's not going to be in Q3 of 2026. I don't know about Q4 yet. But it's more likely a 2027 items that is anticipated but not assured because we don't have specific orders in hand or I'd say, anticipated requirements in hand.
On the missile side, which I would say is currently very active given the use of missiles. And so we are being asked to consider various rate increase proposals across, again, I'll say, 2 or 3 customers with the sort of missile programs that I mentioned in my earlier remarks. And to some degree, we've got to work our way through that in terms of the durability of that demand.
And also, it's actually competing for the space in our Virginia facility and at the moment, we have nothing formally agreed by way of increased orders, which are going to be absolutely necessary should those missile programs actually get built out.
The next question comes from Peter Arment with Baird.
Nice results. John, if I look at Fastening margins and if we backed out the CAM contribution or at least our estimate, it looks like you had, again, another kind of almost record margin for Fastening. What's the best way to think about the time line for synergies for the CAM acquisition?
Okay. So the -- I think the first 3 months of the acquisition have been very much getting hold of, for example, the IT systems and correcting and improving them to have the latest levels of, let's say, CMMC capabilities for cybersecurity and a more modern approach in that area, whole IT suite. So a lot of work has gone on there.
The usual simulation and harmonization of benefit programs for the employees and also an assessment of what needs to be done to improve the asset base. All of the original thesis about what we think we can do by way of improving the margins is there, both for, I'll say, the more straightforward, I'll say, operating synergies of amalgamating and looking at the supply base. We've got clear line of sight to that now, and we'll begin to see some of that in the second half of the year.
But I think the majority of it comes in 2027. It will take us a little while to burn down some prior commitments, both in the supply base and also in the customer arena. And also all the work we said that we would do by way of building out some additional distribution programs for our own distribution arm rather than going through third-party distributors that will progressively come on board during 2027.
So we're doing it. It is -- everything we thought that CAM would be for us is still intact, and it looks good for us. But this quarter and for the margin [indiscernible] of this year, we're going to see they were a 20% company, so we were at 30%, you blend them together and basically, any increase we've done on our legacy business has offset that dilution.
So we're still doing it like a 30% fasteners margin. But with the prospects, hopefully, of seeing some improvements on that as we get into 2027. In earnings per share terms, the debt servicing that will offset a lot of the earnings.
So you said you'd be pretty breakeven-ish for this year and again, starting to see positive EPS effect in 2027 and beyond.
The next question comes from John Godyn with Citigroup.
John, I just wanted to follow up on free cash flow deployment and opportunities. Obviously, you guys are executing a balanced approach. We saw the dividend go up.
The buyback is going up. But just given the top-tier operational execution of the company, there seems to be an argument to continue leaning into M&A. And I wanted to take your temperature there and maybe just plug into your kind of vision and world view.
So as you've seen, we did lean into a couple of acquisitions this year. And I think the really good outcome is that we've expanded the top line and bottom line of the company. And even with all of that, I'll say, use of cash flow to buy back stock and now increase the dividend, we see ourselves returning very close to the same leverage level that we had at the end of last year.
So in one sense, that's really good and gives us that optionality going forward. So what do I expect now looking into '27 and 2028? Well, I mean, I doubt we'll do much by way of change on the dividend in the next 12 months, given we've just increased it by a further 17% on top of the increase last year and the year before.
So that's -- I think that's like settled for a period of time. And then going into '27, certainly, my expectation is that we'll probably buy back more stock than we have in 2026. But at the same time, I think we have a willingness to examine further M&A opportunities and feel quite predisposed to doing it, albeit it would follow our MO of trying to buy what we think is a fundamentally quality company and to see whether the combination with Howmet and that company can produce, let's say, some form of synergized benefits one way or the other.
And so taking my temperature is, yes, we absolutely will need to consider further steps. But again, currently in that more bolt-on, we did, let's call it, a couple of billion dollars between the CAM-Brun, that sort of area, I'm not envisaging at this point anything mega large. We could have an epiphany, which I guess we'd signal, but at the moment, we don't see that.
And I think it's far better we just continue with our path of trying to build out a company with a high growth rate, a high margin, good cash flow, and rinse and repeat.
This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.
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