Howmet Aerospace Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2022

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Halmed Aerospace 4th Quarter and Full Year 2021 Results Conference Call. My name is Natalia, and I will be your operator for today. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.

Speaker 1

Thank you, Natalia. Good morning and welcome to the Halmed Aerospace 4th Quarter and Full Year 2021 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 Forward looking statements relating to future events and expectations.

Speaker 1

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 addition, We've included some non GAAP financial measures 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. With that, I'd like to turn the call over to John.

Speaker 2

Thanks, PT, and good morning, everyone. Let's move to Slide 4. First, let me frame the quarter for you. The environment was challenging with the new variant of Omicron emerging today after Thanksgiving. Fortunately, once we take time to understanding the changing nature of the pandemic, we find that the virus appears to be weakening, albeit it's quite transmissible.

Speaker 2

Boeing also continues to test us with reduced build or 0 build of the 787 widebody aircraft as recertification is once again delayed and unclear. Despite these impacts, HAMM performed well With revenues at $1,285,000,000 improving well above last year and in line with Q3. Adjusted EBITDA improved both over last year and sequentially and was $296,000,000 with an EBITDA margin at 23%. We were pleased with the margin exit rate for both the Q4 and the second half of twenty twenty one. The sales picture is one of strength in commercial aerospace narrow body production, healthy defense and IDT sales combined with constrained sales of our High Performance Wheel segment due to the supply chain constraints at our customers In the commercial truck manufacturing business.

Speaker 2

Clearly, those delta and omicron variants of the virus impacted production operations, but nevertheless, we were able to bring through a good level of efficiency. Turning to the balance sheet now and the cash flow of the company. Adjusted free cash flow was a record at $517,000,000 for the year We also made incremental voluntary pension contributions in the quarter. And if we excluded these contributions, adjusted free cash flow would have been 123% For your information, the free cash flow conversion has continued in the last 3 years at a level well in excess of our long term guide of 90%. The year end cash balance was $722,000,000 and reflects both the good cash flow conversion and the fact that in the 4th quarter, Hammitt repurchased $205,000,000 of shares at an average price of $30.32 The 4th quarter average diluted share count reduced to 431,000,000 And the year end diluted shares stood at 428,000,000.

Speaker 2

The repurchase of shares continued in early 2022 With a further 3,000,000 shares purchased for $100,000,000 during the month of January. As of the end of January, the diluted share count has been reduced to approximately 425,000,000 shares. And finally, the 2021 tax rate was reduced by the work we've done and the effect was $0.01 on earnings in the 4th quarter. We look forward to 2022, and I'll provide commentary when we get to the outlook section of our presentation. Meanwhile, I'll hand the call over to Ken Giacobbe.

Speaker 3

Thank you, John. Let's please move to Slide 5. 4th quarter total revenue was up 4% year over year and flat sequentially. Commercial Aerospace increased 44% of total revenue, which is an improvement sequentially, but far short of the pre COVID levels of 60%. Commercial Aerospace recovery continued in the 4th quarter with commercial aerospace revenue up 13% year over year and 4% sequentially driven by the Engine Products segment and the narrow body recovery.

Speaker 3

Defense Aerospace was down 22% year over year and 4% sequentially, driven by customer inventory And production declines for the Joint Strike Fighter. Commercial transportation, which impacts both the forged wheels And the Fastening Systems segment was up 20% year over year driven by higher aluminum prices. However, The market was down 1% sequentially as the market continues to be impacted by supply chain constraints at our customers, which is limiting commercial truck production. Finally, the industrial and other markets, which is composed of IGT, Oil and Gas and General Industrial was down 2% year over year and 3% sequentially. Now let's move to Slide 6, which sums up the year nicely.

Speaker 3

Let's start with the P and L. For the full year, price increases were up year over year and in line with expectations as they are primarily tied to long term agreements. Structural cost reductions were approximately $130,000,000 which exceeded our target of 100,000,000 Adjusted EBITDA margin for the year was 22.8%, which was an increase of 2 20 basis points year over year Despite $285,000,000 of lower revenue, the 4th quarter exit rate was 23%. Adjusted earnings per share was $1.01 or 31 percent higher than 2020. Moving to the balance sheet, Our cash balance was healthy at $722,000,000 Adjusted free cash flow was a record $517,000,000 which was well above the guidance.

Speaker 3

Free cash flow conversion was 117% of net income. If we exclude voluntary pension contributions of $28,000,000 adjusted free cash flow conversion was 123% of net income. Net pension and OPEB liabilities were reduced by approximately $275,000,000 while pension and OPEB expense as well as the associated cash contributions were each reduced by approximately 54%. Net debt to EBITDA improved to 3.1 times. Regarding capital allocation, we have taken a balanced approach.

Speaker 3

Capital investment projects for forged wheels in Hungary and Mexico are now essentially complete. Concurrently, We have been investing in automation projects in the engines and fastener segments. During the year, we paid down gross debt of approximately 8 $45,000,000 with cash on hand and reduced annualized interest costs by approximately $70,000,000 We also reinstated the quarterly dividend of $0.02 per share of common stock in Q3 of 2021. Lastly, we repurchased approximately 13,400,000 shares of common stock for $430,000,000 with an average acquisition price of $32.07 per share. To sum it up, during the year, we enhanced our profitability, Strengthen the balance sheet and we're balanced in our capital allocation.

Speaker 3

Let's move to Slide 7 to briefly cover The segment results. Engine Products year over year revenue was 9% higher in the 4th quarter. Commercial Aerospace was 39% higher driven by the narrow body recovery. Defense Aerospace was down 26% year over year driven by customer inventory corrections and production declines for the Joint Strike Fighter. Operating profit increased 10% year over year And operating margin improved 20 basis points despite adding approximately 150 employees in the 4th quarter, which now brings our total employees added since Q1 to approximately 950 employees.

Speaker 3

Now let's move to Slide 8. As expected, Fastening Systems year over year revenue was 3% lower in the 4th quarter. Commercial Aerospace was 15% lower as we continue to experience production declines for the Boeing 787. Commercial transportation was up approximately 46%. Year over year, Fastening Systems was able to maintain segment operating profit on $7,000,000 of lower revenue.

Speaker 3

As a result, operating margin improved 50 basis points. Now let's move to Slide 9. Engineered Structures year over year revenue was 12% lower in the 4th quarter. Commercial Aerospace was flat as the narrow body recovery was offset by production declines for the Boeing 787. The Defense Aerospace market was down 26% year over year and flat sequentially.

Speaker 3

Year over year Engine Structures was able to generate $3,000,000 more in segment operating profit on $27,000,000 of lower revenue, primarily due to permanent cost reductions and a favorable $2,500,000 non recurring adjustment related to a customer contract negotiation. As a result, operating margin improved 260 basis points. Finally, let's move to Slide 10. Forged wheels year over year revenue was 15% higher in the 4th quarter. Approximately $28,000,000 of the $31,000,000 revenue increase was due to higher aluminum price pass through.

Speaker 3

Pass through of higher aluminum prices did not impact operating profit dollars, but unfavorably impacted operating profit margin by approximately 3 50 basis points. On a sequential basis, revenue and operating profit were essentially flat. Commercial transportation demand remains strong, but volumes continue to be impacted by customer supply chain issues. Aluminum prices were flat sequentially, resulting in minimal impact to sequential operating profit margin. One final comment on the segments.

Speaker 3

The incremental profit flow through for the segments in Q4 was 30% year over year and can be found in the appendix. The 30% includes a 55% increase in aluminum prices year over year, which adversely impacted the incremental profit flow through. If we adjust for aluminum prices, incrementals were above 70%. Now let's move to Slide 11. We continue to focus on improving our capital structure and liquidity.

Speaker 3

In 2021, we took actions to lower our annualized interest costs by approximately $70,000,000 through a combination of paying down gross debt Approximately $845,000,000 with cash on hand and also refinancing higher cost debt with lower cost debt. Gross debt remains at $4,200,000,000 Net debt to EBITDA improved to 3.1 times Despite cash used for debt refinancing, share buybacks and dividends, all debt is unsecured And the next maturity is in October of 2024. Finally, our $1,000,000,000 revolving credit facility remains undrawn. Before turning it back to John to discuss the guidance, I'd like to point out a few items that you can find in the appendix. First, there's a slide in the appendix that covers special items in the quarter.

Speaker 3

Special items for the 4th quarter were a net charge of Approximately $53,000,000 mainly driven by costs associated with non cash pension plan settlement charges. 2nd, there's a slide in the appendix that summarizes the share repurchases that occurred in 2021 as well as the share repurchases in January of 2022. Finally, in the reconciliation of adjusted free cash flow, you'll notice that cash receipts from sold receivables is $0 in the 4th quarter. As a result of restructuring our accounts receivable securitization program in Q3 2021, Cash receipts from sold receivables will be 0 going forward and the entire impact from the sale of accounts receivables will be in cash from operations. Therefore, starting with Q4 of 2021 and beyond, the definition of free cash flow will be simplified and be cash from operations less CapEx.

Speaker 3

Please note that the net cash funding from the sale of accounts receivable has been $250,000,000 since Q4 of 2020, which means that the sale of accounts receivables has neither been a source of cash or use of cash in 2021. So with that, let me now turn it back over to John.

Speaker 2

Thanks, Ken. Let's move to Slide 12 for guidance for 2022. The leading indicators for air travel continue to show improvement, notably for domestic travel. We continue to hold the view that we'll see an acceleration in revenue growth during the course of the year, following a fairly flat Q1 compared to Q4. The Engine Products business has led the recovery to date, and we now expect that Engineered Structures business We'll see lower revenue in the first half of twenty twenty two due to the continued delays with the 787.

Speaker 2

Fastening Systems is expected to show growth in the first half of twenty twenty two, starting in the Q1. In terms of specific numbers, we expect the following: the guidance for Q1 revenue at $1,300,000,000 plus or minus 20,000,000 EBITDA of $295,000,000 plus or minus $9,000,000 EBITDA margin of 22.7 percent plus or minus 30 basis points And EPS of $0.29 plus or minus a penny. And for the year, we expect revenue to be $5,640,000,000 plus or minus 80,000,000 EBITDA at $1,300,000,000 plus or minus $35,000,000 EBITDA margin at 23%, plus 30 points basis points and minus 20 basis points EPS to increase to $1.37 plus or minus $0.06 and cash flow to be 625,000,000 Plus or minus $50,000,000 Moving to the right hand side of the slide, we expect the following. Revenue to be up approximately 13% versus 2021 driven by commercial aerospace, commercial transportation and the IGT market. The 2022 revenue guidance includes More than $125,000,000 of material pass through impacted margins by at least 50 basis points.

Speaker 2

And for clarity, the price increases are excluded from the $125,000,000 of pass through. Adjusting for that $125,000,000 plus of material pass through, then the incremental EBITDA margins fall nicely in the 30% to 35% range. Adjusted EBITDA is expected to be up 15% versus last year. Adjusted earnings per share to be up approximately 36% versus 2021. Pension and OPEB contributions $60,000,000 in the year.

Speaker 2

CapEx should be in the range of $220,000,000 to $250,000,000 And that continues to be less than depreciation and amortization resulting in a net source of cash. Adjusted free cash flow compared to net income This is approximately 110%. Incrementals adjusting for the metal are between 30% 35% as previously stated. So let's move to Slide 13 for the summary of 2021. In conclusion, Hammitt delivered really well in 2021, and I note the challenges that we overcame.

Speaker 2

EBITDA and EBITDA margin increased with the Q4 exit rate of 23%. Operational productivity was healthy and structural costs Reduced by $130,000,000 Pricing was improved during the course of the year and well above inflation recovery. Free cash flow was excellent and allowed for further share buybacks of $430,000,000 $13,000,000 13,000,000 shares, while also improving the net leverage of the company and reducing gross debts by $845,000,000 and furthermore reducing interest carrying cost of $70,000,000 thereby improving future free cash flow yield of the company. Furthermore, pension and OPEB gross liabilities were reduced by $440,000,000 which is another huge step in the improvement in the balance sheet of the company and net liabilities by $275,000,000 Lastly, work performed on the tax rate showed improvement with the rate reduced by 2 50 basis points to 25%. Thank you.

Speaker 2

And now let's take your questions.

Operator

Thank you. We will now begin the question and answer session. We request that you limit yourself to one question. Your first question is from the line of Robert Spingarn with Melius Research.

Speaker 4

Hi, good morning.

Speaker 2

Hey, Rob.

Speaker 4

John, I wanted to ask you about what we've been hearing on Castings and forgings potentially being a bottleneck with capacity ramp from some of the OEMs and other folks in the industry. Could you talk about that?

Speaker 2

Yes. I mean, I'll probably just give you what I deem I think our three levels of response to your question and probably just cover the first two. At least most simplest, No CEOs that have commented publicly have contacted me to register any concerns whatsoever. I could leave it at that. But I think I'd like to go a little bit further and say, I'm really glad it's recognized Just how hard and how exacting the production of such products are.

Speaker 2

And it's a good job that There is inventory in the pipeline at many levels, starting with completed engines at Boeing and Airbus and also in the pipeline between us and the engine manufacturers. I think it will be also great to recognize the lead times with scheduled commitments to back up the Skylines of aircraft production in full, Assuming these volumes are required. And then the 3rd level of commentary would be, I'll say commenting on the whole supply chain, labor availability skills, response times, etcetera. But for right now, I have no recognition of this as a significant issue in any dimension.

Speaker 4

I think that's a fair point that there's so much uncertainty in the production rates. The other thing I'd ask on this is, if the competition might not be able to keep up, does this present an opportunity for you?

Speaker 2

Obviously, it always depends upon the parts that are in question. My expectation is that the spot business will pick up In 2022 and that will be to our benefit and hopefully we can respond in the same way that we were able to And pick up that additional business should it occur. And I think that's probably as far as I can go at this point, Rob.

Speaker 4

Fair enough. Thank you, John.

Speaker 2

Thank you.

Operator

Your next question is from the line of Gautam Khanna with Cowen.

Speaker 5

Hey, thanks guys. I was wondering if you could just spell out quantify the change in guidance From the Q3 earnings call, obviously, the sales taken down, but What are you now embedding in terms of 787 rate, 777 rate, just some of the moving parts Relative to what you previously provided.

Speaker 2

Yes. So if I exclude metals From that revenue line, then the volume increase is around 11%, so close to that 12% to 15% that I previously called. And the reason for being the lower end of that is down to the 787 and the lack of visibility that we have regarding that aircraft. And we note that our customer hasn't provided Any solid new skyline and therefore we have to make our own assumption of volume of production. In addition, I'd say there's a bit of an inventory overhang on F-thirty five, Given that while we supply to schedule during 2021, I note that Lockheed did not build a full quantity of aircraft.

Speaker 2

So while the Aircraft production is going to increase in 2022 and increase in 2023, then that's great, but we've got to burn off a bit of an over in the early part of 2022 and then we'll see further volume improvements as we go into 2023 When that overhang, hopefully, will no longer be there and it will be vaporized in the 1st part of this year. So those would be the couple of comments regarding the revenues for For 2022 and the early part of the year. Does that cover it or do you end up just a bit more?

Speaker 5

No, that's very helpful. And just to follow-up on Rob's earlier question on pinch points. Have you seen any Pinch points upstream with respect to nickel billet or what have you given the PCP strike and Carpenter having The outage, the unexpected outage at Reading, I don't know, how do you feel about

Speaker 2

the inconvenience? So far, nothing on nickel. I recognize the Carpenter matter and I think that's going to be A little bit of a pinch point in the first half of this year. Nothing dramatic that we see at this Point, but definitely having some impact.

Speaker 6

Thank you.

Operator

Your next question is from the line of David Strauss with Barclays.

Speaker 6

Thanks. Good morning.

Speaker 2

Hey, David.

Speaker 6

Hey, John. So I guess within that 11% revenue growth, John, that you're talking about, can you just Give us an idea by end market, what you're assuming, I guess, Transportation being the big ones, maybe industrial, if you want to throw it in there. And then on MAX, can you give us an idea of what you've Produced in 2021 and what you're assuming for production in 2022? Thanks.

Speaker 2

Yes. So by end markets, commercial aero is going to be up in 2022 led by narrow body, Not a lot happening on widebody with the 787 being the complete wildcard in all of this. IGT should be continuing to be healthy and I believe to be up in the year. And commercial transportation for our wheels business We'll be up and I think that supply chain constraints ease that we're going to see a fairly healthy second half of the year In that business and a really great 2023. The weak points at the moment would be Defense for us, I think it's going to be flat to slightly down for the year And with most of that playing out in the first half of twenty twenty two and oil and gas Too difficult to call at this point.

Speaker 2

We are hopeful for an improvement, but haven't planned on it. So that covers out the end markets. 737, I haven't got the exact numbers, so maybe what I'm chatting here Ken can get them. But Essentially, while we note the production for last year And it's increased in the second half of the year to, I don't know what the number was, let's say, 14, I'm going to recognize rather The numbers are seeing turnaround. We've seen that improvement, but again, we've been supplying it below that level As the remains of the inventories being burnt off on particularly the LEAP-1B for us in the engine segment And that's hopefully going to show healthy growth for us this year, Again, strengthening as we go through the year when we see the further rate increase and there's no inventory left in the pipeline to get burnt off.

Speaker 2

And then should Boeing feel more confident and do continue raising the rate that will be great for us and above what we've guided. Spares, just to comment on that. That's going to be healthy for us this year, but we have percentage increase. So I'm thinking On the commercial aero side, maybe something like a 30% increase in our aftermarket revenues, 30% plus. As you know, it's coming off a fairly low base.

Speaker 2

So the dollars are beginning to be interesting, But still well below our previous levels in 2019.

Speaker 3

Yes. And in terms of David, the exit rate on the 737 in Q4, we were at about 17, 17 aircraft. And as we look Into 2022, consistent with what we said last quarter, probably low 20s in the first half and low 30s in the second half.

Speaker 6

Thanks for all the detail guys. Thank you.

Operator

Your next Question is from the line of Robert Stallard with Vertical Research.

Speaker 7

Thanks so much. Good morning. John, to follow-up on this 787 issue, have you taken the 787 out completely from your 2022 revenue guidance? And then secondly, assuming that's an accurate forecast, can you use this capacity for other stuff?

Speaker 2

We've assumed, I mean, it's just a ballpark number, about 35 aircraft production for the year. It's just a guess. With very limited production, it will maybe 0 production in the Q1. And then assuming there's something, but not quite sure what, so we ballparked it at around that 35 level. In terms of those production facilities, If you take the air force that go into the engine, it's clearly, I mean, the valve that will release casting capacity.

Speaker 2

It's the dies are dedicated to that aircraft, so no, there's nothing to be changed over there. And for the most part, that type of fastening system and titanium structures are dedicated to the aircraft, Albeit there's enough capacity to produce for other customers for any of those flight types or Any bolt fastener, so yes, there's we're able to use them elsewhere, but we've already Made provision to be at production rates for everything elsewhere. So there's no upside in 787 being down. We just like the aircraft to get back Certified and production to start and lift, and that would be very helpful to us.

Speaker 7

Yes, that's great. Thanks, George.

Speaker 2

Thank you.

Operator

Your next question is from the line of Myles Walton with UBS.

Speaker 8

Thanks. Good morning. I was wondering, I don't know if it's Ken or John, but on the Cash flow, obviously, better performance in 2021. And then 2022 still at pretty elevated levels of conversion. I guess the question is Why aren't you building more working capital as you're ramping up into the double digit growth likely this year and next year?

Speaker 8

Are there customers' payables coming in or excuse me, receivables coming in at pace and POs coming in better than you Would that be historically wanted or are we just setting a new bar for cash conversion versus the 90% long term target?

Speaker 2

No change to long term guidance, just that when you've got, let's say, CapEx below D and A for a period of time, that's healthy. We expect, as I guided, the pension contributions So we are expecting some working capital build. And Should we hit our marks in terms of, I'll say, receivables and payables, then I'd be quite excited To use increased working capital in the back end of the year because that would mean a very healthy exit rate and Great momentum going into 2022. And a working capital drag for us is not the biggest deal, given the strength of margin, And we'd much prefer to see the improved revenues. Having said all of that, we do hope to further improve our inventory efficiency During the course of the year, it's part of, I'd say, what we do.

Speaker 2

And that's helping us reduce the what is a pro Pro rata or pro rata, working capital drag from the increased revenue. So in summary, there is a working capital drag on cash flow. We're trying to improve efficiency, but would love that drag to be even higher Because that shows strength particularly in the second half of the year.

Speaker 3

Yes. And Miles, what I would add to that, this is Ken. As John said, it's a modest cash burn in working capital. But as we exited 2021, We built some inventory specifically in the engines business on some of these key platforms in order to get ahead of the ramp. So we think we're in good shape.

Speaker 8

Okay. And did you acquire any inventory from the supplier who maybe been liquidating in the 4th quarter?

Speaker 2

Small amount, yes. Okay. Thanks. Thank you.

Operator

Your next question is from the line of Seth Seifman with JPMorgan.

Speaker 9

Hey, thanks very much and good morning. I wonder if you could comment on maybe not the exact number, but in a relative sense, the LTAs that are coming up this year relative to, I don't know, maybe if they're 3 to 5 years on average, then you think about 25% coming up each year. Is this a heavier year or lighter year and kind of what Is there much expectation for what that might be able to deliver this year?

Speaker 2

Yes. So Consistent with what I've said previously, 2021 was a big year for us And you saw that, I think the number through the Q3 was a cumulative $60 plus 1,000,000 of Price excluding inflationary pass through, the Q4 number will be issued as we issue the pay In a week or so's time. And for 2022, the book of LTA We'll not be as big as 2021, again, consistent with what I've previously said. Nothing has changed. We are well through our negotiations, but not completed for 2022, but well through And our expectation for the price improvement is exactly in line with previous statement.

Speaker 9

Great. Thanks very much.

Speaker 2

Thank you.

Operator

Your next question is from the line of Noah Poponak with Goldman Sachs.

Speaker 10

Hi, good morning everybody.

Speaker 2

Hey Noah.

Speaker 10

John, I heard your comments on the math of the pass through versus Pricing in terms of what that does to margins, but just the midpoint of the EBITDA margin guidance is a little Constrained year over year, it seems like sort of the high end of the EBITDA versus the low end of the revenue gets you the 35% Incremental, but a lot of different places in the ranges don't get that incremental you've been speaking to. So maybe you're just trying to tell us there's risk to revenue, but you feel good about your operating performance. Just wanted to get your latest thinking on your incremental margin potential versus what you were saying last quarter.

Speaker 2

Yes. Well, the last quarter I gave you 35 plus or minus 5 percent prox, and we're well within that. So I think It's exactly in line. I don't think anybody's going to argue for a couple of percent with all of the variables around us. So those variables will be Omicron production disruption, I could talk about inflation, I could talk about recovery inflation, I could talk about 787, the F-thirty 5, The management of LEAP-1B inventory and also things like container availability, never mind the cost of containers.

Speaker 2

So There's a lot of stuff going on. And within that overall context of uncertainty, then I think the guide is just Exactly in line. And we'll see how things pan out during the course of the year. I'm not accustomed It's a disappointing and the most important one, not disappoint myself. And so at the moment, I think we're in line.

Speaker 2

I think the most important thing is we are passing through, we can pass through these significant material Changes and others. So that's the important thing. It's not an excuse me for reduced margins.

Speaker 10

Excellent.

Speaker 2

And it's an I want to get to it's an annual conversation. We've given you a range where We will take this and deliver and hopefully deliver improved margins in 2023 just The same way as we deliver the improved margins in 2022 2021 2021, as you know, was a 200 plus basis points improvement over 2020. And the way we've guided you to, I think, 23% midpoint, which will be an increase over 2021.

Speaker 10

And fastening didn't see that as much in 2021 and is the furthest below pre pandemic. Now that the revenue has stabilized there, is that where there's the most Upside left moving forward.

Speaker 2

Well, I'm certainly optimistic for our Fastener business because that's a good margin business. I'd be a lot more bullish about it if I knew more about the 787. While I don't, I'm going to be fairly cautious. I still think that given I mean, when you've been to like sort through this, Given, I think, in the Q4 revenue slightly down, but margin up. And if you think margin up when widebody is down and 787 down And given the differential mix of Fasteners and Aircraft, it was a really credible performance for the Fastener business.

Speaker 10

Okay. Thanks very much.

Speaker 2

Thank you.

Operator

Your next question is from the line of Kristine Liwag with Morgan Stanley.

Speaker 11

Hey, good morning, guys. John, on Russia, there are discussions again on sanctions. How do you think this will pan out for the titanium industry? And is that a risk point or potential pain point for you? How are you thinking about all of this?

Speaker 2

If anything, I did note comments in the press From Boeing regarding concerns about geopolitical stability and the impact for titanium. And should that Those concerns are proved material or real, then that would be great for us because We've got titanium capacity. We'd be happy to commit to a long term agreement with that customer or need any others. So, if there is geopolitical uncertainty, whether it's for the defense contractors Or for civil aerospace production, then I think that's Yes. We'd be happy to take your calls.

Speaker 11

So John, I mean, following up on that, I mean, how much capacity Do you have for titanium? How much of the aerospace industry's demand can you meet? Should this come about?

Speaker 2

Well, it's clearly not the whole of VSMPO demand, that's for sure. But it's like Those who come first will get the contracts locked and the capacity we're able to offer. Our reuse of Revert and also titanium sponge, which for the most part for us comes from Japan is not affected by the geopolitical uncertainties. And I would certainly want to guarantee for myself that I got access to Titanium.

Speaker 11

Thanks, John. Very helpful.

Speaker 2

Thank you.

Operator

Your next question is from the line of Matt Akers with Wells Fargo.

Speaker 2

Hey, good morning guys. Thanks for the question. Could you kind of

Speaker 3

share your thoughts on headcount additions at this point? You added a lot of people in 2021. Are you sort of covered for this year or are there a lot more that you need to add to support some of the ramp up later this year?

Speaker 2

So we've tried to put headcount in sequence to those businesses that I'll say the early movers in the aerospace recovery, Matt. And so you've seen just under 1,000, the number of 9.50 Net adds in our engine business, we think we're going to start adding in our faster business shortly. We already are adding our personal business and so trying to get ahead of that Volume recovery that we see. In terms of access and the availability of labor, so far it's been okay. I'm saying about 70% of it come from people that we've recalled, and let's say, therefore, 30% from fresh labor For us, my expectation is that if things work out As we expect then, we'll probably be recruiting an additional similar number, probably somewhere between 800 1,000 people during the course of 2022.

Speaker 2

And if things work out well, we'll be on the upside of that. And if not, we'll be on the We'll keep adjusting it as we see fit during the year. Again, if you think about what we said to you today is that we've tried to be thoughtful about the addition of labor to be ahead of the curve in Training and taking those costs up so that we are not able to meet our customers' demand In these especially in those very difficult parts to manufacture, I already talked about. But also, we took the time And efforts and cash cost of building some additional inventory such that we could protect some of the volume ramp that we expect coming. And we think that the demand actually could be quite healthy.

Speaker 2

And rather than get stressed about our production, we want to be ahead of the game, and that's Where we think we are currently.

Speaker 6

Great. Thanks, John. That's helpful. Thank you.

Operator

Your next question is from the line of Timna Tanners with Wolfe Research. Yes.

Speaker 12

Hey, good morning. I just had a follow-up on asking about Capital allocation, I know you mentioned that, 2021 was a balanced approach. You did mention you don't see a lot of CapEx needs. So I guess really just remaining trying to get understanding of how you're looking at dividends versus buybacks versus refinancing and other opportunities? Thanks.

Speaker 2

Yes. My guess at this point is that given our healthy cash flow, we'll still be Returning money of note to shareholders during 2022. In fact, if you think about it, we've already done $100,000,000 in the 1st few weeks of January. So that gives you an idea of our confidence and strength in the cash flows of the company. We'll Feel our way through the year and see how we go.

Speaker 2

But clearly, if all things go as we We'll be buying additional shares back during the course of the year with the cadence yet to be determined. But we have plenty of authorization to do so. Clearly, we're also going to make sure we Fund the business appropriately and that's taken care of in a slightly higher CapEx number than before. And I guess that When we get through our Q1, which we'll be reporting to you in early May, we'll also just take a view of the dividend and whether we feel As though that would benefit from being lifted or not or just do a sense check as we go through. So I expect a balanced approach, but with probably more share buyback as The dividend in terms of any cash flow implication for the company, but I'm willing to consider all things.

Speaker 2

My guess is that when we exit 2022, We're going to also have improved leverage once again of a similar order of magnitude of terms compared to 20 So what I think we're going to have is another and conversation where we're going to buy back shares, consider dividend And improve our debt structure and improve our leverage as we exit 2022, and that will set 2023 up in a really good way.

Speaker 12

Okay, great. Thanks for the detail.

Speaker 2

I can't believe I just talked about 2023 and it's only the start of 'twenty two. I must be getting carried away.

Operator

Your next question is from the line of Phil Gibbs with KeyBanc Capital Markets.

Speaker 13

Hey, good morning. Hey, Phil. Question was on the pricing evolution. Safe to say that last year Pricing gains were about $80,000,000 and I think you already said this year is probably going to be something a bit less than that. Is that fair?

Speaker 2

Yes. Well, the second part is I haven't commented on the first part because that will be an okay in the week or so's time.

Speaker 13

Okay. You talked about the pass through, I think largely I would think largely in the Forged wheels business for 2022. But aside from the labor bill that you expect over the course of the year, Any other incremental inflationary factors that you guys have, maybe at a bit higher level than you were expecting 3 months ago or 3 months ago or something that you don't have hedged out.

Speaker 2

Energy costs are high, that's for sure, particularly in Europe. So if you were to go to almost any country in Europe, all of them having differential percentages, then the cost of energy Because of their, I'll say, policy towards renewables, etcetera, and I'll say, Purity of energy is causing that to be an elevated level. It's also higher in the U. S, but nothing like the increases that are there in Europe. So I draw your attention to energy as one thing.

Speaker 2

And of course, we're all familiar with wider general inflation increase That's there. I guess that's about it really.

Speaker 13

And then just a second part to that energy comment that you just made. Are you all hedged in terms of Your energy exposure there or are you feeling the brunt of the spot market gyration?

Speaker 2

You can assume that it's pretty costly to hedge energy and therefore we'll be incurring additional energy costs during the course of the year. And those which are, let's say, not covered by our customers are all contained within the guidance we've given. As I said, our guidance is within the incremental range already provided when you adjust for that metal pass through.

Speaker 13

Thanks, John.

Speaker 2

Appreciate it. Thank you.

Operator

Your next question is from the line of Paretosh Misra with Berenberg.

Speaker 14

Thanks, Sven. Good morning. On your CapEx guidance and recognizing it's below depreciation in 2022, but is there any larger project That you're undertaking that's worth flagging?

Speaker 2

No. I mean there's no significant projects at all. So there's no Capacity expansion, for example, in our engine business as we've had previously, Ken has already commented that we finished The capacity expansion in our wheels business in Hungary and Monterrey, Mexico. So that's also behind us and expect to see the benefits of that capacity available for our customers as we go through the year Into next year, so that's all good. If there's one theme, I think, where we are going to have an elevated spend Compared to previous years, it will be the culmination of many of the automation products that we've started throughout the company.

Speaker 2

And I'd be willing to commit to those additional targets, in fact, stimulated in many cases those Because I really do feel that's going to pay dividends for us in terms of muting our ingestion of labor And also taking those inflationary costs for the future in terms of just managing our productivity. And also, I think Going along with our productivity, we will also gain further improvements in our quality indices. And as you probably recall from Previous earnings calls, I have noted that the improved quality and delivery from Hammitt over the last 2 or 3 years, And we'd like to continue that path. And I think automation is going to be key to do so Well, we're going through the volume ramps that we are after the next 2 or 3 years.

Speaker 14

Interesting. Thanks. And then just a quick follow-up on your Comments regarding the aftermarket. Sorry if I missed that, but did you say how big your aftermarket business was last year in 2021?

Speaker 2

I did not. But for clarity for everyone on the call, Defense and Aerospace, I think The mark we called out in 2019 was about $400,000,000 and that's close to $500,000,000 these days. And the $400,000,000 which was in commercial and industrial that dropped the depths of, Let's say the pandemic to about $100,000,000 more or less. And compared to say 2021 saw a fractional improvement in the back end of the year and it's on that commercial aerospace business where I believe we can have a 30% plus improvement in 2022 For spares, both the narrow body and wide body.

Speaker 14

Got it. Thanks, John.

Speaker 2

And business jet as well because business jet is really going very well.

Speaker 14

Got it. Very clear. Thank you.

Operator

Your next question is from the line of George Shapiro with Shapiro Research.

Speaker 15

Yes. Good morning, John.

Speaker 11

Good morning, John.

Speaker 15

For the last couple of quarters, you've been a little bit less in revenues than you But the margins either been as good or better than what you've been guiding to. So how long can you continue to do that If we see the recovery somewhat slower, so the revenues continue to be a little bit less than expected out there.

Speaker 2

Okay. Well, certainly, if you'd say compared to what I'd like to have seen in the back end of 2021, revenue would have been a disappointment, but as you know, we can only supply that which our customers want. And I think all of us recognize that, I mean, if you call out one instance rather than go through everything, Then 787, overshadows everything in the back end of the year, And in particular, effectively production going to 0 in the 4th quarter. And so, yes, Revenue lines of disappointment, most important thing is that despite all and within that output, containing that Through cost reduction programs and our efficiency, despite all of the impact of Omicron And that production disruption that it did provide, plus if you also want to pile on, you can add all of the additional protection that we We'll try to provide our employees so we can maintain production and it's like testing regimes and we've been whipsawed, as you know, by mandates and government Some core changes. So again, a lot going on.

Speaker 2

And if you look at the guide for the Q1, it's not really if You then go through it closely and you'll say, well, part of that revenue, let's say, maybe it's half is material pass through, so there's not much volume. And but when you adjust for that material, you'll see that margin is right on top of where we exited the second half of twenty twenty one. So at the moment, what we're telling you is we think we can continue to convert effectively While I'll say waiting for the volume and then for me the really interesting bit is What happens in our 2nd quarter and second half? And we'll know a lot more as we go When we see firmness of production schedules, but we're getting a little bit more optimistic for the 2nd quarter. And certainly, we feel more optimistic in the second half, even though when you think about it in the round, it's never good to have a year where you're back end loaded, But that's always going to be the nature of it when you're in a recovery situation that certainly the commercial aerospace market is.

Speaker 2

And in recovery, it's going to be that way through 2022, it's going to be that way through 2023 as well. So I'd say all good, George, With the moment trying to hold things together, and we have held things together Well, say the market hasn't been kind to us by way of volumes. And then should we get A little bit of a width of increase, like same as we had in Q3, then I'm hopeful we're going to convert And maybe enter those sunny uplands as I think.

Speaker 15

Okay. No, it's been impressive performance. I just wonder How long do you keep it going if you don't get the revenue?

Speaker 2

Yes. Well, I guess, I mean, If you want to light that candle at night, make sure that I want the volume because operating with The lack, I mean, the headwinds we've had over the last few quarters and year or 2 years, it's been tough. But The answer is we've converted, we've done what we should do and delivered. And I'm looking forward to the volume improvements, which Will happen. It's a strong statement, but will happen during 2022 at some point.

Speaker 15

Thanks very much.

Speaker 2

I think it's also important to keep the big picture in mind that Despite all I call all the little bits of stuff that you deal with, the big picture is Let's just consider revenues are going up. We're in recovery. The commercial aerospace business is going to improve. Narrow body is leading the way. Body room increased, but it's from Airbus and Boeing and hopefully stronger for Boeing.

Speaker 2

And hopefully aircraft will start being delivered in China shortly for the narrow body. I mean, it's all good. So let's keep focused on the big picture here.

Speaker 15

Very helpful. Thanks very much.

Speaker 2

Thank you.

Operator

Your final question is from the line of Noah Poponak with Goldman Sachs.

Speaker 10

Hey, John. I just wanted to try to better understand what's going on with the 787. I'm a little surprised by your comments that You're sort of not hearing much from them. I mean, is that surprising to you? I know they have a lot of inventory, but they're talking about restarting the underlying production rate.

Speaker 10

Presumably, they need to give So what's going on there? And then putting their comments aside, what's your assessment of What's happening there? Why it's taking so long? And when it starts back up?

Speaker 2

I don't know if my assessment counts so much at all.

Speaker 10

It does.

Speaker 2

But I think Boeing's assessment makes a lot of difference. My take is Boeing rightly don't want to get ahead of the FAA in providing commentary. I don't think that's been helpful in the past and therefore I think a cautious Line is being taken. And my thought is that Is it the I'm going to call it the MPS Italian Leonardo problem is behind them. Solutions are Don, the gaps which were there in terms of shims are being worked through.

Speaker 2

The issue around the doors has been Solved and it's being worked through. And I think the audit of the supply base in terms of supplier Conformance has been completed. And so there's a lot of milestones, which I think are being done. And everybody is a bit MakeBeat are making predictions for the aircraft. My hope is that During this quarter is that or latest early in the second quarter is that the FAA give recertification.

Speaker 2

And then I think that those aircraft will be flowing because clearly there's a fundamental demand for this Composite wide body aircraft and its efficiency. It's a great aircraft. So if you just look at Some of the summer cancellation of schedules by the airlines, they need those aircraft. And so As it gets recertified, production will begin to lift from the let's assume that those penny numbers are being done currently. And we're going to see rates of 5 in the second half of this year, 5 per month that is.

Speaker 2

So I think that's the way it plays out, but I'm not in control of those events at all. And I'm just trying to give you a view, Albeit, it's a view that, as I said, it doesn't count for much really.

Speaker 10

No, it does, and that's helpful. And I guess given the inventory they have and then that the production rate would start pretty low and maybe be there for a bit, While it may sound surprising to me that they're not giving you a schedule, they don't necessarily need to because They're going to restart at such a low rate, combine that with the sensitivity of being ahead of the regulator and that would explain that what the communication is right now, Even if things are going to restart relatively soon?

Speaker 2

Yes. And I do believe they need to get back to the 5 a month. And overall, If we're not careful, there's going to be if we end up at 0 for an extended period of time, It's going to be really difficult to get production rates up for that aircraft. I mean, it's a difficult aircraft to build. As we all know, that was an aircraft where not only was the fundamental technology change, That was combined with supply chain change of great notes back in, say, the 2000 and Let's call it 8, 9 timeframe.

Speaker 2

And when you think about all the different subs around the world, let's say, from probably as far away as Pan and lots of other countries as well, then there's inventory in the system all the way through And that will take a bit of burning off.

Speaker 10

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Howmet Aerospace Q4 2021
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