Q4 2020 Howmet Aerospace Inc Earnings Call
Sure.
Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace fourth quarter 2020 results Conference call. My name is Thea and I will be the operator for today as a reminder, today's conference is being recorded for replay purposes I would now like to turn the conference call over to your host for today, Paul Luther Vice President of.
Of Investor Relations. Please proceed.
Thank you Phil Good morning, and welcome to the Howmet Aerospace fourth quarter 2020, and full year 2020 results conference call.
I'm joined by John Plant Executive Chairman and co Chief Executive Officer told the old co Chief Executive Officer, and Ken Jacobi, 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 of the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In addition, we've included some non-GAAP.
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.
Yeah.
Thanks P T and welcome everyone to our fourth quarter call.
Following the same fool of myself as last quarter's earnings call on.
Trying to give an overview of the fourth quarter performance of tall of Google then speak to segment information.
And can and will provide for the financial detail.
I'll return to talk to the outlook for the 'twenty 'twenty one for non sure yeah.
So please move to slide number four.
On the first let me provide some qualitative commentary you call. It in the fourth quarter before moving on to specific numbers.
The fourth quarter played out as expected and guided.
The results were above both the consensus on the improved outlook that we provided in November.
Revenues rose compared to the third quarter.
Due to the lesser impact of commercial aerospace inventory corrections.
Performance improved again on the decremental margin year over year was 24 per cent.
The which was an improvement from the decremental margin in the third quarter, which was 37 per cent.
The incremental margin on the revenues benefited from the utilization of labor that we held on to the third quarter in order to meet the expected increase in fourth quarter revenues, which were 9% as approximately forecast.
First of all the third quarter included the 8 million write down of of long term contracts that we bought out.
Moving to specific numbers.
Revenues improved Joseph third quarter by 9%.
And the 29% lower than the fourth quarter of 2019 due to the reductions in commercial aerospace the <unk>.
Fourth quarter EBITDA margin was 22, 8% on the head of outlook.
The fourth quarter EBITDA margin in 'twenty 'twenty, one I was in fact, the same as the fourth quarter of 2019, while mitigating the market reductions on commercial aerospace adverse mix.
Performance was driven by the time net cost reductions on price increases.
Lastly, the fourth quarter earnings per share was 21% again ahead of consensus and that's the top end of all of our outlook range.
Moving to cash free cash flow for the fourth quarter was positive.
$268 million, which is the third consecutive quarter of positive free cash flow since separation.
As you know we define free cash flow very conservatively at the net cash off the everything I asked the pension after all of securitization pay down et cetera.
Q2 through the Q4 free cash flow was $487 million on above the outlook. The 400 and some T. Eight of 487 million includes the 19 million reduction.
In the accounts receivable securitization.
A $70 million of our cash flow to pay down in incremental voluntary pension contributions.
$47 million of severance cost and we did receive a 45 million tax refund.
Without these one time items free cash flow would indeed have been 638 million.
Full year cash free cash flow as a percentage of net income was 115 per cent well above our guide of approximately 90 per cent.
On would've been approximately 160 per cent, excluding the onetime items mentioned.
You are on cash balance was also ahead of us look at $1 6 billion.
After repurchasing $73 million of common stock throughout the year at an average price of $18.98.
Now, let me tell the types of Targa to highlight segment performance.
Thank you John.
So let's move to slide number five please.
Hip so far people is the top priority is the.
Covid cases continues to increase worldwide in the fourth quarter.
Our operations pick the contingency and customer demand with no nature of it.
Yeah.
Our segments remain focus on the cost containment and cash preservation targets in the fourth quarter.
Structural cost reductions exceeded the outlook.
Effective variable cost flexing.
And Carlos continue the in specific locations diminished.
To manage the sales fluctuations in different segments.
Cash management actions continue the clock speed.
Strict capital expenditure control strong accounts receivable collections.
And the effective inventory management with the key customer stranded inventory of discussions in the background.
Trivia that's of high Mets fourth quarter cash performance.
That's most of these please.
I will start with engine products.
Commercial aerospace the revenue show of course on the improvements with the third quarter of seasonal shutdowns impacts not repeating.
And inventory adjustments slowing in language out of expectations.
Defense and aerospace.
And the industrial gas turbine growth continued in the fourth quarter.
In fact, the variable cost flexing.
The private permanent cost out ahead of the plan have contributed to our incremental margins from the engine side in the fourth quarter.
We are expecting the stranded inventory discussion with our key customers to continue.
Fastening systems industrial business continued to growth balancing the timing of commercial aerospace distribution business in the fourth quarter.
I mentioned in our last earnings release that the fast on this business is the highest number of locations and.
In the permanent cost reduction of gain traction across the dislocations in fourth quarter.
We continue to bridge the timing of pending productions with target that sort of loss and such just the variable cost flexing improving our operating margin relative to the flat revenue in the fourth quarter versus third quarter.
The engineered structures segments revenue shocked the small increase in fourth quarter versus third quarter. While we continue the level loading of our operations for an optimized operating model of Florida being the long lead time orders.
We are ahead of hot cold stock plans.
Implemented additional head count reductions to get rid of for the latest announcements in the 70% of the build rates.
Cost of plants are running ahead of plan.
Contributor to incremental margins also on the structure.
Commercial vehicle market recovery in the fourth quarter led to a record quarter of the profit margin for the build segment.
While the markets continue to recover.
Increase in kind of low cost country of content.
Keeping permanent cost compressed.
And increasing the share of hardware evolutionary charge of nine pounds meals led to very healthy incremental margins in the fourth quarter.
Let me now turn it over to Ken to provide more detail on the financials.
Thank you told them.
Now, let's move to slide seven.
For additional details on the fourth quarter, let's start with revenue.
As expected revenue was down 29% year over year, driven by of 51% reduction in commercial aerospace and the 10% reduction in commercial transportation.
These markets were partially offset by continued growth in defense aerospace and industrial gas turbine markets.
On a sequential basis, although commercial aerospace grew 5%, we do expect the meaningful recovery in commercial aerospace in the first quarter of 2021 due to lingering customer inventory corrections.
Regarding the defense aerospace commercial transportation and IGT markets. They all had double digit sequential growth.
Operating income excluding special items was down 28% year over year with commercial aerospace representing 40% of total revenue compared to 60% in 2019.
Permanent cost reductions and price increases continued in the quarter permitting.
Permanent cost reductions were $60 million in the quarter and 197 million per the year, which were ahead of our outlook.
Price increases were $11 million for the quarter and $39 million for the year, which were in line with our expectations.
Take care of mental and marketed as the route to 24% in the fourth quarter compared to 37% in the third quarter.
Fourth quarter earnings per share was 21 cents, which was ahead of consensus and at the top end of both of the outlook range.
Moving to the balance sheet and cash flow John covered the full year and post separation numbers, which were ahead of the outlook.
I would add that in the fourth quarter. We finished the year with $1 6 billion of cash after repurchasing an additional 22 million of common stock in the quarter at an average price of $23 of 99 cents.
The main and common stock repurchase authority from the board of Directors is 277 million.
Lastly, net debt to EBITDA.
Was three two times on a revolving credit facility of $1 billion remains undrawn.
Please move to slide eight.
Slide eight is the summary of EBITDA margin performance.
The fourth quarter EBITDA margin of 22, 8% was ahead of the outlook and at the same level as the fourth quarter of 2019, despite a 29% revenue decline and an unfavorable commercial aerospace mix the.
The improvement in EBITDA margin was driven by price increases variable cost selecting and permanent cost reductions.
Now, let's move to slide nine.
Before moving into the revenue and segment profitability I would point out that the fourth quarter revenue was in line with the outlook at one point to three 8 billion, while profit was more than 10% or 27 million better than the outlook.
Now for more detail on fourth quarter year over year revenue performance.
Revenue was down 29% driven by commercial aerospace, which continues to represent approximately 40 per cent of total revenue in the quarter.
As previously mentioned commercial aerospace was down 51 per cent year over year, which showed a 5% sequential increase.
Our second largest market defense aerospace.
The show growth and was up 24% from the quarter and 10% sequentially driven by demand for the joint strike fighter on both new airplane builds and engine spares.
Our next largest market commercial transportation, which impacts both the forged wheels in the fasting system segments, which day.
The 10% year over year.
We continue to see favorable change for increased demand in this market improved 15% sequentially.
Finally, industrial and other markets, which is comprised of IGT oil and gas and general industrial was flat.
But up 12% sequentially.
IGT, which makes up 45 per cent of this market continues to be strong and was up 38 per cent year over year and up 3% sequentially.
Moving to slide 10.
Quickly cover full year revenue performance.
For the full year revenue was down 29% driven by commercial aerospace, which was down 38%.
Commercial aerospace represented approximately 50% of revenue, which was down from approximately 60% in 2019.
Defense Aerospace was strong throughout the year it was up 14%.
Defense Aerospace represents almost 20 percentage of total revenue.
The commercial transportation was down 31 per cent for the year, but showed the strong recovery trend in the third and fourth quarters.
Finally.
The industrial and other markets was up 1% with IGT up 28% as the IDE.
G T remark market rebound from a weak level in 2019.
Now, let's move to slide 11 per the segment results.
As expected.
The <unk> products year over year revenue was down 33 per cent in the fourth quarter <unk>.
Commercial aerospace in the segment was down 58% driven by customer inventory corrections.
Aerospace was partially offset by a 30% year over year increase in defense aerospace and of 38% increase in IGT is IGT benefits from continued favorable natural gas prices.
Decremental margins for engines improved to 18 per cent for the quarter compared to 34% in the third quarter.
On the appendix of the presentation. We've provided the schedule of shows how all of the segments decremental margins improved from the third quarter two of the fourth quarter.
Now, let's move to fastening systems on slide 12.
Also as expected fastening systems year over year revenue was down 30% in the fourth quarter.
Commercial aerospace on the segment was down 38 per cent and commercial transportation was down 21%.
Like the engine segment, continuing experienced inventory corrections in the commercial aerospace market deck.
Decremental margins for fastening systems improved to 45 per cent per quarter compared to 58% in the third quarter.
Now, let's move to engineered structures on slide 13.
Engineered structures of year over year revenue was down 30% in the fourth quarter.
Commercial aerospace on the segment was down 52% driven by customer inventory corrections and production declines from both the 787 and 737.
Max platforms.
Commercial aerospace was partially offset by a 40% year over year increase in defense aerospace.
Decremental margins for engineered structures improved to 24 per cent for the quarter compared to 27% in the third quarter.
Lastly, let's please move to slide 14 for forged wheels.
The Orchard wheels revenue was down 6% year over year, but increased 18% sequentially as expected.
Despite the loss of revenues the wheel segments operating profit was higher than last year and operating profit margin was at a record high of 30%.
The improved margin was driven by continued cost reductions.
Moreover, with the reduced volumes, we're able to shift production temporarily the low cost countries, including Hungary, and Mexico, which improved our margins.
Lastly, we've been increasing market share with the new innovative 39 pound wheel.
Now, let's move to slide 15 per.
Special items.
The special items for the court.
Were a benefit of approximately $14 million after tax primarily due to insurance proceeds received per fires of true of our plants. Additionally.
Additionally, a favorable outcome of the Spanish tax assessment.
Assessment, primarily the offset or severance cost.
I'd like to comment and provide further perspective on how much post separation special items for.
For the past few years, we undertook the major restructuring the performance improvement program, including the separation of our kind of corporation.
Post separation of the after tax charges in 2024 of approximately $100 million driven by two items first of voluntary U K pension settlement charge of $55 million in the second quarter, which reduced our gross pension liability of $320 million and then second in April we paid down and refinance.
The card yet it didn't after tax cost of $50 million.
The refinancing at the $420 million of cash to the balance sheet and refinance the portion of the 'twenty 'twenty, one and 2022 bonds two of maturity in may of 2025.
Regarding the balance of the other special items.
Pretty much all net it out.
So now let's move to the capital structure liquidity on slide 16.
We continue to focus on improving our capital structure and liquidity.
All that is unsecured and our next significant maturity of October 2024.
Gross debt at the end of 2020 was $1 5 billion of net debt was $3 5 billion.
Strong cash generation in the year as we reduced our net debt by approximately $370 million since separation.
Moreover, as we previously mentioned, we decreased our U K gross pension liability by $320 million.
But the two additional items of note.
First our $1 billion five year revolving credit facility remains undrawn.
Second we have reduced our AR securitization by $100 million in 2020.
This reduction in our sold was effectively a repayment of debt, which increases working capital and reduced our 2020 adjusted free cash flow as John mentioned.
Lastly on January 15th of 2021, we used cash on hand to complete the redemption at par of our 2021 bonds that were due in April.
Paying down the bonds of three months early at no additional cost we saved $5 million of interest cost on.
On an annual basis interest cost of reduced by approximately $19 million.
Now, let me turn it back over to John.
Thank you Ken and the please move to slide 17 for closing remarks on the fourth quarter.
On the 'twenty 'twenty before talking about the 'twenty 'twenty one outlook.
Revenue was in line with the outlook well profit margin exceeded.
The differentiated products and the ability to scale. There's also the price increases in line with expectations.
Permanent cost reductions continued on accelerated throughout the year, which also exceeded our outlook.
The fourth quarter EBITDA margin rate of 22.8% exceeded the outlook was at the same level as the fourth quarter of 2019, despite some 29% less revenue on that.
The unfavorable commercial aerospace mix.
Regarding liquidity.
The free cash flow of cash balance exceeded our outlook.
Full year of accounts receivable securitization was reduced by 100 million on voluntary pension contributions were made of $70 million on.
The severance costs of 51 million of mine could well be we had tax refunds of some $78 million.
For the of Capex was favorable to the outlook of 3% of revenue the.
The $155 million spent.
The $100 million less than the depreciation of 206 to 9 million of.
Adjusted free cash flow, what's ahead of US look at 487 million for the second through fourth quarters on 387 million for the full year.
Net debt was reduced by 370 million since separation.
Additionally, at the gross pension liability was reduced by some $320 million.
Cash increased to $1 6 billion.
$100 million of beat the guide after the repurchasing of $73 million of common stock throughout the year at an average price of $18.98.
2020 was another year of heavy lifting off.
The separation, we refinanced the balance sheet placed into the Covid pandemic of the impact on the operations and on the sales demand and further improved our balance sheet.
Now, let's move on to slide 18.
First let me comment on the 'twenty 'twenty one outlook qualitatively.
Our end markets of defense Aerospace commercial transportation and industrial gas to the bonds continue to be healthy and growing.
Commercial aerospace has less visibility on it.
The flex up you got in the global vaccine rollout.
The acceptance.
The impact on travel.
Airlines travel should improve especially for short haul routes, which may help the fitbit narrow body inventories, especially for Boeing.
We expect improved clarity on these factors as we move through 2021.
Regarding commercial aerospace, we expect increase the aircraft build especially as the move forward into 2022 and beyond.
This will help but the inventory clearance and shift to an inventory build situation, which will help rebuild the pipeline of that.
Kraft parts.
Now, let's move to the specific numbers.
Revenue for the first quarter is expected to be $1 2 billion, plus or minus $50 million.
Okay.
The EBITDA, we provided you do with the baseline figure.
With the range of minus $5 million, plus $15 million, so between $2 45 and $265 million.
Our EBITDA margin is range from 28 per cent to 21, 3% on.
The earnings per share is the 16th since the 16th baseline with the range of 15 to 19 cents.
In Q1, 'twenty 'twenty, one and we expect commercial aerospace to be down a little from Q4 due to lingering inventory corrections.
Note that for the second quarter third quarter on fourth quarter average was 1.208 million on the baseline guide is in line with the average at the last three quarters.
For the year, we expect revenues of $5 $1 billion of baseline with the range of 5.0 of $5 billion to 525 billion in the woods minus.
Minus 50, plus 150.
EBITDA baseline of $1 1 billion with the range of 1.07 billion to 1.15 again minus 32, plus 150 plus 50.
EBITDA margin 21, six per cent for the year with the range of 21 point to 21, 9%.
Net earnings per share of baseline of 80 cents for the range of 75 to 89 cents on free cash flow at 400 million plus or minus $50 million.
Let me provide you with the few assumptions the cost restructuring carryover into 2021 will be 100 million price increases are expected to be above the 2020 increases paint.
Pension cash contributions are expected to be about $160 million compared to last year's $236 million.
The operational tax rate is in the range of $26 five of the sense of 28, 5% similar to the average rates for 'twenty and 'twenty and 'twenty seven five per cent.
Adjusted free cash flow conversion is expected to be of 115% again above our long term outlook of 90% the.
Our cash tax rate will increase to about 15% on capex, we've put in the range of $200 million to $220 million.
Maybe a couple of further comments to put 'twenty 'twenty one into perspective, you can see by the revenue guide of $1 2 billion for the first quarter versus $5 1 billion for the year at baseline.
There is an expectation of quarterly revenue begins to accelerate during the year.
Modular a respectable on them.
The 2020 yeah.
And you have a baseline versus the normal outlook would we use we have a smaller lower bandwidth to the downside on the higher bandwidth the upside that concludes my commentary before we move to question and answer Thank you.
Thank you and we will now begin the question and answer session. As a reminder, press star one to be placed in the Q&A queue press the pound key if he would like to be removed from the queue.
We request that you limit yourself to one question well pause for just a moment to compile the Q&A roster.
Yeah.
And the first question will come from Gautam Khanna with Cowen. Please go ahead.
Yeah. Thanks, good morning, guys.
On the golf on them.
John and Ken I was wondering if you could.
Give us a little bit more of your assumptions on Q1 in 2021 guidance because.
It looks like it's sequentially lower than Q1.
On the implied EBITDA margin.
For the year is below that of Q4 and I was just wondering of mix worsened sequentially.
You know the 787 situation has gotten worse from what you last updated us on in November what kind of explains the sequential and then.
Okay.
The follow up after that thank you and let me let me have a go at the Gulf of in the.
I mean, I'll give you a round number so last.
Last year of second quarter revenues were 12, 50, Q3, 11, 30, Q4, 12, 40 give or take on a million of so and that average is at the 120 right.
So what.
We've placed won't be cool baseline.
The 1200.
With the bandwidth around it plus or minus 50.
So our view is the Q1 is essentially the same as the average of the last three quarters.
With my feeling on.
I'll say statement is the Q2, we were not seeing much by way of.
Customer inventory reductions, although we had the impact of certain of the customer plants being closed because we went into April of last year.
And then the significant inventory corrections in the third quarter of particular note on the low of correction in the first quarter.
Right now it just feels as though things are pretty opaque.
And essentially the rollouts of the vaccine the airline load factors in fact, if anything.
The line load factors of the of reduce substantially in the.
Europe.
With the the almost closing down of traveling in certain countries, particularly into the U K.
On the international Air travel has has actually become if anything a little bit more problematical, rather the improving.
So right now there's little to observe and celebrate.
And then you look at the of the Rollouts of the of the vaccine in particular.
And it's not feels also below that which we could hobble maybe should have expected.
And indeed, some of the the process to actually get that into the into People's arms is is also being the I'll say underwhelming.
And the and I can talk from personal experience, having got my first shot of couple of weeks ago.
On the just the whole process, even trying to register and get the vaccine never mind. The is it going to be available for the second sure. So yeah. The.
The whole rollout of its been a it's the underwhelming.
And so when you think about travel at the moment on therefore, what's the impact on billed.
You know, it's the there's little to us to the upside and celebrate.
And so we just say first quarter is roughly in line with the average of about three quarters.
Hum.
Is that stuff.
Best we can see.
I mean, it's the bandwidth the variability around it so it could be.
As we put the what we call baseline while the outlook just try to say this is what we think is like that which you can rely upon with the relatively small downside.
And with a relatively higher upside so we've given you and I used symmetrical.
Compared to what we normally do of.
I'm, just giving you a midpoint on of plus or minus around it.
For the EBITDA margin in the first quarter and then for the year. We also gave you an asymmetrical picture, calling one base line and then the less.
The lesser reduction on a higher upside.
And it really is it's the degree of tightness regarding the.
The future demand I mean, we had the courage again to provide not just guidance for the course of book guidance for the year on.
I just don't want to get ahead of ourselves on you know ahead of our skis at the moment and say you know.
Do we really have the absolute foresight to see the full year and I think any reasonable person would say, it's it's it's it's difficult when the sudden the factors that you don't yet understand I.
I mean, while commercial transportation feels pretty solid.
The defense and the industrial market for us still pretty solid.
On the oil and gas market is is looking better with the improvement in oil prices.
Natural gas is still you know sort of of being the prevalent fossil fuel used in power stations all of us to the each of the good and then there's the commercial aerospace and the cash.
Commercial Aero, while we did see a low of inventory takeout in the fourth quarter. It was still a 51% down year on year on.
On the moment, we don't yet have the courage to say, it's going to get significantly better with the first quarter or the first half of this year.
And I mean, the the bright news on the horizon of P.
He has to be the Airbus have indicated the increasing build rates for the <unk> hundred 20, which is which is great on that will bump up the inventory. We think in light of course of the year and maybe give us a build situation.
Whereas on the 737, we haven't had any significant news one way or the other on on seven.
Seven nights of them, it's a it's a little bit reduced from what we thought so again take it in the context of beats the baseline it's a view on.
The we're hoping that the the the view of where the incremental revenues, we do see that as we move through the year and that's why I call them until the $1 2 billion for the first quarter, let's say five point, along with the asymmetrical bandwidth around it.
And it should give us hopefully.
I'll say of higher run rates into the into the back half of the year.
This does that cover the Gulf of them.
It. It does maybe you can give us based on what you know as of now late in Q1.
The middle of Q1.
What segments do you expect to be sequentially up.
Sequentially down if you have that visibility at this point.
I, probably have a good thoughts around the commercial transportation business being slightly up on.
Just find myself cautious around commercial aerospace with the with the all of those on this call it roughly in line.
I recognize it didnt really talk much to the margin question here on sort of let me cover that out as well.
So in my thoughts around the the first quarter is and we've guided in Uh huh.
Thank you.
Give or take 21% or possibly even the.
We had to the heart of numbers you know over the over 21, conceivably because I feel stronger about the margin and then I'll do the the revenue side you could even.
The badly at the full end of the bus you know what on what do I think of first of all of its higher than 2020. So I think that's good to say that we are confident that the first quarter is going to be it's the run rate higher than 2020.
And I do recognize the at the moment, we do say, we all saying the it's probably not quite as good as the fourth quarter and put the so you can assume that's within the bandwidth of the whole of the uncertainty around the commercial aerospace market at the moment, which are which we choose to be cautious about.
Because we just don't feel as though we know enough and don't feel that I am on solid ground enough of it at this point in time.
We hope for better we are we just planning to be in.
In the zone, where we think the we feel confident at this point.
So I hope that comes out of the margin side of it as well for you.
Thank you.
The next question. The next question will come from Carter Copeland with Melius Research. Please go ahead.
Hey, good morning, just a quick follow up to that on the variable cost flexing and furloughs can you give us a sense of how much of that is a headwind.
On to the profit in 2021, and that's built into your plan.
The bulk of months, we've just said to ourselves there is the potential that.
We may need and we hope to bring people back from furlough are the may be some let's call it.
Let's say required retraining just to make sure we're on top of our game because we treat the.
Both of the quality of promises on the on all delivery promises is very serious.
Despite all of the I'll say.
Pandemic disruption last year the hour.
Or are both on <unk>.
All of the indices on the dairy.
Indices were actually improved again.
And we do want to maintain that track record. So we have assumed at the maybe a little bit of drag from bringing people back earlier than the image before.
Before the demand profile.
On the just to make sure that the end of the 40 trained and fully ready to go just the same as in.
In the third quarter, we did hold on to some labor ready for the fourth quarter and you saw that was good on.
So again you know, it's it's just the planning assumption we.
We don't we're not brought anybody back just yet.
So we're hopeful that we have the problems to do with the sample the thought of the lead to better days ahead for us because that's what I call. The high quality problem and it's just a matter of them the efficiency of which we do of that process Carter.
Okay, and then just another little quick one on the forged wheels low cost sourcing and the the hungry move do you can you give us a sense of how much of that transition has now taken place.
The substantially complete and you know when does it all get transferred over just as there is there any additional benefit that we should.
I think it's still rolling its way on in 'twenty and 'twenty one.
Yeah, So first of all for the.
For the investment we made in 2019, we have been utilizing that on.
On the.
We have been increasingly stuffing that.
And it's there is still more to come.
And in the in that regard from where we were in the in the third the fourth quarters last year.
So in terms of.
Utilization of the new plants, because we've tended to try to use the new role on the site necessarily some of the old because of the efficiency we gain from it.
And therefore, the the margin.
There is still some to come in the first half of 'twenty 'twenty one.
We also have also been adjusting our manufacturing footprint.
Which again to the benefits and chosen to invest some more money is and into the hands of hungry.
Four wheels business and that basically will come on stream during the fourth quarter of 'twenty, one all leading to a I think Uh huh.
Healthy towards the run rate as we exit the year, but really of eating up the 'twenty two so like previous commentaries that we'd seen as you know the 22 to be at similar levels of 2019, and then twenty-three above all of that still holds on.
At the moment, you've seen what I think shows of really strong incremental margin in the fourth quarter. So it was volume has come back into one of our divisions.
Then the incremental margin.
It was tremendous.
I hesitate to give you the non because it just sounds so good I mean, the Ken can give it like the needs too, but basically the alcohol of fabulous incremental margin on that which if we if everything works out as planned and we hope to replicate that in and.
And on commercial aerospace businesses, when we begin to see some volume recovery.
And that's the you know well, we feel confident we're going to see.
The company in the future, it's still of Nacho, what will it be and when.
Great. Thanks for the color John Thank you.
The next question will come from Robert Stallard with vertical research. Please go ahead.
Thanks, so much good morning.
Hey, Rob.
John I just had a follow up on the what you said earlier on the habits on the pay $3 19 on Boeing on the Max.
The bottom line and this is how much inventory do you think there is still on the chain as it relates to your product.
And when can we see this point when we go from sort of Destocking restocking and what sort of forecast of you built for that into your 2021 numbers.
Okay.
So when when we originally built our Oh path of 'twenty 'twenty, one and we just assumed the the 43 twentyish slots through the year.
We also recognize the wheat, we had not been.
Supplying part of the 40 rate. So we were let's say.
32 to 38, so instead of just the 35 Bill sets, we guesstimate, it's always difficult.
But when you were at the first year round the through second tier levels in the supply chain and as you know through our engine products business, we operate through a.
Through both the GE aviation and also the Pratt and Whitney for all of the the two engine variants for the the <unk> hundred 20.
My expectation is that the the Destocking will on I'm going to take a swag of this now we think that will have completely dried up.
At the end of the the second quarter.
And we're going to have to start building.
Some product ahead of.
Particularly as it goes to the 45 rate in the.
Fourth quarter of this year, so that's what I call. The AR. It went into the year. We all want bright spots are and we've got two commercial transportation of nowadays they say of bus lift on that gives us.
The brings a little bit of the smiles of all face on the.
On the handful of Boeing at the moment.
The they they.
The state they've been building at seven a month in the in the backend of the of 'twenty 'twenty, whereas we know we've been supplying at less of half of that relates to a small numbers.
And we just expect that to continue certainly through the.
The first half of this year.
And then when they raise it to the 10 and 20.
And then hopefully into the surgery is by the second quarter of 'twenty. Two then well before that and we love the stopped matching the of the the run rate.
Of part shipments of the build rates of aircraft now of course.
When was that of car.
The you know I don't have a lot of information regarding the clearance of the boat inventory at this point you know I know the Ryanair order on those.
The 27 deliveries of the 737 out of the 450 aircraft the popped up and.
In the fourth Queen the I think in the fourth quarter full body, which is great, but we know the give them. The fact that they built snus is 20 aircraft in the in the in the in the fourth quarter.
Just the or just the there'd be a lot of the bill.
Most of the Bill of rights sorry, So yeah, there's still a lot to go in so once we see that inventory dissipating as the information begins to flow of this year I think will become increasingly confident in the in the Boeing stated build rates.
Barry mined to date.
Actual firms all we've seen is reductions sequentially from the last 18 months and the Wii.
We obviously notes the coke plant the increases but for us to feel confident we've got us the AR.
The aircraft Park dissipated.
And those increase in bill rates reconfirmed to us on the.
So we tend to be a little bit cautious at this point in time.
That's great. Thanks, John.
Thank you.
The next question will come from David Strauss with Barclays. Please go ahead.
Thanks, Good morning, guys.
Hey, David probably price FERC can.
A lot of a lot of moving pieces here on the on the free cash flow walk a 'twenty 'twenty to 'twenty 'twenty, one looks like your you know at the midpoint forecasting about flat.
Could you walk us through can just you know net working capital kind of what you're thinking I guess pension down a little guys from cash taxes are up you know capex is down severance is down.
And then what you're assuming for the AR securitization program as add on is that of headwind there.
This year as well.
Yeah, Hey, David So.
A couple of things on the the free cash flow.
Provided we've got a nice improvement there on the pension cash contributions and OPEC contributions on a year over year basis.
As you know we all are as we exited.
2020 of the discount rate Didnt worked favorably for us. It was about 80 bps of unfavorable that cost us around $200 million.
On the liability side.
Asset returns were very strong for the business over 14%, so that kind of net it out but when you look at the work that we've done on the pension and OPEC program, especially over the last 12 months, we're going to see a favorability there.
The other things I look at the tax rate are pretty much the same as what we've had before.
You can see interest expense because that's the most likely going to be as you do the walk around $290 million per the year and in the Big question, David and I know you're focused on it like we are is the working capital right as we looked at 2020, our working capital.
It was not of source where use of cash in 2020, right. We took down the a our securitization program, which was a $100 million burn in that number. So that's all embedded there. So it wasn't a of source or use even when we consider the bring down to the a our securitization program.
So as we move into 'twenty 'twenty, one we think working capital and this is all going to depend on as John talked about the revenue ramp as we go through the second half of the year as well as some of the stranded inventory as we cleared that out of the channel I expect working capital to be of modest source of cash.
Embedded in that $400 million guide that we gave you.
Okay and the one thing we didn't the one thing we didn't cover Ken was the way we don't plan on a change in a all of it.
The 100 million he's done.
And we think we'll just leave that alone and in 'twenty 'twenty one at this point in bright line.
Yeah, sorry, John I missed the 250 million there capex.
No change.
Alright, Thanks, and John obviously sitting with a pretty big.
Cash balance nothing on the on the debt side I guess the do you know how are you thinking about share repurchase and does your EPS guidance reflect the any any sort of capital deployment of benefit or not thanks.
No we haven't assumed anything you know EPS regarding that.
And my feelings on the the cash balances are.
The thing I'm focused on the more than anything at the moment is a 'twenty 'twenty two bond maturities.
And the and that's like you know if if we wanted to.
The should we just roll them off on the due date or she'd be move early thoughts of consideration.
All of which we are sort of thinking about it.
On so that's in the alcohol in the in basket.
In terms of.
For the share repurchase of it of any notes.
My my thoughts there all of us.
The trigger I think for us to be more aggressive in that regard would be seeing solidification of the on of course, the commercial aerospace build rates and so the way I think about it is we've done some modest.
Picking off of the shares of the last the couple of quarters.
In terms of what do I Wanna be bold of the math in any significant way than it would be you know once I'm convinced the the aircraft build skylines solidify become twice to them from a fluid state. You know is this or is it that they know what's the why.
The rate really going to be.
That's the trigger for me to be a to be more aggressive on the on the outside so.
Taking cash and the deploying the into the share buyback it's of any major notice the true.
Figure for the holidays, all centered on the Scott answer the if I as two of build off of real confidence and I see the skull onto begin to lift the case would go to the back half into 'twenty two.
I see inventory being put into the system because those builds on schedule for all of them just talked about on the good news is that we were told that we were gonna see those the bus the increases actually scheduled in February the Nokia.
So we haven't seen them in the first two of three days, what we say by the end of the month of you'll see those in the in production releases.
And then when you see that you get of more of a confidence than just the new skyline number because as you know that skyline, even on the more confident air bus the side move from me and maybe it's going from 40 to 40 720, let's see of forty-three then of 45 before moving maybe two of 48 of 22.
I like to see it in in schedule four of them rather than just the good.
News media for the.
We need to just see what sort of wide body doing and then the clearance of the the of the the inventory for Boeing and I think that's that's the point of what I'll say, yeah. We're good and it will have a pretty good view of what our incremental margins will be as we see that demand increase and then it's off to the races.
It may be in terms of any cash deployment of the share buyback.
Alright makes sense, there's lots of things okay. Thank you.
The next question will come from Robert Spingarn with Credit Suisse. Please go ahead.
Hi, good morning.
John just getting maybe a little more specific.
Are there any kind of one off opportunities that might drive commercial aerospace up in 'twenty 'twenty, one what one I'm thinking of is that M. T. You talked about of 20% to 30% increase in the MRO for them on the G. T F. On some incoming G. T F work low pressure turbine upgrades normal first time shoppers.
It's a hot section of upgrades those sorts of things are there some things there that can drive 21 up.
Right now we've set ourselves of the US best profile is not going to change over the first two quarters of 'twenty 'twenty one compared to.
The last two quarters in 2020 of in any of the God. So what do you think about last year compared to the full.
400 million normal revenues, we'd have for example in all of our our engine business for commercial aerospace the.
The the effective effective run rate.
For the last the couple of quarters has been you know like 70 580 per cent, even the 85% down makes a good set of months. So we'd just assume not need that just continues on with you.
No we're not.
Seeing anything in the choosing to believe are at the moment. The there could be an increase just because you know what's been the.
What's still out there what could be kind of the kind of belies the mood of we noticed that a couple of our customers off providing commentary about the solidification of the out into the back half of the year.
And I think we're willing to accept that.
Albeit at the moment again, you know it's difficult to plan for it of always.
Thought that we'd see some narrow body build rates increases necessarily before we'd see a large increase in MRO, but you know.
When it does come back then clearly the.
Kind of be a benefit for us because it's driving the longest let's call it only 25% of normalized levels. The.
On message, it's pretty tough on we'd just assume that's the case for the next two quarters.
Okay, and then I know, it's a delicate topic, but I thought I'd revisit.
Just the idea of Pratt and there are new airfoils facility and if theres any more insight into what's happening there and if that's going to be work that might share on your markets or if it's if it's a separate.
And separate content from what you do.
First of all of its not its not a delicate topic, it's it's pretty straightforward really.
Brought decided back in 2017 and the year after that so the.
The previous business in the half oils to go to make a selective reinvestments.
The felt.
Felt the need first of all to close some business to be able to provide a more accurate coring.
Four of those costing because previously the never been able to achieve the I believe the the yields which are necessary to be cost effective and in that regard.
I have the answer of the quality of before once that comes out.
The investment is exactly the same as previously stated 650, yes, we think.
It covers both the.
On the casting coring on.
Hole drilling machining coating, so there's a lot of stuff in there.
And you know all of you as the the.
Increase in spares demand and the.
Let's call them that 'twenty, three 'twenty five 'twenty seven timeframe, but of the spares demand is likely to grow very significantly.
And all of the capacity could be used for that.
What we what we also notice that we have renewed.
We've renewed our our LTA with the with profit in this area and so all good nothing nothing nothing too.
For the really no information the withheld.
Okay. Thank you very much.
Thank you.
The next question will come from Seth seismic with J P. Morgan. Please go ahead.
Yeah. Thanks, Thanks, very much on a good morning ease off.
From a you know there's some nice growth in the defense end market and you talked about further growth going forward.
The main customer I guess when he had some some good growth in 2020, you talked about things sort of flattening out.
Lockheed has talked about the the F 35 production rates sort of nearing a run rate. So do we think about defense growth this year of sort of.
You know the the year end run rate sort of normalizing of not driving the growth or have there been share gains or maybe you know places outside of the F 35 that.
It might be able to continue.
Continue to drive growth there.
Yeah.
Again, putting line between perspective for yourself. The F 35 is about 40% about defense sales, so it's less than half.
So we do have a lot of significant the defense business elsewhere with the.
Apply a G are.
With the with a lot of military.
Four applications on the other structural castings the applications that so there's.
There's a lot of spot and Whitney. So I just wanted to you know baseline that for us.
Hum.
The military budgets, even in the course of the year.
Don.
I don't necessarily move on.
On a similar percentage, it's often a little bit of a hike towards the end of the year of money to spend their budgets are a win.
When the still replete with money and so the my thought is the maybe the fourth quarters of little bit higher just because of.
Just the way I see nothing in previous years as well.
Having said all of that you know we believe the defense sales will be solid.
The increasing in the in 'twenty and 'twenty one the a.
F 35, maybe a more modest part of the items of a rebuild maybe slightly more in the Spanish bill, but nothing of great note at this point and we just see generally the the minutes of your budget for 'twenty one.
Healthy.
And so it wouldn't surprise us we see the similar cadence to the year of again slightly low in the in the early part of the average slightly higher on the second half of the U M of any.
But budget monies all expense.
Great. Thanks, and then as a follow up the you know the idea of.
Inflation has huh.
If it becomes more of that's come on People's radar screen until all of that more recently.
Thank the back at archive games occasionally in the.
And the T C kind of segment there.
Occasionally be some aluminum impacts.
Is that something we should be aware of at all for the for the forged wheels business and then you know and the rest on the aerospace side.
Been striking to me.
Each of which raw materials have not at all of them part of the discussion on.
And so expect that to kind of remain where should we expect that to kind of remain the case with the pass through as you know working fairly effectively on you know not being really out of consideration.
Yeah, I feel as though you are in a if I have a call of materials is the massive issue I feel like maybe I should shoot myself.
Maybe that's a bit of extreme.
But when.
When you're in the 1995, let's call it 95 per cent pass through situation then.
In the course of the year that maybe a quarter weighted in terms of of lag as the metals move massively but are in the normal course of our.
Let's say metals cover those or a back to back of agreements with our customer base, including wheels.
So it doesn't mean, the maths it whether it's in aerospace product or a.
Commercial aluminum wheel, but whether it's the cobalt or whether it's nickel ore vanadium ore of aluminum theres, a pretty much kind of a test.
Great. Thank you very much.
Yeah, I'd, just add to that sort of as John mentioned 90, 95 per cent of close pass through and for the remaining piece, we have hedging agreements in place to so that whole volatility piece from the Ozark kind of king days of that.
That goes away.
Right now that that clarifies things. Thank you.
Maybe I should also remind you that we you know we had covered on that back for a lot of what's now of chronic cough in terms of the aluminum.
The aluminum pass through and spend a lot of time correcting that in 2019 as well so.
It was the diminished feature of that business and not a feature of a of a problem for her medisoft.
Okay.
The final question is from Noah <unk> with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
No.
Yeah.
So on everything I'm hearing from you on this call I think translates to the.
Forged real margin a little bit over 30 per cent being sustainable.
Is that accurate and then I wanted to circle back to the incremental margin you mentioned in the piece of the business of that.
Had better volume to can you quantify it for us on and then it sounded like you were.
You think of that number is translating to the aerospace business kind of back half of 'twenty, one or into 'twenty. Two as you have better volume is that you know literally the case.
Well, obviously when I say, it's simple.
Let me use the back.
Back end of your question first.
It was more of a directional comment so the smoking returns I'm hopeful of incremental margins.
All of healthy.
On gas can just gave you the specific wheels incremental.
But the because I thought I told you draw the good.
And in terms of the I think the wheels margin, which are I think it was 30%.
The EBITDA margin in the in the fourth quarter.
And he said of sustainable you know.
The the volumes, we're seeing on the hard yes, I do I mean, I I have no intentions of that business going backwards.
The EBITDA margin.
Okay. The only thing I'd add to comment on the incremental Hey, Noah Yeah. No. So we the we put a slide in the appendix. It has the details for wheels in the other businesses as well, but as John mentioned.
From an EBITDA perspective, Q4 of 35.5% great. That's as we've adjusted the the production footprint and leverage some of the low cost country areas. We've also invested in them as well. So we've got the benefit of the geographies of the global footprint. The team has.
On a terrific job in wheels of this year in terms of taking cost out of the business quickly.
And then there's the volume started to come back was very surgical in terms of how we brought people back in.
But the expansions that we have are going to help as we move forward and the last thing I would mention is just the improved yields in that business as well the production of the wheels business.
Has improved over the last several years of real Trust me with that team and I'll give you one data point from a quality perspective.
P. P M in our wheels business of less than 10.
So one zero right, so a pretty good production process there as well.
Yeah, Okay, and if I could just on the the.
On the Incrementals from Q3, the Q4 was.
All of the jobs.
Okay.
Just one follow up on the the the revenue the sort.
The sequential walk for the revenue on in the 'twenty 'twenty revenue driving at the discretion.
Given it would seem like most of the businesses outside of aerospace of original equipment have some visibility into improving our already of improving.
And then within aerospace of original equipment, there's just a lot of moving pieces given the unique situation with the Max on the 80, 320th going higher the 80 Sevens coming down we're never exactly sure where you are.
Can you just tell us in the 'twenty and 'twenty one on revenue guidance, we provided today.
But what our aggregate total aerospace of original equipment revenue is doing.
As we move through the year of those higher or lower exiting 'twenty, one compared to the exiting 'twenty.
Hi.
Okay exit 'twenty on the tons you want us that's pretty straightforward.
So a lot of moving pieces complicated by the inventory.
Last month's but.
Basically rising as we exit the year of as what we are you know I'll say from you believe.
Okay, great. So the the lift on the narrow body side is more than the incremental step down on each of them.
Yeah.
Okay. Thanks.
Thanks, very much okay. Thank him.
We have reached the end of.
We have reached the end of the of lot of time for the Q&A session, ladies and gentlemen, Thank you for participating on today's conference call you may all disconnect.
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