Howmet Aerospace Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 12 speakers on the call.

Operator

Good day, and welcome to the Third Quarter 2023 Halmet Aerospace Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over

Speaker 1

I'm joined by John Plant, Executive Chairman and Chief Executive Officer and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question and answer session. I would like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections Listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation, References to EBITDA, operating income and EPS mean adjusted EBITDA excluding special items, adjusted operating income excluding special items and adjusted EPS excluding special items.

Speaker 1

These measures are among the non GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. And with that, I'd like to turn the call over to John.

Speaker 2

Thanks, PT, and welcome everybody to the Q3 earnings call. The results for the Q3 were solid in all respects and exceeded the guidance given in August, which itself was a further increase on that provided in May February. Sales of $1,658,000,000 increase of 16% year over year. EBITDA was $382,000,000 an increase of 18%. EBITDA margin increased to a headline rate of 23%.

Speaker 2

Margin rate improvements reflect the continuing good work in all segments. I would like to note Fasteners with another sequential Quarterly improvement of 2 30 basis points and additionally, the Structures segment had a 3 20 basis points recovery from the Q2 rate. Thomas, year over year revenue increase flowed through to incremental EBITDA margin at a rate of 28%, Which was in line with guidance. Operating income increased by 22% year over year and operating income margin was 19%. Continued top line growth and healthy margins generated an earnings per share increase of 28%.

Speaker 2

Free cash flow was healthy at $132,000,000 and helped drive shareholder friendly actions, including gross debt retirement of 200,000,000 Share buyback of $25,000,000 Lastly, we also announced a 25% increase in the dividend in Q4 On top of last year's 50% increase. Having provided this top level summary, I'll pass the call to Ken to provide further details of revenue by end market And the results by business segment.

Speaker 3

Thank you, John. Let's move to Slide 5. All markets continue to be healthy with revenue in the 3rd quarter up 16% year over year and 1% sequentially. As expected, sequential revenue growth was impacted by normal third quarter seasonality. Commercial Aerospace increased 23 Year over year, driven by all 3 Aerospace segments.

Speaker 3

Commercial Aerospace has grown for 10 consecutive quarters And stands at 49% of total revenue. Commercial Aerospace growth continues to be robust, Supported by demand for new more fuel efficient aircraft as well as increased spares demand. Defense Aerospace was up 13% year over year, driven by the F-thirty 5 and legacy fighter programs. Commercial transportation, which impacts both forged wheels in the Fastening Systems segment was up 7% year over year driven by higher volumes. Commercial transportation remains resilient despite normal seasonality.

Speaker 3

Finally, The Industrial and Other Markets were up 10% year over year, driven by Oil and Gas up 29%, General Industrial up 8% and IGT up 4%. In summary, another very strong quarter across all of our end markets. Now let's move to Slide 6 for more details on the Q3 results. Starting with the P and L and enhanced profitability, Revenue, EBITDA, EBITDA margin and earnings per share all exceeded the high end of guidance. Revenue was $1,658,000,000 Up 16% year over year.

Speaker 3

EBITDA was $382,000,000 up 18% year over year, While absorbing near term costs associated with net headcount conditions of approximately 645 employees. The Engine segment drove a majority of the increase by adding approximately 500 employees. Year to date Net headcount additions are just over 1500 employees. We continue to increase headcount for the expected revenue ramp. EBITDA margin was strong at 23% despite absorbing the headcount additions.

Speaker 3

Adjusting for year over year inflationary cost pass Approximately $15,000,000 EBITDA margin was 23.3% and the flow through of segment Incremental revenue to EBITDA was approximately 28% year over year, which was right in line with our guidance. Earnings per share was strong at $0.46 per share, up 28% year over year. The 3rd quarter represents the 9th consecutive quarter with growth in revenue, EBITDA and earnings per share. Next is the balance sheet. The balance sheet continues to strengthen while returning cash to key stakeholders.

Speaker 3

The ending cash balance was $425,000,000 after generating $132,000,000 of free cash flow. In the quarter, $242,000,000 of cash on hand was allocated to debt reduction, common stock repurchases and dividends. Net debt to EBITDA improved to a record low of 2.3 times. All bond debt is unsecured and at fixed rates which will provide stability of interest rate expense into the future. Our next bond maturity of 70 $5,000,000 is due in October of 2024.

Speaker 3

Howlett's improved financial leverage and strong cash generation Reflected in Fitch's August credit upgrade from BBB- to BBB, 2 notches into investment grade. Moreover, Moody's upgraded Howmet's outlook from stable to positive in September. The balance sheet continues to strengthen and is recognized with the rating agency upgrades. Finally, moving to capital allocation, we continue to be balanced in our approach. In the quarter, capital expenditures were $59,000,000 which continues to be less than depreciation and amortization.

Speaker 3

In the Q3, we reduced debt by another $200,000,000 Year to date, we have reduced debt by approximately $376,000,000 which will lower annualized interest expense by approximately $19,000,000 We also repurchased $25,000,000 of common stock in the 3rd quarter At an average price of $49.32 per share. This was the 10th consecutive quarter of common stock repurchases. Share buyback authority from the Board stands at $797,000,000 Since separation in 2020, we have repurchased more than $1,000,000,000 of common stock. We exited the 3rd quarter with a diluted share count of 414,000,000 shares. Finally, we continue to be confident in free cash flow.

Speaker 3

In the Q3, the quarterly stock dividend was $0.04 per share. The quarterly stock dividend will be increased by 25% in the 4th quarter to $0.05 per share. Now let's move to Slide 7 to go through the segment results for the Q3. The Engine Products segment Continued its strong performance. Revenue was $798,000,000 an increase of 17% year over year.

Speaker 3

Commercial Aerospace was up 15% and Defense Aerospace was up 33% with both markets driven by higher build rates and spares growth. Oil and Gas was up 33% and IGT was up 4% as demand continues to be strong. As expected, Q3 sequential revenue was down 3% driven by seasonal vacations. EBITDA increased 18% year over year to $219,000,000 EBITDA margin increased 20 basis points both year over year and sequentially To 27.4 percent, while absorbing approximately 500 net new employees. We are pleased with the continued strong performance of the Engines team.

Speaker 3

Now let's move to Slide 8. Fastening Systems year over year revenue increased 20%. Commercial Aerospace was up 34%, Including the impact of the emerging wide body recovery, commercial transportation was up 6%, General Industrial was up 7% and Defense Aerospace was down 5%. Year over year segment EBITDA increased 19%. EBITDA margin was 21.8 percent and it's improved 320 basis points over the last two quarters.

Speaker 3

Please move to Slide 9. Engineered Structures year over year revenue was up 18% with Commercial Aerospace up 33% driven by build rates and approximately $30,000,000 of Russian Titanium share gain. Defense Aerospace was down 20% year over year. Sequentially Engineered Structures improved production rates And revenue was up 14%, which was in line with our expectation of 10% to 15%. Segment EBITDA increased 7% year over year.

Speaker 3

Sequentially, EBITDA margin improved 320 basis points to 13.2% Despite absorbing approximately 145 net new employees in the 3rd quarter. Q3 was good recovery by the structures team and we Let's move to Slide 10. Forged Wheels year over year revenue increased 7%. The $19,000,000 increase in revenue year over year was driven by a 13% increase in volume, partially offset by lower aluminum prices. Segment EBITDA increased 20% year over year driven by the higher volumes.

Speaker 3

EBITDA margin increased 2.90 basis primarily due to the impact of higher volumes and lower aluminum prices. Finally, let's move to Slide 11. Our balance sheet continues to be a source of strength with healthy cash flow supporting a $200,000,000 debt reduction in Q3. The $1,250,000,000 October 2024 debt power was inherited from Alcoa Inc. And has been reduced $705,000,000 with cash on hand.

Speaker 3

Since the separation in 2020, we have paid down gross debt by Approximately $2,150,000,000 with cash on hand and have lowered annualized interest costs by more than 120,000,000 Gross debt now stands at $3,800,000,000 All long term debt continues to be unsecured and at fixed rates. We will continue to focus on improving our capital structure and liquidity. Lastly, before turning it back to John, let me highlight one item. In the appendix, Slide 18 covers our operational tax rate, which was approximately 22.8% year to date. The midpoint of our guidance represents a 500 basis point improvement in the operational tax rate since the separation in 2020.

Speaker 3

Strong performance by the tax group and we continue to be focused on further improvements in our operational tax rate. Now let me turn it back to John for the outlook and summer.

Speaker 2

Thanks, Ken. So Let's move to Slide 12 and talk about the outlook for the next quarter and year end. So first of all, regarding Commercial Aerospace, airline load factors continued to show improvement and resilience. Factor improvement for international travel, notably in Asia, also continues to increase. Domestic airline activity continues Given these low factors and the continued restriction Of aircraft rebuilds, a fleet of existing aircraft are having to work much harder.

Speaker 2

This is leading to robustness in the engine spares market, Which is further increased by the fact that the deployment in recent years of new engine technologies, which are currently operating with increased replacement parts Due to lower time on wing, you'll have read about this and you can be assured that Hamad is playing its part in supporting both the technology upgrades in the high pressure turbine And through providing additional service parts. This will continue for the next 2 to 3 years and probably beyond. Moving beyond commercial aerospace to the defense markets. This market is also showing strength with Start at the gradual buildup of engine spares over the next 2 to 3 years to support the F-thirty 5 program, For which the fleet now stands at 975 aircraft and growing. These increases more than offset the continued bulkhead inventory correction In our structures business, other markets of IGT and oil and gas continue to be very healthy.

Speaker 2

In Commercial Truck and Trailer, builds and order intake continue to be good, despite the lower freight rates and increased price of diesel fuel. We continue to be cautious though as we look forward until we see several months of data for new 2024 orders, Which the order books have only been opened for a month. The initial month was good, but we also know that orders can be depending upon how the broader economy moves in recent months. In aggregate, we see limited risk of aircraft demand from both the commercial aircraft Market and Defense Markets. The 2 markets aggregate to approximately 65% of our revenue That moves up to 80%, excluding the commercial transportation business.

Speaker 2

Beyond the fundamental demand from airlines, Clearly, we rely upon aircraft manufacturers being able to produce and build up the stated and scheduled quantity of aircraft, particularly narrow body aircraft. Looking forward into 2024, we envisage growth to be in the 7% range, Plus or minus a percentage point. The headline sales number for 2024 is likely to be approximately $7,000,000,000 This will be further refined when we see the achieved Q4 build rates from Boeing and Airbus with their confirmed plans going into 2024. All of this will be provided in further detail in February, along with the assumed build rates. Our stance is normally one of caution.

Speaker 2

Moving specifically to the Q4 of 2023, we see revenue of about 1.6 $35,000,000,000 plus or minus $15,000,000 EBITDA is $375,000,000 plus or minus $5,000,000 earnings per share at $0.45 Regarding the full year 2023, revenues increased by about $100,000,000 from $440,000,000 to $6,540,000,000 plus or minus $15,000,000 EBITDA has increased by a further $40,000,000 to 1.48 $5,000,000,000 plus or minus 5. Earnings per share has increased by 0 point 0 $7 to 1.77 Plus or minus a penny. Free cash flow is at $635,000,000 plus or minus 35,000,000 In summary, we see strong performance with health and liquidity and an increased guide for the remainder of the year. We consider the year to date progress to be very good despite the continued choppy build conditions in commercial aerospace. We are accompanied by the fact that any build misses by aircraft manufacturers will be moved into backlog given the very strong underlying demand for travel And in particular, the absolute requirements for fuel efficient engines and fuel efficient aircraft with an overarching mandate Our full year guide of $1.77 earnings per share is an increase of 26% year over year.

Speaker 2

This builds on the 2022 versus 2021 increase of 39%. Currently, in 2023, we've Purchased $376,000,000 of debt and brought back $150,000,000 of common stock. Net leverage is further improved in Q3 and is heading towards approximately 2x net debt to EBITDA by year end. All of the debt actions help accomplish our goal of reducing the interest rate burden in both 2023 And also going into 2024 with further improved cash flow yield despite the increase generally of interest rates. Thanks, everybody.

Speaker 2

And now let's move to your questions.

Operator

We will now begin the question and answer session. In the interest of time, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kristine Liwag with Morgan Stanley. Please go ahead.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Hi, Christine.

Speaker 4

John, Ken, PT. I guess, With the 7% revenue increase for your 2024 initial outlook, what does that imply for aircraft production rates for the Boeing 737, 787 and the Airbus A320 and A350. And also, when you talk to your customers, How much visibility are you getting for the ramp?

Speaker 2

Okay. I guess that's the big one, Christine. So let me just talk generally about the 7%, first of all. Within that Assumption is a mid teens assumed increase in commercial aero And more like single digit increases in industrial, things like IGT, Oil and Gas and General and Other, while an assumed high single digit decrease In commercial transportation, so basically, in our client, solid defense, solid general industrial markets, Healthy increase in commercial aerospace, but reduced by high single digit assumption On commercial or transportation, that's roughly not a client. I'm going to say, we see assumed build rates In, let's say, forecasting gainances.

Speaker 2

And for the most part, We can see that they're going to increase both widebody and widebody's fractional increase in mix next year. At the moment, specifically for Boeing 737, which is what you assumed, You asked the question about our assumption is that it's somewhere between the mid-30s and 40, somewhere in that region. We don't want to pit it specifically at this point. You can assume that's within the range, plus and minus, I gave. And it's really important that we see Boeing achieved the rate 38, which we know is going to be prior to now hasn't really happened.

Speaker 2

It doesn't seem to be happening just yet, but we know it's going to be very soon. But we're not yet ready to believe Input into our guidance, even though we can't supply at rate 42 should Boeing be in a position to build at that rate.

Speaker 4

Great. Thanks for the color.

Speaker 2

Thank you.

Operator

The next question comes from Robert Spingarn with Melius Research. Please go ahead.

Speaker 5

Hi, Scott Micas on for Rob Spingarn. John or Ken, I wanted to ask you a little bit about pension contributions for next year. And also just given the work you've done there, are you considering any sort of risk Transfer to get rid of the pension liability and improve free cash conversion?

Speaker 2

We've been working as a Pension liabilities for several years now and we've indeed taken over the last 5 years from where we started several Leon, out of that net liability or gross liability rather. And we've always been focused on taking gross and net out together. Otherwise, you just leave yourself open to interest rate risk and mortality risk. And we've managed it down now to I think about $0.75 billion for pension and healthcare, something in that region. And so it's now, let's say, a tiny fraction of our market cap and therefore essentially is not relevant.

Speaker 2

At the same time, while I've noted that one other company may be a couple of Continued advertising. I'm not yet at that point willing to consider that. It's not that it's off the table because I think it would be something which would be useful to do. But at the same time, I think At this current time, there's other better uses of our cash and also I'm not willing to leverage to enable that to occur. So essentially, we're aware of it.

Speaker 2

We continue to work at our plans. I can see us Potentially picking off 1 or 2 and do partial annuitization either within a plan or in a total of a plan, But you shouldn't expect to see that liability extend which they must pay the premiums to insurance companies to enable that at this point in time. I think that may come over the next, let's say, 3 to 5 years at some point, but not yet. And the assumption we have for next year is that cash contributions will be a little bit higher than this year, But at this point, not material.

Speaker 5

Thanks. I'll stick with one question.

Speaker 2

Thank you.

Operator

The next question comes from David Strauss with Barclays. Please go ahead.

Speaker 6

Good morning. David? John, you mentioned your work on upgraded Blade, I wanted to see if you could give a little bit more color there around the timing of When do you think you'll be producing upgrading producing and delivering upgraded blades to both GE and Pratt?

Speaker 2

Okay. So both for the GTF Advantage engine upgrade And for the LEAP-1A-1B upgrades, Those have been something that we've been working on for several years now. And if anything, let's say, a little bit later Into production than originally envisaged, although that those push Backs and timing have not been as a result of Hamed not being ready. So we're in good shape. I commented in the past that increased performance in the high pressure turbine leads to increased complexity And with that is value and we certainly have been Intimate with the engine manufacturers to improve the performance as the engine temperatures sort of seem to be higher than originally envisaged Therefore, to help improve time on Wink, I feel as though specific timing for both What was originally called lean burn is now has a different code name for GE.

Speaker 2

And I think for the advantage for Pratt and Whitney, you're best asking them For timeline disclosure rather than myself, because we have an agreed plan, but Yes, that can and indeed has been varied according to the specific needs of those engine manufacturers at this point in time.

Speaker 6

Okay. Fair enough. I'll ask them.

Speaker 2

Thank you. It's far better, David.

Speaker 6

And then Ken, I guess a 2 parter for you. Just quick comments on working capital Through the end of this year, it looks like you're kind of on a pretty big reversal benefit in Q4 and thoughts on that into 2024? And then Pension expense, you brought it down a little bit for 2023, but what are you looking at for 2024? Thanks.

Speaker 2

I'm going to comment on the working capital first and then let Ken amplify And then let Ken totally deal with the pension side. And the reason why I want to talk about The working capital because it's also tied up with the specific operations and status Where the different business units are. So, first of all, in terms of working capital, I mean, They are or accounts receivable and accounts payable, they just move on the days assumption. So if revenue goes up, David, as it has, Yes. And clearly, we have more dollars tied up in receivables than we had, but that's a good answer because if it's whatever days it is and I don't know as we've ever disclosed it, but you Back engineer it, but our days are pretty constant.

Speaker 2

And so because revenue went up, Few more dollars went on, but the days in receivables exactly the same. Payment payables, the big wild card on what But just because I don't like it doesn't mean that it's not where it should be at this point in time. So it moves with the, I will say, Status within each business and where we are operationally and in terms of start from, let's say, volume recovery. So if you take our wheel segment, which was the first division to show volume increase, Manning and then moving through towards stability and now smoothness of production, our days of inventory are in really good shape. And indeed, I believe, we're at close to world class levels.

Speaker 2

If I look at our engine business, which Our 2nd division out of the gate in terms of building of revenue, increasing manning and that's Continuing to increase, we have gradually been smoothing out production, Albeit, we're not in the same level yet as we are in wheels. And so what we see is Gradual improvements in efficiency of our inventory holding and days on hand. And I think that will continue To improve again in the Q4 and into next year. So I'm pleased with the trajectory, but we're not yet at where we need to be On our engine business. In terms of fasteners and structures, those are very different points.

Speaker 2

Fasteners It has been later in the cycle in terms of volume pickup. As you know, we've been recruiting this year, building it up. And you've seen, 1st of all, the margin begin to respond to that and also mix and production efficiency. And also you've seen a little bit of a calming of recruitment in that business in the last few months. Okay.

Speaker 2

We're still in that, we say recruitment mode and replacement mode for employees, but trying to improve efficiency. At the moment, the days on hand is well out of order in terms of where it needs to be And it's not yet improving at all, but we'll begin to improve, I believe, as we go through 2024. In the case of structures, that's probably our worst business in terms of days on hand. And if you remember, last quarter wasn't particularly a great quarter in terms of the throughput of the business. And so I allowed that business not to focus on inventory, but just to use inventory as the buffer to help stabilize The manufacturing operations and therefore improve the margin, which is what you saw occur in the 300 basis points improvement in the At this point, I don't think it goes anywhere at all in the Q4, and that's a combination of it Still needs to stabilize its operations.

Speaker 2

But also, at the moment, I see customers laying in additional demand, particularly laying in additional urgent demand on the titanium side. I'm not yet prepared to add heads nor working capital in inventory nor input materials Until I'm satisfied with the economics and to pay those premium costs. And so if anything, I'm going to hold back On that, because I've got better places to deploy capital, which is what I told you last quarter and generally in the business I'm very disciplined of where we allocate capital. And so at the moment, I'm not Trying to drive working capital, particularly in that business, but that will come next year as that business begins to smooth out and improve its production And gain more responsiveness in terms of, I'll say, people paying for the premiums who if they want the demand to drop in, then they pay for Otherwise, they don't get it. It's that simple.

Speaker 2

So that deals with working capital, be comprehensively, David. And now I'll pass to Ken.

Speaker 3

Yes. Hi, David. So as John articulated there, days are really the key on working capital. And then also depending on where we are Cycle by Business segment. So, as we exit this year, I think we've given everybody the walk in the assumptions tab of the decks to But that would indicate a working capital burn this year, roughly about $190,000,000 plus or minus.

Speaker 3

It's really driven by we've increased the revenue guide once again, so you have more AR that goes with that plus We're keeping inventory in the business to make sure that we're not the bottleneck for our customers, right? Delivering on time in full at the right spec is really Important for us. So we got a little bit more inventory. Next year, we've got another growth projection here. So I anticipate there'll be working capital burn again next year in 2024, probably be better than this year As we work down inventory in the business, but it's again going to be dependent on where we are in the cycle.

Speaker 3

So I believe it's in really good order here, Driven by the growth of the business. On the pension expense side, as John mentioned, I'll start at the top of the house. We've taken gross liabilities down by 45% since separation. That's a pretty big decline. A big significant part of that is the actions that we've taken to reduce gross liabilities.

Speaker 3

You also get a bit of help from the increase in discount rates, There's a lot of action around that gross liability. John mentioned cash, right, it will be up next year. We remeasure at the end of the year. So that's Pretty much of a volatile line, so we'll give you more guidance on the next call in terms of what the cash contributions would be. The expense side, That's a little bit more visible right now.

Speaker 3

Again, we strike it at the end of the year. If you look at our pension and OPEB expense right now, it's 35,000,000 Dollars on an annual basis. So next year based on asset returns, so the market's been a little tough here. I'd say probably Another $15,000,000 plus or minus $5,000,000 on either side of that. So really not material, but I think that's all in good order as well.

Speaker 6

Great. Thanks. Thanks for all the detail.

Speaker 2

Thanks, Angus.

Operator

The next question Comes from Scott Dutoul with Deutsche Bank. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 2

Hey, Scott.

Speaker 7

Two very quick questions, both for John. First, Did price realizations accelerate again in the Q3? I think they had accelerated last quarter. And then on fasteners, can you say whether you're shipping 5 a month on 8.7 at this point or are you still tracking a

Speaker 2

bit below that? Thank you. Okay. I don't think we've given the 3rd Quarter detail on the commercial side, I think that will be in our 10 Q later when we file it. That's correct.

Speaker 2

What I'd say that it's in good order and in line with what we previously said Both for the quarter and for the year. And I stand behind my comments regarding 2024, I wish I made on the last call. 787 at the moment, we're a little bit below Rate 5, and fully expecting that to move up to rate 7 Next year, as I commented before, we see very strong underlying demand for that aircraft, and I can see the need to go above rate 7 as well. It's only a question of when.

Speaker 7

Okay, great. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Myles Alton with Wolfe Research, please go ahead.

Speaker 8

Thanks. John, I was hoping you could dig a little bit deeper into the Fastening margin performance and obviously Sort of troughs at the beginning of the year and has been shown some signs of resiliency and improvement. I think at the beginning of the year, you told me to not expect much For a couple of years, are we at a point where new management plus the rate increases on the wide bodies, we should start to Think about getting back to 2018, 2019 Fastener performance?

Speaker 2

I think it's a bit premature to go back there because I mean, I think the conditions there and why the wide body market in particular were quite different To what they are now, we're basically in the Q1, which is probably our low point In fact, the margins reflected essentially just a total metallic build of aircraft So let's you can call it 0 in terms of any real volume on the composite side. So that's one factor. Of course, that's begun to change. The business itself Has also begun to improve, and I see a much Improved signs of operating efficiency improvements, but with a ways to go. I see additional discipline in the business Commercially, and there's still a ways to go.

Speaker 2

And going forward into next year, What I see is a volume increase for commercial aircraft production and also Fractional improvement in mix because of the widebody going to next year, you can pick your own Your assumptions on what the final wide body production will be in composite aircraft, but essentially even on wide body transitioning from metallic composite aircraft during the course of the year, hopefully with some deliveries of 777X parts as well, which has got a composite wing. And so I'll say general improvement in conditions for the business, but still with a big thrust on improving It's productivity and throughput efficiency, which needs to occur. So basically, some ways to go yet. I have optimism we'll continue the good trend of the last couple of quarters, but It's too soon to call out any specifics on it. And I don't think we have a guide by segment anyway.

Speaker 2

But and I haven't guided We'll have net margins for the next year, just giving you the fact that revenue increases. So that gives you a picture for that business. Thanks, John. Thank you.

Operator

The next question comes from Ronald Epstein with Bank of America. Please go ahead.

Speaker 9

Hey, John. How are you?

Speaker 2

Hey, John.

Speaker 9

Yes. The topic that doesn't tend to come up much is the forged wheels. And it appears that it's been running ahead of expectations. I mean, how should we think about that? And what are your expectations around it?

Speaker 9

And when we think about modeling it, what would be a prudent way to do so?

Speaker 2

Well, essentially, the play on Forged wheels for aluminum is that you start off with what's the Big picture in terms of truck and trailer production, essentially in North America and Europe, Albeit, we do play in some of the Asian markets at a significant share position as well. And then you factor in basically some sort of whatever percentage change that is and then you factor in As a positive against what I think will be a worse macro position next year, there'll be some Penetration achieved against steel wheels, particularly as fuel efficiency requirements step up. A fractional contribution, but nothing of great note in terms of adoption of different, I'll say Powertrain, as I say, they're seem to get there is move towards electrification or whatever, but no big moves next year, but that's a positive vector as well. And then a fractional share improvement on top of that. So basically, we see Secular growth in the segment, offsetting some macro decline in the assumed markets.

Speaker 2

And that's why Guy commented as I did about high single digit reduction for the business is our assumption, trying to be fairly cautious at this point in time until we've got a better read on what's the general economy going to do. Although I do see freight rates beginning to stabilize and improve recently. So there's a lot of factors yet To bring to bear in terms of what the final outlook for next year is, but I want to take a fairly cautious assumption. This year, I don't really commented I saw a more difficult second half. As it is, we've still been able to burn off backlog.

Speaker 2

And let's say, even despite today, we have, is it Mack Truck, It is subject to the UAW strike. Our arrears are such that that's not going to affect us in the Q4. And our assumption is that by Q1 next year, by another couple of months, our UAW disputed that macro could be resolved and therefore they'll be back. So that's about it really. It's been pretty strong this year, ideally, given you the general

Speaker 9

And then maybe just one follow on, if I may, just a little change of subject. The when we think about the Pratt and Whitney situation With the GTF and all the disks that need to be reworked, is that good, bad, neutral for you guys? I mean, how should we think about the impact on you, I mean, the company, Vis a vis the GTF situation?

Speaker 2

Yes. I'll start off with having to separate Two issues, I think, on the GTF, because I think while it gets all And meshed together, I see them as quite separate. And then the categories are intertwining for convenience. So the disc contamination issue, to you that requires inspection That might take, I don't know, so many days, let's call it, 20, 30, 40 days on and off wing to achieve that inspection and then I guess longer if Those desks turn out they require to be replaced or not. And I guess it's a small fraction of those that will require to be replaced.

Speaker 2

That's one item or Yes, separate item. Over, let's say, previously in center field, but now I'll call it left field, there is the discussion about The time on wing issues that have been publicized by everybody regarding the GTF Well, particularly in harsh climate countries or pollution countries that the time modeling is a fraction Of the predecessor engine and also what was originally thought for the GTF. So the question then becomes For the problems around the combustor, the filling of holes, the higher temperatures and then those temperatures and pollutants hitting the Few blades in the high pressure turbine, those clearly require replacement and the question is what is the replacement interval for them. And so the so that stands alone as an issue and Pratt and Whitney will determine what frequency they want to replace those blades at. Again, more of a question for Pratt than for myself.

Speaker 2

We're able to stand behind them and supply what needs to be supplied Within degrees, the question is what's the requirement? Then of course, you can entwine them together. So maybe when those engines are off wing for the powder metal contamination issue, Maybe the opportunity will be taken to replace some of those high pressure turbine blades and other components on the engine or maybe it won't. That's a practice issue. And the question I have in my mind is, Do they go for full replacements for them as they really look at inspect and take the engines off the wing for the first time?

Speaker 2

Or do they stick them back on just because the airlines will want the engines back on wing and only seek to replace those in harsh climates At that time, and so maybe that's the more the what I read from MTU of the 300 days turnaround time. So I just don't know, Ron, what it will finally turn out to be. It's a choice by Raytheon or Pratt and Whitney to determine to what extent do they make improvements for the time on wing issue, including the high pressure turbine parts As I take those things off, so what is written about as almost one issue of powder metallurgical, there's 2 distinct issues, Which may come together, but just depending upon the pressure to get those engines back on wing. And we are still in discussions with Pratt and Whitney regarding all of that. And they determine how many of our parts Go to OE production and how many goes to the spares market, and that's up to them and the aircraft manufacturers to decide that.

Speaker 10

Got it.

Speaker 9

Thank you very

Speaker 2

much. Thank you.

Operator

The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning, everyone.

Speaker 9

Hey, Noah. John, I was hoping to

Speaker 10

get a little more color from you Effective on the broader aerospace new build ramp up, you've had good perspective. And As you mentioned, you've been cautious and that's been correct. It felt like in the middle of the year and kind of around the air show and into the summer, you sounded more optimistic and Sounded like the supply chain was kind of finally ready to go. And then we've had these incremental engine and aerostructures issues. Did Boeing especially and I guess Boeing and Airbus keep the underlying broader supply chain going towards the planned higher rates?

Speaker 10

And is everything kind of ready to ramp once aft fuselage and the like are fixed? And you mentioned them giving you plans for next year. Are they incrementally more firm on that now with the master schedule than they've been Cover it to date. Are things firmer or is that wishful thinking?

Speaker 2

I think Boeing, in particular, have had firm plans throughout the year. It's The realization of those plans, which has been more of the issue. I guess it's from a combination of reasons. There's always going to be somewhere in the supply Among all the parts and difficulties, there's always going to be the degree of experience in Boeing's own plants with all of the change People in and out or out and in post COVID. And then of course, we read in the press about the difficulties I'd say, was it strike at Spirit Aerospace and then some other production issues of Some failed parts and holes and all the rest of it.

Speaker 2

And yet there seems to have been some management change there, Which may prove to be positive, because that's a TBD. And hopefully, there and I guess you listened carefully The commentary from Spirit yesterday, we're optimistic that those fuselage and other component problems Do get resolved. It's not something in our control. But should those begin to improve, I think that's a major Step forward in Boeing realizing its own plans for production rate increases and also getting behind it The retrofit of those tails, which were subject to fasteners fitted wrongly or And the holes drilled too big and bigger fasteners put in. So I think the coping with herculean efforts to Try to achieve all of that.

Speaker 2

But as you know, these Turkulating efforts by themselves don't sort of produce the output And we still got to see that improve. So hopefully, during October, November, December, we will begin to see rate pickup It's Spirit, other suppliers and then obviously Boeing itself To get to their required or stated rate 42 next year. In terms of then on the engine side, you've read commentary, I think, from I think anyone I've seen is the G commentary instead of, let's 1700 engines, 1600 engines, that isn't really impactful for us at this point in time because For us, it's just us meeting their rate requirements and then there's a choice, as I said, rather than the previous question, what goes to OE Compared to what goes to service requirements, we're dealing with very robust demand on both sides. And we see that demand increasing again next year, plus some blended in changes potentially for the technology change yet to come.

Speaker 10

Okay. I appreciate it. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 4

Hi, John. Hi, Ken. Thank you, guys. So Hey, I have two questions, if that's okay. So John, don't stress the second one.

Speaker 2

Well, I've been pretty lenient today in answering 2 parts, 3 parts. So yes, Sure. Go for it, Sharon.

Speaker 4

You are, you are. But I want some good nuggets here. So, the OEs that are calling out Castings and Forging in terms of supply chain, kind of slowing down the supply chain. I know you've been clear that how Matt isn't a bottleneck and you aren't in the large So maybe could you characterize your output today and what you're capable of in terms of demand? And then This is more of like a larger opportunity in terms of pricing and volume.

Speaker 4

How do you think about that trade off going forward?

Speaker 2

Generally, forging and casting has been a bit of a whipping blow for a couple of years With commentary, I think, made even before there was any basis for it, Albeit subsequently, I think there has been a basis for the commentary where to replace the skill levels To produce some of these, in particular, the cashings is really at a very high order. So the recruitment and then trading time to produce effective production workers in some of this Certainly strained, I think, all of the companies in that regard, including Hammett. We did choose to start recruitment a bit earlier. I know that I've cost the company pretty to 20 basis points of margin by Being slightly ahead of the curve on recruitment, but at the same time, I think it's paid dividends for us and The fact that we've been in position to produce generally on time at rate and with generally good quality. So I think it's been a good trade off for us.

Speaker 2

I want to correct you on the structural casting So we're probably the number 2 in the market behind Precision Cast Parts, but they're still the big dog on the block In terms of production of structural castings, we do produce them and we're at a good rate for, let's Say 98% of all of our structural castings. I mean, early on, we had a few moments, but things like Fairings are now just like shelling peas and coming off at good rates and no problems whatsoever. And Should there be increased demand for structural castings, obviously, where Tools and if not, the availability is set to tool us for the next few years should engine manufacturers want to Is that we're in a position to supply because we still have some available capacity and indeed are willing To invest commensurate with its being a good return of capital. And generally, I've been quite positive about investing in our engine business and contrasting that to the structures business, which is based upon returns. So it's a long way of saying we're in a good state We're in structural casting.

Speaker 2

We are the significant supplier to the industry on turbine blades. And I hope that's given you enough nuggets.

Speaker 4

How do you think about pricing and your contract structures going forward given the constraints in the supply chain and you're hiring ahead of the curve?

Speaker 2

Pricing has been positive for us, and I think it reflects the value that we bring. When I look at some of the requirements for the increased temperature performance in the, Let's say narrow body engines, we are bringing to bear some of the not all, but some of the technologies that we've Employed for the F-thirty five engine in terms of ability to manage both pressure and thermal performance So in the high pressure turbine and we're able to produce parts, we obviously Work with the customer to engine to specification, but if they're specified at 2,500 degrees and operate higher, We can take it higher because as you know for the F-thirty 5, we're up at 3,500 degrees and indeed the only Company in the world that can provide the turbine parts with that further performance in that environment. We have already commented previously that we are working on the improvements for the Currently, 2028 upgrade to that engine to improve its thrust and time in air. And so again, we are able to take the temperature 4 months of those parts and elevate it further. And we've talked a little bit, but only a little bit in our Technology Day about some of the technologies But we'd be able to deploy for that.

Speaker 2

And so we're in position to bring a degree of performance and capability at scale, Which I think needs to reflect in value because in truth, the turbine blade is a pretty small part of the value of the engine. And to achieve the requirements for, let's say, lower carbon footprint, continually taking up the pressure inside the to improve the atomization of the jet fuel and then for its burn characteristics, the lower pollution, the whole, I'll say fuel efficient in carbon footprint presents great value to the industry. Great. Thank you. Thank you.

Operator

The last question today comes from Seth Seifman with JPMorgan. Please go ahead.

Speaker 11

Hey, thanks very much. Good morning, everyone.

Speaker 2

Thanks,

Speaker 4

Josh.

Speaker 11

So John, I know you said you wouldn't say this or haven't said this, and so I'm not necessarily expecting a number In terms of the margin outlook for next year, but if we think about that sort of baseline incremental of 30%, the plus or minus 5%. How do we think about the puts and takes for where next year can come in relative to that 30%. Does the addition of headcount and the need for the learning to develop among your employees, does that keep things sort of Below that 30% range as it's been in recent years or are there other opportunities to be above it? What's the best way to think about that at this point?

Speaker 2

Yes. I mean, we were able to the last quarter, 19% operating profit, 20 percent EBITDA rate. I don't have any commentary regarding margin rates for next year. What I still see At the moment is potentially, I don't know this, but potentially a few more months of choppy Production, particularly on the airframe manufacturing side, it's just an assumption. Maybe we get lucky towards the second half of next year or the back end of next year and we see things get to smooth out.

Speaker 2

Yes, we have seen some things begin to move in our favorites with that as I commented when on the inventory side when I was talking about our engine business. But in terms of at what point do we reach what I call what I previously referred to as state of grace where things smooth out and Yes, margins become stable and better and cash just oozes out of the industry and hopefully out of harm. I've always said that's a year away, and I still think it's a year away. It could be the back end of 'twenty four, But more likely going to 25, and that hopefully combines with if the 25 external, I'll say views of what the aircraft production will be, including its wide body mix, then that begins to get, I say into a good state. So I have generally medium to long term optimism I feel as though we are in a really great place with great backlog and good things to come, albeit Still having to face up to shorter term challenges of all the things we've talked In terms of build rate changes and assumptions change in many parts of the markets, in particular, the commercial I think that's a better best picture I can give.

Speaker 2

Excellent. Thanks very much. It's helpful. Thank you very much.

Operator

This concludes our question and answer session and concludes the Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Howmet delivered 16% year-over-year revenue growth in Q3 to $1.658 billion and 18% higher adjusted EBITDA of $382 million, boosting the EBITDA margin to 23% and driving a 28% increase in EPS to $0.46.
  • All end markets remained robust, led by 23% commercial aerospace revenue growth (10th consecutive quarter of gains), alongside a 13% rise in defense, 7% in commercial transportation and 10% in other industrial segments.
  • The balance sheet strengthened further with $132 million of free cash flow, net debt/EBITDA at 2.3×, upgraded credit ratings (Fitch to BBB, Moody’s positive outlook), $200 million of debt paid down, $25 million in share repurchases and a 25% dividend hike.
  • Segment highlights included Engine Products revenue up 17% to $798 million with a 27.4% EBITDA margin; Fastening Systems revenue +20% with margin gains of 320 bps; Engineered Structures revenue +18% with sequential margin recovery; and Forged Wheels revenue +7% with EBITDA up 20%.
  • For Q4, Howmet expects roughly $1.635 billion in revenue, $375 million of EBITDA and $0.45 EPS, lifting full-year guidance to $6.54 billion, $1.485 billion EBITDA and $1.77 EPS, and sees about 7% revenue growth for 2024 to ~$7 billion.
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Earnings Conference Call
Howmet Aerospace Q3 2023
00:00 / 00:00