Q3 2020 Howmet Aerospace Inc Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to the home and Aerospace third quarter Twentytwenty results. My name is <unk> 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.

Thank you Steve Good morning, and welcome to the helmet Aerospace third quarter 2020 results Conference call I'm joined by John Flynn Executive Chairman and co Chief Executive Officer told the old co Chief Executive Officer, and Ken do you Koby Executive Vice President and Chief Financial Officer.

After comments by John Toga in Ken We will have a question and answer session.

I would like to remind you that today's discussions will contain forward looking statements relating to future events and expectations.

You can find factors that could cause the companys 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.

Thanks, P.T. and good morning, everyone and welcome to this morning's call.

I plan to give an overview of how much third quarter performance.

Hi, Paul good speak to segment information.

And then Ken who will provide further financial detail.

Lastly, I will return to talk to the outlook for the fourth quarter.

Any 20 financial yeah.

Please move to slide than before.

The third quarter performance was good and in line with expectations, including strong cash generation.

Revenue in the quarter was 1.1 billion, a 37% year over year and was impacted by commercial aerospace being down 56% driven by customer inventory corrections.

We continue to expect that she's the low point for higher revenues.

While anticipating that there could be some lingering inventory corrections that could carry over into the fourth quarter and possibly the first half 2021.

Commercial transportation was down year over year.

We had healthy sequential growth of 42%, which favorably impacts the fluids wheels and commercial transportation processing segment.

Moreover, we had growth in defense aerospace.

In the industrial gas turbine business year over year.

The mix of our portfolio has changed that approximately 40% of Q3 revenue.

Being tied to commercial aerospace.

Operating income excluding special lot, especially guidance was 100 million.

And this includes the buyout of an unfavorable long term contract, which cost $8 million.

This hopefully should be the last of the cleanup items over the last year.

Segment, decremental margins, including the contract termination with 37% year over year.

I had indicated on the Q2 call.

The third quarter was likely to be more decremented than the second quarter.

Reflects that we chose not to take out cost one quarter on risk not having the people assets in place beat what we expect to be an uptick in future demand.

For example.

Sales in the third quarter.

We completed all of the people reductions in our wheel segment and have since pulled people back on furlough I have begun recruitment in certain countries actually bring production assets back online, both forgings and machining lines.

Structural cost reductions will continue within each of the aerospace segment to the end of 2020.

And in the first quarter in Europe.

Third quarter.

It reflects further structural cost takeouts of 56 million, making year to date cost that take out of 137 million, which is ahead of targets.

This structural cost take out.

In addition to the flexing variable costs.

Which we expect by the end of this quarter 2021 should be out to perfect flex.

Further to this price increase use of 14 million were achieved in the third quarter compared to 9 million in the second quarter.

Year to date price increases of 28 million.

I'm pleased that all of the Twentytwenty long term contract negotiations on a completed on price negotiations are well underway for the 2021 long term agreements.

Now, let's move to the balance sheet and cash flow.

Adjusted free cash flow in the third quarter was very good at 188 million before further reductions in the accounts receivable to Cook securitization program.

Cash flow was 143 million after the reduction in the AOL program.

The 45 million of the accounts receivable assessor <unk> securitization reduction.

Well, it's effectively repayment of debt.

Cash severance payments in the quarter were 14 million.

The third quarter cash balance increased to 1.4 billion after the $51 million of common stock share repurchases, which were at an average price of $17.36.

Oh peak operational cash requirements are approximately 300 million, which results in ex <unk> excess cash in hand, well over a billion dollars.

Net debt to EBITDA is approximately 3.2 times.

Now revolver of $1 billion continues to be Undrawn.

Oh plots are running it's.

Now, let's move to slide five Oh plants are running with employee and partner safety being a top priority.

Kidney monitoring employee health risk on old programs meet or exceed local standards.

To best serve our customers, we effectively managing daily adjustments for customer inventory corrections and shutdowns.

Regarding cost out most of the North American permanent personnel reductions have been completed and our head of targets.

Therefore, we will be raising 2020 permanent cost outlook.

We also continue to flex variable spend and labor effectively with revenue.

A strict and disciplined capital expenditure process has been affected.

We will once again be reducing our annual capital expenditure outlook.

Lastly, we focus on working capital, but expect it to be use of cash and Twentytwenty asked we have reduced our A.O.L. securitization program by approximately 95 million year to date.

Moreover, we have stranded inventory, which we expect to be a source of cash in 2021.

Now, let me turn it over to talk about.

Thank you John.

Let's move to slide sales.

Be summarized on slide six the stats are so far segments.

Aerospace segments continue of its revenue adjustments that although slightly different threats.

Let me start with engine products.

Although strong defense aerospace industrial gas turbine growth continued into fourth quarter commercial aerospace and expect that customer inventory corrections and seasonal shutdowns.

We continue to expect that third quarter will be the lowest revenue quarter of 2020.

And we are ahead of our permanent cost reduction plans.

Additionally, we.

We are flexing variable labor and in direct costs with revenue.

Regarding our long term agreements 20.

2020 negotiations are now complete and we are actively working on 2021 contracts.

Our philosophy on price has not changed.

They actually product segments biggest challenge continues to be managing to stranded inventory.

Which had a modest reduction quarter over quarter.

Moving to fastening systems.

They're fastening system segment follow suit lacking reducing revenue trends, mainly due to the timing of commercial aerospace distribution business.

The decline in commercial aerospace, it's partially offset by growth in fasteners industrial business.

Regarding the permanent cost reduction fastener says the largest number of European locations within our business, which impacts the timing of cost reduction actions, but follows directionally the revenue reduction threats.

We are bringing this timing bits heavy furloughs and effective variable cost flexing.

Maintaining our critical talent and skill sets is our priority during this period.

The engineered structures segment has long lead time orders, requiring close discussions with our customers to level up their demand for an efficient operating model for the next six to nine months.

Permanent cost reduction actions are ahead of plan.

Long term agreement pricing negotiations are complete for 2020, including beating out unprofitable products.

In the Fortunately all segments.

Third quarter to one it's one of the revenue starts recovering from second quarter to one it's one.

As John mentioned short quarter sequential revenue was up 42%.

Top U.S. shipping ports are near or above record levels of volume reached that I striking to Matt.

We expect continued growth in fourth quarter, and tear called employees back from furloughs and restarted operations.

We have compressed permanent costs and have been effective in flexing production to meet customer demand.

Lastly, we renewed one of our largest customers long term agreements, while increasing share beat our you know either lightweight 39 pounds.

I will now hand, it over to Ken to give more details on the financials.

Nike Toga now, let's move to slide seven.

So before moving into the revenue and segment profitability.

I wanted to note that the third quarter revenue and profit was in line with expectations and better than the implied outlook that we provided on the second quarter earnings call.

The improved performance will be reflected in the updated outlook for the remainder of the year.

Now to the third quarter.

Total revenue was down 37% year over year, driven by commercial aerospace, which now represents approximately 40% of total revenue in the quarter.

Moving to the right hand side of the slide commercial aerospace was down 56% year over year.

Consistent with our previous outlook, we expect the third quarter to be the lowest revenue quarter of the year as customers adjust inventory levels.

Regarding the remaining 60% of the portfolio I.

I would point out that our second largest market defense aerospace continues to show year over year growth. It was up 15% in the quarter driven by strong demand for the joint strike fighter on both new engine builds and engine spares.

Our next largest market commercial transportation, which impacts both the forged wheels in the fasting systems segment was down 31% year over year. However, it's told that has mentioned we are seeing favorable trends for increased demand in this market improved 42% sequentially.

Lastly, the industrial and other markets, which is comprised of industrial gas turbines oil and gas in general industrial was down 4%.

I would point out that I T, which makes up approximately 40% of this market continues to be strong and was up 23%.

Now, let's move to slide eight.

On this slide we are providing historical information for the combined segments with an estimated operational view of corporate.

Compared to the prior year third quarter revenue declined approximately 660 million with a corresponding segment operating profit decline of 246 million.

Despite the 37% year over year revenue decline, we remain profitable and generated strong adjusted free cash flow in the quarter.

Included in the third quarter results. Our continued price increases of 14 million and continued permanent cost reductions of 56 million for combined benefit of $70 million in the quarter.

On a year to date basis price increases were 28 million in cost reductions were 137 million for a combined benefit of 165 million.

One last comment on cost reductions of the 137 million realized year to date. This includes carryover benefits from our 2019 cost reduction program.

This program generated $54 million of benefit year to date for 2020 and finished ahead of target [laughter]. The program is now substantially complete.

In the appendix, we have provided additional information, including historical financials for each of the segments.

Now, let's move to slide nine could go into more detail on the segments.

Engine products year over year revenue was down 43% in the quarter. In this segment commercial aerospace was down 65% driven by COVID-19, 737, Max production declines in customer inventory corrections.

Commercial aerospace was somewhat offset by 18% year over year increase in defense aerospace and a 23% increase in <unk>.

Third quarter results were impacted by an 8 million dollar charge to exit unprofitable long term contract.

Cost reductions and price increases continued in the segment.

And the team continued to flex variable spending to mitigate the impact in the quarter was the significant decline in commercial aerospace revenue.

Now, let's move to the fastening systems segment on slide 10.

Also as expected we experienced a steeper revenue declined it faster.

The third quarter year over year revenue was down 31% driven by commercial aerospace and commercial transportation, both being down over 35%.

Continued cost reductions combined with third quarter price increases helped to mitigate the decrease in revenue. However, a weaker product mix with less commercial aerospace and the expected delay in European cost reductions unfavorably impacted results.

In the near term, we are furloughing employees to offset the delay in European cost reductions.

Now, let's move to slide 11 to review engineered structures.

For the engineered structure segment third quarter revenue was down 35% commercial aerospace was down 54% driven by COVID-19 production declines on both the 787 and 737, Max as well as customer inventory corrections come.

Merkel aerospace was somewhat offset by a 26% year over year increase in defense aerospace.

Cost reductions and price increases helped mitigate the decrease in revenue, but structures experienced a weaker product mix with less commercial aerospace.

Lastly, let's move to slide 12 reports wheels.

In the third quarter revenue for the forged wheel segment was down 29% year over year, but increased 52% sequentially as expected.

Employees are returning from furloughs, and we continue to quickly flex staffing at variable cost to meet changing market demand.

Despite revenue being down 29%.

The impact of cost reductions resulted in a healthy EBITDA margin for the quarter of 26%.

Now, let's move to slide 13 for special items.

Special items for the quarter was a net benefit of approximately $23 million. After tax and included two items first a $36 million after tax benefit related to a us tax law change.

Second a 12 million dollar after tax charge related to severance programs. He severance programs are tied to the permanent cost reduction actions.

Now, let's move to slide 14.

We continue to focus on improving our capital structure and liquidity.

All debt is unsecured and our next significant maturity is in 2024.

Our cash position remains strong it increased to 1.4 billion in the quarter and is expected to increase again in the fourth quarter.

As we look into next year, we will use cash on hand to pay down the 2021 outstanding notes in the first quarter of 2021.

A couple of additional items of note first our $1 billion or five year revolving credit facility remains undrawn.

Second we have reduced our AE our securitization program.

Prior to the separation earlier this year, we historically sold 350 million worth of they are each quarter.

Beginning in the first quarter of this year the amount of they are sold through the securitization program was decreased each quarter approximately $20 million decrease in the first quarter, a $30 million a decrease in the second quarter and a $45 million increase in the third quarter.

The total decrease has been approximately $95 million year to date from $350 million. They are sold at the end of 2019 to approximately $255 million. They are sold at the end of the third quarter.

The $95 million reduction in they are sold its effectively a repayment of debt and unfavorably impact year to date adjusted free cash flow.

Before turning it back to John to cover the 2020 outlook let.

Let me review some assumptions on slide 15.

Depreciation and amortization is expected to improve to approximately $270 million for the year.

The annual operational tax rate is also expected to improve and be in the range of 27% to 29% for the full year.

Regarding capex, we are once again, reducing our annual capex spend outlook to approximately 160 million for the year, which is a historical low at 3% of revenue.

Lastly.

As a result of the common stock share repurchases in the third quarter, we are lowering the expected fourth quarter diluted share count to approximately 437 million shares and the full year average diluted share count to approximately 439 million shares.

Now, let me turn it back over to John.

Thanks, Dan now, let me discuss the outlook for the remainder of 2020.

We are improving the outlook and narrowing the ranges.

The improvement strengthen the sales increases EBITDA increases EBITDA margins of lists the earnings per share compared to the prior outlook.

Revenues in the fourth quarter are expected to be 1.23 billion, plus or minus 13 million.

On price increases are expected to continue.

If the dollar in the fourth quarter is expected to be proximately 255 million plus or minus 50 million.

We are once again, increasing our annual permanent cost that target 285 million $160 million.

These are savings realized in yeah.

Fourth quarter EBITDA margin is now increased to 20% to 21%.

From the prior midpoint of 20%.

I think this may be the most significant item about coal this morning beyond the good cash generation.

[noise] annual earnings per share improved to a range of 68 cents to 76 cents.

Cash generation in the quarter. Some separation Q2 to Q4 as strong an unchanged at 450 million plus or minus 50 million. Despite the third quarter incremental reduction in A.O. securitization, a 45 million.

Yeah, when cash is expected to increase once again to approximately 1.5 billion.

The event cash balance includes $95 million as I knew where does she didn't nail securitization.

$51 million of common stock repurchases at the average price of 70 36.

Approximately 300 million of share purchase authority remains on the prior announced board authorization.

Fourth quarter net debt of approximately 3.6 billion recent improvement post separation, which was started up 3.8 billion.

As we move into 2021, you plan to use cash on hand to repay the outstanding 2021 bond maturities.

During these uncertain times, we focused on the areas, which we control including price.

Of course, flexing structural cost reductions.

Thanks, redemptions on free cash flow, while being prudent with our cash.

To Opportunistically, you pay down debt and repurchase shares.

Moreover.

Diverse portfolio with less than 50% of revenue tied to commercial aerospace is delivering strong results, while we wait for commercial aerospace to recover.

Let's move to slide 17.

To summarize.

A third quarter was delivered in line or better than the implied outlook.

Cost and price leverage has been deployed we.

We have healthy and improving liquidity with positive cash flows in this kind of environment.

The fourth quarter outlook improved regarding revenues margins and profitability with earnings per share guidance raised no. Let me tell you though to take your questions.

Thank you we will now begin the question and answer session. As a reminder, please press star one to be placed into Q in a Q press the pound sign if he would like to be removed from the queue. We.

We request that you limit yourself to one question only and once again, ladies and gentlemen that star one for any questions well pause for just a moment.

The first question will come from Seth Seifman with Jpmorgan. Please go ahead.

Oh, Thanks, very much and good morning got John I'll have Dan Hi, One question I about this out you know news we saw recently about Pratt and Whitney are planning to start building airfoils in North Carolina, and basically you know how you view that.

You know what what it might reflect about customer behavior, and you know what implications that might have for how that and for your own strategy.

Okay.

First of all Weve not to discuss this with brands, but when you.

To reflect on the situation in the industry.

We work with.

Company is already that have their own testing capabilities. So for example, GE rolls Royce so from all have casting foundry is so that in itself is is nothing new to us.

ER and when we look at Pratt <unk> Whitney in fact.

They had their own casting capability until they exited named 2016. So we have a positive on the history of working with or without customers.

In this environment.

So it's a I would say nothing.

New or else.

We do feel confident in our position those Ah innovation and technology leader, especially in the hall, So section of the engine.

Or I mean, do we produce some very specialized blades, which are quite extraordinary like it has been at this for the JSF, which is really a product engine.

<unk>, if I come to little bit Philadelphia that you could almost some of the.

I'll say dep, so that capability is.

We do go to the extensive building our own furnaces.

We have proprietary coal preparation waxing and testing processes and measuring and.

Controlling the temperature gradient starting off with an average of.

300 degrees Fahrenheit higher than the casting temperatures.

All night, some costing temperatures are by competitors so.

Yeah, well one of the things we do is by keeping all of that's production equipment in house, So it's really not.

Ladies speaking about how and why we do it.

In any technical detail.

Enables us to keep I think the the technology.

Page and in particular, the scale that we have with it and the the know how to take ability and I think as you know we've been in this in this business in the 50 to 60 years.

So I think you know we have.

All three levels of caustic capabilities and all of the sub processes to replicate.

But which have met house would probably take it.

In the region up towards $10 billion of capital plus a model so.

No I I I always absolute respect everything with the cost of those two.

I'm, probably more importantly, we you know we have a competitive environment already with the other competitors.

But currently we are the market leader, but probably one and a half times, but I think it comes down to those very unique capabilities that we have and the experience of working very collaboratively with our customers to do the most extraordinary applications, where they already have.

Okay abilities and so this would mark you know a yeah.

Probably what you turning to being a hub having in house capability alongside GE.

Aviation Rolls Royce himself from so hopefully that covers it up for you also.

Okay. Thanks very much.

You bet.

The next question will come from Robert Spingarn with Credit Suisse. Please go ahead.

Good morning.

Well two things first a clarification on what you just said and then a question just specifically I'm proud how protected is that position with contracts and L. T. A's. If you think about your overall revenue there and then just given your visibility on commercial Aero, which I don't know if it's any better than anybody else's, but you seem to have the confidence.

I wanted to guide up today to buy back stock can you talk about trends from here on that 56% decline in Q3 in commercial Aero revenue, how youre thinking about that percentage number as we go forward. The next few quarters. Thank you.

Okay <unk>.

I don't think there's much to add to the.

Property conversation, we do have a long term agreement covering many years in place. So I think that so that's the good news in all of this.

So much of anything else I'll move on to a highly.

C or the balance of year, and then just 2021 for us.

We did call out the third quarter.

In a previous earnings call in early August we felt that it would be.

Hello.

Felt that it would be the most severely impacted by inventory reduction to that customers.

And as you know we operate both the first t. a place that make it be moving in a bus and also a second taking place in terms of some of the engine parts that we supply to the engine manufacturers and so you get or an increased inventory effect as you go through a number two in the supply chain.

And that's why we felt back in a in August the tried to indicate a deferral also calling out back then that we have.

Well go slow with the majority.

The severity of the image reduction you would try to accommodate and work with our customers to accommodate it sooner or later well have a drag out in a in a long tail.

And we we all clear that you know we're not completely through this it's going to continue.

I will have an impact into the fourth quarter of in some areas.

Into the only bought a 2021.

And that's taking into account the the planned increase in a in a bus and other body sales we know.

We're taking that into account at this point, but we do feel that revenues will improve in the fourth quarter.

And that gives us the plot hold that we always schools.

To to really get 20 to 20 long frames as best as we could.

Maybe talk at amplify the point, we set out.

Okay, and the the depths of the let's quit haga who'll locking in a in the second quarter, we didnt know very much.

So oh, Oh targets was to move quickly.

To address the problems that we saw coming from the commercial aerospace market.

I'm, calling it that we would.

Viciously try to achieve the exit rate EBITDA margin or not but not through the present area.

We indicated that or clearly.

Feel confident enough to know that we increased the midpoint of the fourth quarter guidance, a a little bit.

Until sold at around that and that was really to try to give.

Given the best view, we could it be exit rates, which obviously helps when we view I know 2021 profitability, albeit today, we're not guiding that's all I got for revenues or margins were 2021 that really is a oh.

Fourth quarter cool, but the the end of January early February.

So we all come for them, but the the third quarter.

It was a low.

We do see your revenues in the in the fourth quarter Ics are increasing.

The you know increasing not just in a in commercial transportation, which is self evident but also in the in commercial aerospace.

For US is part of it is the it's the natural rebound from the in but you take out in Q4 I.

I mean, where do we go from here and so there's so many things that we need to think about for 2021 and you look out d. If about clearly we'll know a lot more three months from now you know whether it's this morning was the black Sea news or whether it's <unk>.

Oh narrow bodies, a strong business as we see has Maxine are you completely re certified around the world and what's the the build rate and build late getting into 2022 <unk>, what's the inventory build to accommodate all of that so there's so many factors, but so I'll say it maybe I've spoken to London.

But it's it's really is comprehensive the court is below.

Oh, we are going to see that defense spending continue analogy t. stretch into the fourth quarter.

Rebound in commercial aerospace sales.

Commercial transportation currently with the the wouldn't behind its back in terms of volumes from our customers for commercial truck and trailer manufacture until all of them do you see do.

Do you see commercial aero trending up sequentially quarter by quarter from here at least from the down 56 in Q or.

I I am not going to go beyond the the fourth quarter at this point I don't feel as though who Ah I know enough to really.

Good quality publicly about the quarter the sequential production through through next year.

I think we need a little bit more knowledge.

I'm, hoping that.

The production of Boeing or begins to increase next year or for the narrow body noticed affecting anything from wide body.

And ER and we await confirmation those the you'd be a bus or situation in terms of so the deprecation Oh stock in production schedules, which are which are busting did announce that increase of almost 20% in the narrow body production in the halfway through next year. So.

So I feel good that we see an improvement in the fourth quarter mapping out.

2020 long or what happened to each quarter. It is just a bridge too far for us at this point.

The next question will come.

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

Thanks, Good morning, everyone.

Oh do.

Uh Huh, John or Ken I wanted to go back on your comments on on working capital I think prior you've been calling for working capital but to be a tailwind.

This year, but it sounds like a Mac or talking about maybe a b make a headwind for the full year, but then some inventory when we seen in 21. So if you could clarify that and then I guess any sort of early indication or early look in terms of how you're thinking about.

Pension next year. Thanks, Okay.

So maybe if I.

Start at the top level to say why we see wasn't capital we called it out differently is to be a useless yeah.

And now I'm going to hand, the cross the toll go to talk a little bit about dropped inventory, what we have this year and into next year.

So, let's let's do not see couldn't some let's say I cover the two points, which is ER.

Why do you see this year.

Oh man the pension side of course, it's all though so.

So.

They used essentially is a is that they all securitization played out it goes through it.

It's fixed working capital when he goes through that line on the cash flow statement acute exam.

Exempted the <unk> 95 million.

And that would be working capital inflows for the year. So it's a function of the the accounting around the securitization.

One thing David that you know I've always felt a little bit uncomfortable about because we are we had this ah off balance sheet financing, which was a carryover from alcoa.

The 2016 separation a carryover from the Arconic go separation.

I read that securitization into peak is always be the remainco and wanted to to gradually worked that down which is effectively just Ah you know working down of a delta of the company and feel that its a good thing to do it also improves the interest.

Kinda recalls the company. So that's the the principal reason around it and if you were to do that you will see.

I are improving or 80, a unique under good control on our imagery imagery speed, but you said the normal definition of working capital would be.

In good shape, but it's just a function of this oh securitization played which goes through the working capital line.

Coming on pension then pass across the toga, if the pension at the moment. So we do see that Oh, that's cool, but enables talk basically is that 2021 that will be lower.

In Ah then 2020 in terms of pension contributions and we'll give you a more exact number on Bob.

At this time he wants out fourth quarter results like these that told me if I could ask you to comment on truck inventory of both through engine across the segments and also the we've been to 2021.

Sure John.

Hey, it's important to highlight that we are reducing our inventory and b are supporting the cash generation. However, if you look at the scale of the reductions into stranded inventory in hand.

Today, So on hand translation is naturally under pressure.

So the two segments that they have the highest pressure on the stranded inventory, our our Asians and structures businesses. So.

So I mentioned that we are working very closely with our customers to levels that demand into production levels, especially on the structure side, especially on days it lumpy time orders and therefore, we project that is.

[noise] trended even said it will continue into 2021, and we should be felt I've seen car days on hand bid in 2020.

We are managing also they stranded inventory on the engine side and.

We have some more adjustments that we have working with our customers, but we expect the impact will be much smaller.

I'd be got minimal impacts for the segments like fasteners on David's stranded inventory said that their active dimensions.

Great. Thank you very much thank you.

The next question is from Gautam Khanna with Cowen. Please go ahead.

And if you wouldn't mind opining on kind of the pricing opportunity and 21 22 and 23 at the Investor Day, you gave kind of a longer term outlook and I wonder how that's changed you know maybe relative to 2000 twentys actual price.

Realization.

If you can give us any flavor for that.

That'd be helpful. Thank you okay, Okay, well first of all let me call on some 2020 that it's not complete.

You saw the the third quarter of a comparative to the second quarter I'm. Good list, the solidification and completion of those those agreements for full 2020 the old Don.

Regarding a 2021 the the several LTAC involved as always as you know they are different customers different years different products are they all they do separate.

The dialogue as you know covers price show a show me technology programs goals it jumps conditions.

I'm pleased that up to the progress so far on the 2020 ones.

Lead there are a couple of major ones within a 20 to be lumpy and basically I'm going to say to you that everything that ER. We are seeing is going to be consistent with what I've said before.

But the 2021, we'll we'll be on on the same body basis, a biggie for us, though no 2020.

Difficult.

This of course plays well into as it goes into 2022 2023, when hopefully a commercial aerospace volumes are beginning to show you a increases on quickly. So they can take significant increases.

And so those increases price increase it to get applied to that higher volume sales.

If I look at the current status for 2021.

We're currently about 60% complete say were probably a little bit earlier than normal no in gauging this item through.

I expect though continue to fill in over the next few months.

But the important thing is 60% of all 2021 is now complete.

Fine.

And the 2023 2022.

Yeah. The you know I don't believe that it will be as big a year was 2021.

But are there any other you know there's not much color I'm able to give you a yes on 22 and 23 apart from yes sales yourself in like in the positive side.

<unk>.

Thank you.

The next question will come from Carter Copeland with millions research. Please go ahead.

Hey, good morning, gentlemen.

Uh huh.

John I wondered if you could maybe just clarify that the share comment you made earlier the one to one and a half times is that does that imply a a 60 40 split.

Split and if that's not right. If you could correct that for me and then I just wondered if you might.

Kinda give us a sense of hot section versus Cold section are you you went to great lengths talking about the capabilities on into the Hot section airfoil Olson and I just wondered if you could around that share.

Disclosure give us a sense, where in the engine that might be higher or lower than the aggregate. Thank you.

Okay.

When we exited.

2019 show was that the pro market was amount about 49% plus or minus Oh said both of them.

Our next largest competitor was that we went to them.

Three so it was about 50% greater than the largest component. So all in all that mess basis relative market share basis.

On the whole time.

If you break it down than our market shares would be higher.

The the persky blades in the in the turbine so we'd be at the hospital Super wholesale.

It's a time when our market shares with the Oh, let's say for the types of this cool in excess of 60% or not they are you at all.

And depending upon the application could be as much as the hub.

So that gives you some idea the at the market share to build market share and topology within the engine.

Great. Thank you for the color.

Thank you.

The next question is from George Shapiro with Shapiro Research. Please go ahead.

I was wondering in your raise for the year was that mostly due to how much wheels has recovered in the aerospace was comparable to what you saw last quarter, where he could provide some color on that and then also the incremental margin on a sequential basis.

Listen wheels was like 49% I mean, what's kind of a sustainable incremental margin for that business. Thanks very much.

Okay.

First of all.

Clearly realty is a benefit to us as we move the Q3 into Q4, so that is not.

The ER that is not the sole reason for the improvement in the EBITDA margin guide.

We also are seeing or.

A benefit in taking our commercial aerospace business. So its a student in all aspects of the business.

Thing, which is a country lagging you now plan to a of any of the implementation of the cost flexing no structural cost take out so it's across the board George sales who yeah.

But clearly within that when I look out and or the.

The strength of the wheels business is is coming through.

And so I'm hopeful.

So EBITDA as we go it was we started up in a in 2021.

The ER getting close so it's not as good as the the 2019 margin rate, even though we know we will not see the revenues in a in 2021 as good as 2019.

In the last earnings call I did state that we saw revenues in that business and then getting back to the 2019 levels in Twentytwenty two but I think we we are looking forward to margins getting back to the year, rather not give that the structural cost take out some conflicts.

And basically improved and the cost base that we have.

Okay. Thank you very much thank.

Thank you.

The next question will come from Josh Sullivan with the Benchmark company. Please go ahead.

Hey, good morning, John Ken.

Just a question on fasteners, you know you mentioned some reading out of unprofitable products. You know how much volume did that include have you outright exited any aerospace products and particularly just some color there.

Great.

First of all.

The the the.

But my mail back up and get told a bit of thinking time until it's on the hospital side, where but the the exit of the what we talked about the unprofitable contracts, we haven't called out the segment. That's your intrastate wasn't class knows.

Wherein Ah you know I think largely good shape. There's always things you can do to try to look at certain things with job local billings performance, but basically this was the exits of something which was loss, making and ER and needed to be dealt with two we didn't want to carry the problem in doing so.

So what I'm.

But maybe as a broader comment on five snows told if you'd like to say, a where we see you know basically apart from one or two areas, we fairly good shape.

Yeah, I I, just looked like to it.

Clarified it my comments about beating outflows on the structure side if fuel contract.

Renegotiating our price.

Pricing.

And in general the kids being very positive cost structures and certain part numbers it where she historically not good. So it'd be continues to be chose the option not to renew those bonds. It's in the big picture not significant for us.

And beneficial for the business.

Specifically talking about the fasteners or.

Contract negotiations struggling bit positive answered renewals have been very good and you do not really have any specific action. It to specific they're looking to peak numbers of contracts that have given us margin issues, but again.

Overall, it's been a very positive contracting you vote for all of our segments, including <unk> fractious fasteners and engines.

So if I kind of got John.

Yes. Thank you.

HM.

And once again, ladies and gentlemen, if he would like to ask a question. Please press star one again Thats star one for any questions over the phone line well pause for just a moment.

And the next question will come from pair Telos Miss route with bearing Baird. Please go ahead.

Thank you and thanks, John and Ken for all the color I actually had a question for coal Guy if I may I'm told.

You have been with the firm now a bit hunger actually just curious any initial impression as to what you have seen then what are some of the opportunities for the firm that you see a had a anything that surprised you. Obviously very unusual times just started in euros, but would appreciate any thoughts that you could share with us.

Sure, Hey, I think I'd like to start with the car.

Comment that constitutional leadership it Hameed aerospace is key for us excess.

So.

Okay I Fabian.

Immersed in involves deploying that businesses since my announcement that the Investor day.

Just with the separation of course, and then of COVID-19 crisis I have been leading to cost containments cash preservation activities.

Driving she stopped flaring customer negotiations.

And.

Most importantly, I'd like to emphasize that.

I haven't strengthening fundamentals fulfilled grading playbook that John is introduced to.

Comment last year, and John and I have been working on this operating playbook for a long time.

And you have a plan, but John that we're rolling out step by step and we are definitely seeing now the results and the benefits of having garnered disciplined.

Rating playbook in place to continue enrolling in theater and feel comfortable so as I recall that process going into next year.

Does that answer the question.

Yep.

Thanks. Thank you ma'am I spent much Josh thanks, Josh.

The next question is a follow up question from George Shapiro with Shapiro Research. Please go ahead.

Yeah, John I, just wanted to pursue a little bit more my question. So is aerospace better in the fourth quarter than you thought it was going to be in the third quarter and if so in what way. Thanks.

Thanks.

I suspect the the benefits.

I mean, the slightly better volumes than we'd anticipated. We you saw the revenue increase so it's not just the wheel. So it's a little bit the event, but that could also be down too conservative assumptions. So we tend to do to roll with.

I think the cost Takeouts, you see boots on the structural side I'm not gonna stay together, you see not improve they'll be better.

And then.

Or probably even more important it's a bigger number than that he structural cost take out as these are variable cost take outs, which we've never called out the absolute dollars because it wasn't beats the relevance of bodies. The percentage I know you are you getting close to what we call the perfect flex.

We see ourselves flexing the cost base, a little bit, but oh of course, all the only areas, but in particular.

The podium promos bdcs in the commercial aerospace business about flexing the cost base has been a higher order.

And done but again planful.

Again, partly because we tend to plan conservatively and then see if we can or exceed it so.

So that's where Ah, that's where it's Oh I'm not saying that's a that any increase in aircraft build anything like that that's not a that's not the case based is it could be in the fourth quarter. Moreover, the assumption.

Assumption that we've made with them at this point, we feel confident about the the revenue lift that we've talked about the yeah. The cost take out the therefore the improvement in the ER. The EBITDA margins that we've called out because for US that's all about the platform we enter a twin.

21 risk.

Thanks, very much for the follow up.

Thank you.

The next question is a follow up from Gautam Khanna with Cowen. Please go ahead.

Thanks for the additional question John I was wondering if you could maybe frame for us or level set us on why the company is able to get pricing.

And what looks like a particularly stressed time for your customers and.

Is it a.

Is it sort of a rolling one time mark to market on some of the contracts that.

How many inherited from the legacy companies, maybe that were off commercial terms relative to your competitors.

And therefore, you know you're just kind of reset the market maybe half.

FX energy pass throughs on metal things like that weren't.

Well you know you were taking too much risk on the legacy contracts relative to your competitors or if it in fact.

The customers wanting.

Recognizing the value you guys provide and just you know you're seeing price inflation in the end market because again I'm just trying to square with what you guys said ER.

Before your time as CEO, you know or chronic used to talk about price deflation as a reality in aerospace.

And I used to have floating bar charts that show to the owners flights and now we're talking about the opposite trend over an extended period in a downturn.

Just if you could help square why that is.

Still true.

Thank you.

Yeah, I mean I'm not.

Blue column and.

We did sell some management stance towards it.

And I.

Originate so many mystery, which is cool really you know the Moody's is probably more used to price deflation.

HM claim to the monetization of that's the input Oh products for vehicle Assembly.

But even.

When I when I was looking at it very closely.

Heading in the US then.

The.

Technical capabilities and performance differentiation of the products. So even though for example, I don't believe the steering wheel on a vehicle is is the old studios are equal a very different due to the capabilities cosmetics quality a deliberate.

So it really is trying to really understand the performance differentiation, but.

The product.

I'd like to believe that how about provides us not only in product quality technology.

But also in delivery performance and consistency with that with my customers.

Oh always tried to work collaboratively collaborating with our customers.

To to maximize the value for both of US Oh, I'm, so inherently not cool that's all.

The aerospace parts market in quite the same way as would be Oh, My God I don't believe inherently that it is.

Consistent with past deflationary or anything like that I think there is a risk.

Good.

<unk> capabilities of most of the parts that are produced in aerospace a technological one those in their own rights.

To achieve a level of safety and before month or the traveling public.

Which is quite extraordinary I'm going to answer my my hats off to everybody in the industry.

Right.

Second tier levels close to let alone helps if need be.

Claim on the subject themselves.

But within a <unk> I do think I don't believe this is just the any correction a pastiche. This approach and it's just you have cleaned out one or two contracts which were.

Are they.

Inappropriate take <unk>.

That's gone I tried to indicate that although when it comes on the coal that so.

I think we know you all but or.

Dealing with such things and that's why I called out the money on in the in the corridor in the normal operating can be pretty the milk like yourself and not as a special item.

And and then I just think it's very consistent application of those.

Okay characteristics. So we will never we never arresting if you look at the some of the developments that were making using within our portfolio.

<unk>.

<unk> for Ray Durrell Pos for engine as we were trying to balance them all the time.

But I did try to call out the descriptions of these things, which we truly trying to protect and even to the extent of not buying a lot of the machine tools outside shifted that knowledge can't leak out into the wider marketplace and so when you go to that level of Massachusetts, making your own.

Equipment.

Because it gives you that.

Yeah, I'll say capabilities, which we which we think is extraordinary I think that does give you the ability to look out.

Price and also the Oh.

I'll say devalue produced at the scale with which we do with that and often think people underestimate scale within such things.

The economics of production and also the methodology, which you can create the scale.

So it's a long way of saying I I think the attitudinal. Some says is different sales.

Same time now I do recognize that there are parts that we are able to improve the economics on the parts that we we do concede price to echo some say so it was a range of <unk> and Ah you know good negotiate these negotiations. So it was important that we end in a place of equanimity everybody's feeling good.

Or do the shares all settled on the prices all settled and then we move on for us for several years.

It in the ground that we've just been implementing.

Yeah. So for the you know five years on the majority of our parks are going forward. So that's a you know again the good.

Condition to be in you know not commented about the.

The.

Just SMIC so any.

Essentially increases I think that's not that's not appropriate I'm not going to comment on share actually the bluff separately, but apart from that we were in the divides zone that we thought we'd be in the I think in every body for myself enough customers was a place of goods.

Thank you.

Ladies and gentlemen, we have reached the end of the amount of time for the Q1 day session. Thank you for participating in today's conference call you may all disconnect.

Thank you.

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