Q1 2021 Howmet Aerospace Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace first quarter 'twenty 'twenty. One results my name is Shelby and I'll 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.
Sir Vice President of Investor Relations. Please proceed.
Thank you Shelby good.
Morning, and welcome to the Howmet Aerospace first quarter 2021 results conference call on <unk>.
Bye John plant Executive Chairman and co Chief Executive Officer told the all co Chief Executive Officer, and Kenji of Kobe, Executive Vice President and Chief Financial Officer.
After comments by John till the end, Ken we will have a question and answer session.
I would like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In 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.
So on speech he good morning, and welcome to the call.
Similar to last quarter, I will give an overview of how much of the quarter performance. Then pass of the tall go talk to a market and then Ken will provide for the financial detail.
All of it turned to the to the cole to talk to guidance for the second quarter on the full year 2021.
Please move to slide four.
Let me start with some commentary on the first quarter.
Revenue was $1 2 billion on in line with expectations, while EBITDA EBITDA margin on the earnings per share exceeded expectations.
The adjusted EBITDA was $275 million on an adjusted EBITDA margin was a healthy 22, 7% said much of the fourth quarter of 2020.
The earnings per share excluding special items was 22 cents, which was ahead of expectations ahead of Q4 2020.
Historically Q1 has been a significant cash out flow for the company.
However, with improved margins on in Huntsville, and Cup of control the outcome of noticeably improved.
This will be followed by cash generation in quarters, two three and four.
Lastly, in the first quarter, we focused on deleveraging.
The thing the early redemption of the 2021 of those for approximately $360 million of caution we're using cash on hand.
The resulting quarter end cash balance was $1 two 4 billion.
Moreover, on Mesa, we completed the early redemption of the $476 million of notes due in 2022 for approximately 500 million inclusive of the accrued interest and fees.
Both transactions were completed with cash on hand.
Year to date, we have reduced debt by approximately 840 million, which reduces the 'twenty 'twenty. One interest expense was 38 million on $47 million on the run rate basis.
In addition in 2022 there'll be a carryover of the interest savings of $10 million.
Now, let's move to the market some performance on slide on slide five.
Q1 revenue was the same as the Q2 to Q4 of 2020 average on in line with out of expectations.
On a year over year basis, commercial aerospace was down 52% driven by the lingering effects of custom the image rejections and fundamentally the level of belts, starting with the Boeing Max.
Commercial aerospace continues to represent 40% of the total revenue of the company compared to pre COVID-19 levels of 60%.
The commercial aerospace declines, partially offset by the continued strength in our other markets defense Aerospace was up 12% year over year, driven by the joint strike fighter new builds on spares.
The industrial gas turbine business continues to grow on was up 35% year over year also driven by new builds on spares.
Lastly, the commercial transportation business was up 15% year over year, despite customer supply chain constraints.
Well the truck demand is very strong our.
Customers manage through supply chain issues with several commodities, which are in short supply, including semiconductors tires on glass to name just a few.
The working closely with our customers to meet demand, which is showing some interruptions.
At the bottom of the slide you can see the progress on price cost reduction on cash management.
Price increases are up year over year and continue to be in line with expectations.
The structural cost reductions are also in line with expectations with a $61 million year over year benefits.
The segment decremental margins continuing to be good 27% driven by price variable cost flexing on fixed cost management.
Capex was $55 million in the quarter, but continues to be of less than depreciation and amortization, resulting in the net source of cash.
Okay.
Adjusted EBITDA margin for the quarter was 22, 7% consistent with Q4 of 2020 on approximately $30 million of less revenue.
The one revenue of $2 billion was consistent with the Q4 Q2 to Q4 2020 average.
You can see the benefits of other options since the start of the pandemic with the 300 basis point EBITDA margin expansion, while revenue was approximately $45 million less in the same period. So good year on year of performance.
Now let me tell you two of the toga to give an overview of the market.
Thank you John.
Please note the slide seven.
Not the year over year revenue performance here.
Q1 revenue about the down 12, 6% driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter.
Commercial aerospace was down shift of 2% year over year in line with our projections is the continued to see customer inventory corrections as expected.
Defense Aerospace continues to grow and was up 12% in Q1.
On the diverse set of programs Victor joint strike fighter.
Some of the 40% of the total defense gets us.
Commercial transportation, which impacts both the porch meals and fastening systems segments.
It's up 15% year over year with the.
The very strong market demand.
Finally, the industrial and other markets, which consist of IGT oil and gas and general industrial was up 1%.
IGT, which makes up approximately 45% after the market continues to be strong and was up and helped each other quite first then year over year.
I bought not so on the Dol, but you can give a more detailed view of the financials.
Yeah.
Thank you told us and good morning, everyone well now, let's move to slide eight for the segment results.
As expected engine products year over year revenue was down 32% from the first quarter commercial aerospace was down 55% driven by customer inventory corrections and reduced demand for spares.
Commercial aerospace was partially offset by a year over year increase of 18% and defense aerospace and of 35% increase in IGT.
IGT continues to be strong and we will continue to make investments in this business as demand has been increasing for cleaner energy.
Decremental margins for engines were 26% for the quarter.
Segment operating profit margin was approximately 19%.
In the appendix of the presentation, we have provided the schedule with shows each segment's decremental margins for Q3 2020 through Q1 2021.
Now, let's move to fastening systems on slide nine.
Also as expected fastening systems of year over year revenue was down 29% in the first quarter <unk>.
Commercial aerospace was down 42% like.
The engine segment, we continue to experience inventory corrections in the commercial aerospace market.
The industrial and commercial transportation markets were down 2% year over year over year, but up 19% sequentially.
Decremental margins per fastening systems were 45% for the first quarter as furloughed workers returned to work.
Please move to slide 10 to review engineered structures.
For engineered structures year over year revenue was down 36% in the first quarter.
Commercial aerospace was down 57% driven by customer inventory corrections and production declines for the 787 and 737 Max.
Commercial aerospace was partially offset by a 10% year over year increase in defense Aerospace Deca.
Decremental margins for engineered structures were 18% for the quarter compared to 24% in Q4.
Lastly, please move to slide 11 for forged wheels.
Yeah.
Forged wheels revenue increased 19% year over year, despite customer supply chain constraints.
<unk> forged wheels revenue grew faster than the overall market.
In part due to help with new innovative 39 pound wheel.
Segment operating profit margin was another record at almost 31%.
As of year over year incremental margins were 56%.
The improved margin was driven by continued cost management and maximizing production in low cost countries.
Please move to slide 12.
We continue to focus on improving our capital structure and liquidity.
First we completed two early redemptions of our bonds.
The first transaction was on January 15th we used cash on hand to complete the early redemption at par of the 2021 bonds due in April 2021.
Like the paying down the bonds three months early at no additional cost, we say $5 million of interest.
The second transaction was earlier this week on May 3rd.
We used cash on hand to complete the early redemption of the bonds that are due in February 2022.
The bonds were redeemed at the cost of approximately $500 million.
As a result.
The interest cost have been reduced by approximately $47 million year over year.
Moreover, as John has mentioned in 2022, we'll get an incremental $10 million of.
The carryover interest savings.
Gross debt stands at $4 2 billion.
All that is unsecured and the next maturity is in 2024.
Finally.
Our $1 billion revolver remains undrawn.
Before I turn it back to John to discuss the 2021 guidance I would point to point out that there's a slide in the appendix the cover of special items in the quarter.
Special items for the quarter were a charge of approximately $16 million after tax and the charges primarily related to the three items first.
We had fire costs of two of our plants of $7 million.
Second we had an impairment of assets associated with an agreement to sell of small manufacturing business in France of $4 million.
And third we had a pension settlement charge in the U S of $3 million.
Finally, we continue to work on reducing legacy liabilities.
And improving asset returns for the pension plan.
The highlight two significant items first we had announced the planned administration change of certain prescription drug benefits that is expected to reduce cost and reduce our OPEC liability by approximately 20% or $39 million.
Second we are benefiting from pension assets investment returns of over 13% that we realized in 2020.
The combination of the asset returns and the liability reduction have decreased annual an annual pension and <unk> expense by 37% or $13 million annually.
So now let me turn it back over to John.
Thanks, Ken.
Let me move to slide 13 tool of the Q2 the annual guidance.
First the good news is that we're another quarter of along towards the recovery of the commercial aerospace market.
This will go a long way in helping profitability and complementing the growth and some of the entity at the day.
The aerospace IGT and commercial transportation markets.
They're all series of leading indicators that are showing very well for us.
Some of the flooding quadras bookings of flights.
Hotels and car rentals.
And we also note the increase in U S. E. T S. A numbers of flight take offs, particularly in the U S and China.
You remain somewhat muted given the effects of the pandemic on slow implementation of COVID-19 vaccines.
All of the should begin to help airlines with the aircraft production, particularly of narrow body aircraft.
We know that the demand for wide body aircraft, probably may not reappear until mid 2022 or even into 2023.
We see at the end of the second quarter.
To be an inflection point to the beginnings of production increase this will happen in the second half of the year with the exact precise timing yet to be determined.
We are planning to bring bring back from furlough will recruit several hundred workers. During the next two quarters to train and retrained to be ready for the steep mountain just in the same way that we did in the third quarter of 2020 for the commercial wheels business.
My expectation is that these costs plus cost of recommencing multiple plants the equipment will hold the EBITA margin around the 22% levels until the stabilization is reached.
We also know that there isn't the effect on the commercial transportation market of part shortages, particularly semiconductors, which is reducing shifts of production work in the second quarter.
As noted earlier today, the timing for cash generation and.
It's been a focus for us and instead of the normal large Q1 out flow, which then has to be subsequently overcome the first quarter was essentially breakeven on all subsequent quarters are expected to be cash generative.
Specifically the guidance for Q2 sales at 1.2 billion plus or minus $30 million.
EBITDA of 265 million, plus or minus $5 million EBITDA margin of 22.1% plus or minus 10 basis points on earnings per share of 20 cents plus or minus of sand.
And for the year.
Sales at the $5 1 billion, plus 100 million minus 50.
EBITDA baseline increases at the the EBITDA baseline increases by 50 million to 1.15 billion with the range of close 50, the minus 25.
EBITDA margin baseline has now increased to 22 of the half percent 60 basis, plus 60 basis points on minus 20 basis points in terms of the range.
The earnings per share of baseline increase used the 95 cents of significant increase over prior guidance and the range of plus 7% to minus full sense on the cash flow of baseline increased to 425 million plus or minus $30 million.
Moving to the right hand side of the slide we noticed the second half revenue is expected to be up 12% from the total company driven by the increases in commercial aerospace defense and IGT.
Price increases to be greater than 2020 cost reduction carryover of approximately $100 million on pension contributions of $160 million we.
We continue to evaluate the impacts of the American Rescue plan Act on pension contributions until determine those later in the year.
Capex is expected to be in the range of $200 million to $220 million compared to depreciation and amortization of $270 billion.
And adjusted free cash flow conversion, it's about 100% of net income.
We plan to reinstate the quarterly dividend of two cents per share of common stock in the third quarter of 2021 pending the final board approval.
Now please move to slide 14.
Summarize.
Q1 was the healthy stocks to the year and liquidity of the company continues to be strong.
The guidance provided he's raised from that given in early February.
<unk> first quarter profitability of strength.
The redemption of bumps of cash to institution of the dividend all of which provide value to shareholders.
More broadly the focus is now turning to the beginning of the revenue recovery in the second half.
Answering with commercial aerospace on the run rates of both revenues and margins as we exit 2021 of moving into 'twenty 'twenty, two where we see the prospect of further the leading indicator of improvements.
Thank you and NAV will take care of questions.
Thank you we will now begin the question and answer session.
As a reminder, press star one to be placed in the Q&A. Thank you Chris.
Chris pound, if he would like to be removed from the queue.
We request that you limit yourself to one question.
Our first question comes from Seth seismic of J P. Morgan.
Oh, thanks, very much and good morning.
Good morning.
Good morning, just looking at the the different segments and sort of you know where arrow.
Came down I guess, if you think about where you are relative to the bottom you know it sounds like obviously there's a.
Increase is coming for the second half.
But for I guess for fasteners I guess the did you feel like you have visibility with regard to what the level of of Destocking is on that the the you know.
What we've seen in Q1 of kind of close to the bottom and then I guess similar of the.
For.
The structures as well.
Yeah, So what I think about it is in terms of sequence of the of the transition.
And with the end of the second quarter of being the transition from basically the current holding parts of them on.
On the REIT is.
The results of the reduce demand and then the the correction of the inventory of dealer customers.
And already we know the commercial transportation is going well.
Subject to those Oh say interruptions because of supply shortages.
The the the Big Todd comes in commercial Aerospace, we believe at the end of the second quarter.
And I think that's going to be led.
By the the engines business in terms of the first uptick in demand with the unsupported by structures with fast and those probably are still being a little bit behind that by another quarter or so so.
Picture for the year was the the commercial aerospace I think year on year, we're going to see that segment up.
15% to 20%.
In the third quarter.
The second.
The second quarter will be a reduced decrement compared to what we see the 52% cash.
Currently and then of the increase that we see a ton of cars.
It will be led by engine to support the bus structures with the following maybe the fourth quarter or EBITDA.
At the end of the year.
Just disclose the inventories are absorbing some of that with what we think will be a fairly significant snapback.
In the in the first part of 'twenty 'twenty, two so I guess the sequence of that I expect.
On the you know both for the commercial aerospace markets on how it affects each of our segments through the next three quarters.
Great. Thanks, that's very helpful. And then just as a as a quick follow up can you talk about your level of visibility on the 737 Max versus.
On the we're on the call three months ago.
Yeah, I mean, we think that it's going to continue in line with the Boeing build rate, which is currently at seven.
I think the 14 are in the late summer.
And then the into the I think it's 22 per month range the.
As we start the.
'twenty 'twenty, two and then up to the 30 a month so all of.
It seems such well at the moment.
Still.
I sit on the previous calls have been supplying the effectively below the seven rate per month in aggregate all the different level of school to the different product lines, but we are expecting to see.
The <unk> being in line with the ships that values to equal production and then the lift of production.
As we go forward so.
That's all built into what we think will be that the 20% increase in commercial auto and the.
The commencing in the third quarter.
And also supported by.
By the increase in production that are in narrow body for the a 324 out of bus as well.
Great. Thanks very much.
Thank you.
Your next question is from Robert Spingarn of Credit Suisse.
Hi, good morning.
John just following up on Seth's question there on the Max maybe just to go.
The ask it slightly differently, but with Boeing or other suppliers talking about 160 aircraft.
Aircraft being produced in the in.
In 2021 can you tell us where you are relative to that number given the inventories in the already on the supply chain and so on in other words, how much production do you need to do the match to the were 160.
Yeah, I think we are closer to the to the 120 level. So, let's say, 25% below the number of for the year is how we see it with the.
So the inflection point coming so you know the significant inflection point coming as we start of Q3 for which the if.
We didn't have confidence we would not be going through the recruitment of bringing the bulk of people are in the second quarter starting in the second quarter of seeing significant employment increases during the next two quarters.
Okay, and just on that I guess on the other question that Seth asked and you talked about the second half improvement earlier led by engines. When will you actually know how far in advance of the shop visits or are they scheduled in our parts ordered and what are the lead times are.
The four structures and fasteners as well so in other words when will you know what your second half looks like.
Okay.
We have already begun to see the order intake now.
From a customer, particularly on the on the engine side with the less of a commitment of the I'll say the scope schedule releases.
D like transmission. So what we're seeing is the all the things which have been stated are appear to be materializing.
Hum.
The as we speak so even in the last week, we received letters from let's say suffered on the CFM and the meetings with the GE aviation et cetera. So.
It's gone from what we think might happen to our I can say a lot more confidence on the question is one of just the the final degree TBD to be disturbing. So there's the other stuff, which off the fill in lots of ink.
The level of confidence components of three months ago.
And is it different for fasteners, it's it's much more book and burn so the lead times of shorter and you won't get of a firm view on that.
Yeah, we we off rates are with some of them because some of them. The main min Max systems and so the the the.
Or just take some time to.
The average.
So at the moment the us like we were rehab moving down on those mid Max systems that takes the time to feed through.
Then the individual then snapped back.
The most significant to the upside, but with the two I'll say, maybe a two quarter delay.
The segment is because of weather.
The other is that's the most likely scenario. So that's why I said I think the fastest it will be a quarter or two behind the what we're seeing elsewhere.
Right right well thank you John.
Okay.
Your next question is from David Strauss of Barclays.
Good morning.
Hey, David.
Hey, John.
John can you can you touch on you know what day, what in an inflationary environment might mean for your business thinking about it from a.
Pricing and raw materials standpoint is the is an inflation you're on and you net all of that do you think of the inflationary environment.
Potentially going forward would be a net positive for the business.
So the next few years I don't see the significant Oh, I the way because material inflation.
The essentially be passed through to our customer as part of the escalate to a degree of instead, we have the muscle we're talking more about the what would be the bucks of labor inflation.
Labor for labor inflation.
On some significant parts of the businesses that was already set up for the next.
So the two to four years, depending upon the various labor agreements that we have in place.
But obviously some of the workforce. It's it's it's an annual event.
And it's not for us to gain the the productivity that we seek to go on each year to offset the the labor inflation.
Well I'm I'm in an inflationary environment. So I don't expect that to be of problem for us.
And indeed with the cluster of agreements that we have and also some of that we see is that being taken care of with the within the.
On the width of the L. T negotiations that we've been undergoing.
Okay.
As a follow up on the on the capital of deployment front I know you've you've.
You know you've taken out of a fair amount of debt reinstituting, the dividend, but still looks like you know.
Where you're tracking your you know your cash balance would be well over $1 billion at year end without doing anything else. So yeah.
Now the you don't have much of it looks like the due on the on the debt side of things how are you thinking about the share repurchase from here.
Yeah.
So when we describe the potential pool of capital allocation strategies in some detail of the law school cool the bucket I think I've called it the smorgasbord of opportunity to do those things.
Well, what we consider it as the first order of bottle was two.
To deal with the next couple of maturities of the bottoms up and we did that the easily from cash on hand on.
And the obviously produces a lower interest of the company.
The lower gross stuff on muscle or it's also seen some improvements from the rating agencies.
So that's been a I think of good step for US and of the next thing you have to address the at some point, but not until I don't think just now is the October 'twenty 'twenty four at some point. So that's three of the half years away some of the bumps. So let's say the part of the of the balance sheet is he's dealt with.
We felt confident in the cash flows of the business to reinstate the dividend on the loss of expression of about confidence on the again part of Oh from two.
To say, it's all of the money to shareholders.
And then the other two aspects of we are you have to consider is our is what about the share repurchase on the also to what degree if any thing do we participate in any M&A activity, which may materialize over the next the.
So a year or so.
The commercial aerospace market solidifies.
Two if the sky lines on the confidence level the be all Oh can believe it.
Clearly that's beginning to happen given what I've said about the the inflection point that we see coming on the and I guess with you in that position. David that you said is the if all things work out as planned as the we'll have a very significant cash balance at the end of the year the.
Of the ability to make.
Make other decisions on capital deployment.
In in the future. So I think he's always well in terms of let's say of the whole capital allocation strategy that we set for ourselves.
In the recent months.
Alright, thanks, very much from that.
Yeah.
As a reminder, we do ask that you limit yourself to one question to ask the question Press Star one.
Your next question is from Carter Copeland of Melius research.
On one question David is in trouble I guess, I guess I kind of stick to one right John.
Well, the you'd never do anyway taught us a day I.
I mean, just like all of its one of these like aspiration things, but yeah. You go for the you guys put the multiple of five part question.
Oh, that's fine I'll I'll do one one Carter. So obviously the shift in focus is moving to going back up and production and then.
Yeah, bringing people back from furlough training and the like but one of the things that we you know we used to talk about before this all went down was a yield whether that's you know first pass yields are of roll group of yields and in some of those key spots are in your facilities. When you look it at that yields and production facilities.
Today versus where those were you know when we were talking about shortages in.
And you know of Yum factories, you know two years ago or so how does that stand today and how does that play into your you know your confidence and conviction around going up without hiccups.
Okay.
When I look at the last couple of years in and out of Aerospace business Ah I think one of the Untold stories is the is the improvement in the in a delivery of four months on a.
Policy levels, where it's been a reducing of areas, whether it's been the parts per million defects or even in total scrap in the manufacturing plants and yields have clearly of definitely improved.
Both for a defense aerospace on the commercial aerospace.
The segments and so it's it's it's all of it.
It's all good.
I.
I really want to protect.
The reputation of the ability without customers.
On the on really seek to do that by.
Bringing labor back on training it so I think the things we did last year in the in the third quarter for our wheels business.
Hum paid off handsomely in terms of our ability to increase production.
With excellent quality and deliver the spirit.
Significant incremental margins that we've seen in the wheels business.
And so we're all of the night I think stumble through this.
You know were trying to to be ahead of it being planned for the on labor.
On the recognizing that there was of training time on retraining for people to be able to deliver at the yields that we currently have on them.
Hopefully continue to to improve the.
So that's why you know.
I want to yeah.
Plan carefully through the next couple of quarters, because we are talking a very significant increase in labor, obviously will be tailoring it to the trimming it exactly as we seek to go through it but I really want to be ahead of this thing and not chasing it not having the yield issues.
The <unk> Bill.
And all of the consequences of that puts up on the business. So you know if it cost us a net.
Say a.
The couple of two or 300 basis points of whatever margin for a quarter or so I think that's that's money really well spent because that's kind of be you know what's the margin as we exit this year of hydro before them into 'twenty 'twenty, two so I'm really trying to be plentiful about the next phase of our business on.
The not just the react to it after the events of 19.
Seem to be scrambling. So that's all part of the volume we bring to US I think to the industry until the customers.
Great. Thank you John.
Thank you.
Your next question is from Gautam common of Cowen.
Hey, guys.
And you go home.
Forgive us of two question, but the first I was curious about.
Lead time discussions with customers are you, having both of them I mean.
I imagine the chicken of Rag, if the lead times of short they don't have the urgency to place orders.
And we have you know as the order books pick off the lead times of standard.
It was the QE and the fact I mean do you think that plays out over the next year and a half where we see kind of the bullwhip effect.
I know you just talked about the second half being above the first half of it.
I mean could we see kind of outsized growth as we move in or do you think it will be just feathered in gradually.
In terms of the recovery.
And then I have a follow up on.
Yeah.
On the way I say it at the moment. He is everybody's aware, there's plenty of metal in the system on.
On the other night gives people I'll say, he's able to drop it a little bit later than would have been normal. If you looked at the demand levels of 2019, where our lead times were let's say to get metal for some of our products was oh it.
Was it was over the 12 months on so we need to.
The recognized the situation, where all of them will tell me sort of dropped inventory and we still have kept inventories, which we plan to liquidate the during the balance of of 'twenty 'twenty.
One.
And the and it's really interesting when we look at out of.
Inventory levels. We it was the most of the year one of the recent discussions on a quarterly review has been to what degree do we hold on to some of those in the AR in the lot of part of the year. Just so again, we're in a really strong position as we enter 2022 with the what we.
Think will be a fairly strong year for us in terms of demand.
So where we find ourselves on the moms as.
The customers know the metal on the system than the other stuff the inventory and so we are more on the three to six months of the of lead times and piece of that being holding off and we've been seeing that fill in the very significantly in the in the last few weeks the.
And then all of the C. It's like Kevin He's gonna depend but I do see.
If we look out six months from now and those lead times are going to be a significantly increased and therefore orders it kind of has to be placed otherwise, but some of the production increases on narrow bodies in particular, that's the.
Boston Boeing of looking out for 2022 and suddenly a later in 2022 I mean, they want it to the unless the oldest of placed a because the deal.
On the availability of the inventory and AR on the curve.
The excess of metal of sustained in the system for the last year. It just won't be that.
That is helpful. And then I just wanted to ask you know last quarter, we talked about.
How the Boeing schedules, a little bit more on blocks on the Airbus.
Production schedule, but.
Spirit yesterday talk about nine to 10, a $3 50 is coming out of the plan. This year of Max I was curious how stable is it now on the Airbus side did.
Did you see much in the way of changes over the past three months.
No because that would be seen no changes on that bus it's been the solid solely the all the way through me of meeting what they've said.
Reinforcing what they've said issuing of the issuing of both Scott a lot of the production schedules. So no no changes really on a bus the.
Not at all and in fact in the more recent past we have not seen changes from Boeing neither of which are in the in the last year or sort of tend to be towards the bottom side again, not none of that's been occurring.
Terrific. Thank you guys.
Thinking.
Okay.
Your next question is from Robert Stallard of vertical research.
Thanks, so much good morning.
Yeah, Rob Johnny we think some pretty positive things about what we could be seeing in 2022 of them beyond but I was wondering as we feed this volume through the system, what you'll force might be on incremental margins as volumes recover can we say for example, take youre experiencing wheels and apply that to aerospace.
<unk>.
Okay.
I think honestly the wheels, they'll have a different profile to a range of this list of our structure. The business. So it's got to be you segment by segment, but essentially a I am on record of having said that we expect the fairly stronger incrementals as we go forward because in the way that we managed.
Through this crisis, you can see the components of our normal decrementals of let's call. It 40%, we've been getting those into the Twenty's and I've been quite pleased with the way we've managed the structural cost takeouts on the variable cost.
The job not to allow those are more fixed cost to creep back into the into the system on.
On the end in the also the trying to be sticky on those variable cost as we go back up the of the production volume.
So yeah, we are expecting healthy incremental margins on part of it is also getting the labor in place at the right time and the net.
Trained and ready as the as I tried to describe on a couple of questions to go. So we don't stumble on way through this.
The plant fully in.
The stuff out.
On the and accepting it said if it costs us.
To the 300 basis points Oh.
Margin.
The 20th of such a PE sponsor of margin. So I think I just called it to like just of a 22% for the second quarter just to take outs of I'd, rather bring the labor in and then look for which of those healthy Incrementals go going forward.
That's helpful and just a quick follow up that margin impact from extra labor that's baked into your 2021 guidance.
Yes. It is.
That's great. Thank you very much.
Okay.
Your next question is from Noah <unk> of Goldman Sachs.
Hi, good morning, everyone.
No.
John having having two Q revenue be down year over year of little bit.
Despite that the lapping of largely pandemic impacted quarter. The the low end of the guide being down a little sequentially that that's pretty surprising given your mix.
Kind of expect out of an aerospace of original equipment is that longer cycle, but kind of aerospace aftermarket defense truck industrial would think would all be up year over year on sequentially.
They're just more.
Destocking in aerospace original equipment or a longer time for you to link up to to Boeing and Airbus than than maybe I had appreciated and so if you could help me understand that and maybe just get specific on how much inventory do sock laughed and anywhere where you are not yet the linked up to Boeing and Airbus.
Would be really helpful.
So Q2 of 'twenty of 28.
The.
Our customers would not rapid to change some of the production requirements.
More of a feature in the in the third quarter was the as you know from last year.
So when we look at Q2 this year.
Because some of the.
Schedules have not being reduced that significantly.
The reduced and you say plants were closed on it.
It's a very I'll call turbulent quarter to comp against.
And so the way I look at it is more material on a sequential basis.
I'm I'm thinking the well commercial Aero was the 52% is gonna be the.
Yeah, a lot less of that.
Terms of Bill comparisons.
And then the only other mute the effect like I'm thinking about it at the moment is.
We we are careful in terms of the commercial cut the old plans of our customers.
Just because of those part shortage of due so we all seeing shifts to go down on customers take weeks out in the second quarter and that's part of what we're guiding to as well, including not the in our numbers as best as we can estimate it at.
At this point in time, so it's a fairly honestly.
Careful assumption around the the commercial transportation business from the second quarter.
At the time the time on say to you now the flip side of the is the order intake for us pretty much globally has been very healthy.
On the you've seen class eight truck and trailer.
Or does it levels now which essentially.
Secure the backlog for the balance of 2021 on most of the way through 2022 at the moment and so whereas before we were thinking of we had a fairly good trajectory, but it wasn't filled in totally now where you see the demand is so strong.
So for example, if you wanted to buy a new trailer.
The truck at the moment, if you order just the day you wouldn't be thinking about taking delivery of 12 months. So you're looking at the until the second quarter of 2022, now that sort of long lead times are in the commercial transportation industry. So that's really very healthy for us of really puts a very sort of platform on the 'twenty 'twenty two.
Never mind the balance of this year. So I just wanted to give you the full picture around the often so if we're cautious on alcohol supply of based interruptions of the truck build in the very short term.
The give the strength of the economy, what we see by way of a transportation and shipping of things its age of producing at very solid picture of a backlog for the next the let's say 18 months.
Okay. That's really helpful could you just put a little more detail around where if anywhere you are not yet linked up to Boeing and Airbus or we're in the business, there's more inventory destock.
Basically we are still having inventory take it out in.
In the in the second quarter.
And then we think and they say it's like it's the best judgment that basically that the that just essentially stops and so.
At this end of the second quarter say, we begin to see our structures business than in the second half. We're planning for increased production, we're seeing it's a clean the I've already mentioned the the engine based business.
The only business, which is going to lag from again, a couple of quarters behind that is going to be our first of the business, where I think we're gonna be close all above.
Almost all of the inventories out by the sense of it might be by the end of the third quarter. It could strained the Q4, but the.
We see some of them. So you know different flavors some of those different segments of according to basically the lead times on the.
I'm trying to get ahead of it because I think one thing our customers don't want the hobby is some of the supply constraints, particularly lab engine parts, which are really long lead time on items ultimately it all on the same constraints as well so a couple of years ago.
Okay. Thanks, so much.
Thank you.
Your next question is from pair of <unk> Misra of Aaron Berg.
Thank you good morning.
I'm guessing structures have the highest widebody exposure and probably engines have the highest narrow body exposure is that correct and if any way you could further quantify that's true.
What's the wide body, what sort of narrow bodies like the <unk> and engine versus structures.
Suddenly you're right in terms of a base of cost structures on our fastener business because of the the composite content of wide body aircrafts, so if you're thinking.
Three fifties as an example of Boeing seven nights of them.
And with the with the composite structures more titanium whole different suite of fasteners and the that you can see that the impact in the way we've laid out the revenue expectations.
With then the suite as we said.
I'll say, an improving situation somewhat behind the of the.
The engine business.
If you look at the traditional split going back to your you got to have to go back to 2019, because it's been moving around some of them still keep all of these numbers on my head, but it's like a 60 40 narrow and it might be 50 545 the narrative.
But a split of.
The house shifted the same as Boeing and Airbus of shifted over the last 12 months of.
You picked on that I think traditionally bloating would've been 60 of those 40 flip the other way and that could rebound again in the in 2021 to some degree of the as the Max gets back.
Up and going.
Hum for engines I actually don't keep the numbers in my head in terms of like what the exact split is suddenly a in terms of what we see over the next 12 18 months is that the that the.
Aero body engines.
So think of leap one of the easily one b's and then you'll see some of the of the aftermarket sales.
Of this business coming back for the the CFM engines.
What was she began to fill them at the bottom of the.
Two of the 22.
But.
I think especially I can do at this point I cant accept the room of the split between wide and narrow of French and maybe we haven't given that.
This is Greg.
Really appreciate the all the details and maybe as a follow up.
But the car to the industrial and other end market and sorry, if I missed this but have you given on what sort of full year growth rate is baked in your revenue guidance for the year.
For the grocery thing just remarks, we haven't called that out but just didn't they just give you a picture on that the.
The way, we see of staying true IGT part of that the.
Business is strong.
And getting stronger in fact, and so at the moment, we could sell everything we could make them and so again, we're working on raising production for that so that's the I'll say some of the exciting oil and gas has been really very muted for the last year on the the first half of this year.
But we thought processes, the maybe the fourth quarter or certainly by the first quarter of next year, we think of in the oil and gas being as she begins to show an improvement for us we see.
The Texas crude now at $66 plus or minus on the natural gas has moved up.
Rig count has moved up significantly for the Gulf of them. So all of that's you're talking well to us in terms of the demand pattern as we work through the inventories and in the oil and gas and then any of general industrial is also strengthening our as we see through the balance of.
Of 2021 again in the second half so.
So the.
Basically snapshot is IGT strong.
Oil and gas.
Another quarter or two of weakness flow of by some strength.
And then general industrial progressively getting better as well.
Great. Thank you very much.
Okay.
Your next question is from Phil Gibbs of Keybanc capital.
Hey, good morning, it's Mike on for Phil I wanted to get an update on price increases here, you're getting good traction there and you expect to be greater than what you saw in 2020, but do you have visibility into when do you expect the lion's share of those price increases to be seen in the year or should we expect fairly steady.
The benefits quarter over quarter.
I think we're gonna see of fairly steady pattern of throughout the year now most of the agreements have now been Oh I think all of all the agreements of the renewed in terms of L. T. H for 'twenty, one we don't expect much by way of spot business unless it's for me.
Sales in the backend of the weather Oh, let's say demand this mismatch to the previous schedule.
So I mean, that's the picture of the and I guess, we will be giving a non.
As detailed in our 10-Q, which we plan to issue later today.
But basically everything's in order on the side compared to previous statements.
Okay, great. Thank you thank.
Thank you.
Your next question is from George Shapiro with Shapiro research.
Yeah, John it's it looks like sequentially commercial Aero was maybe down about 2%. If you could validate that and if you could also break out what you think the mix is now between OE and aftermarket and then the improvement you're looking for in the second half is that primarily Oh.
Or after the market. Thanks.
Okay. So.
Benefits in the second half centuries of way are they.
We'll be some modest improvement I think in commercial aero, but fairly modest.
She gave you the picture if you go back 2019 of the reference point 800 million of spas, which essentially the engine buses.
On top of laying off of.
The structure of business.
He was 400 of millions of defense and industrial the grew let's say, let's call it 20% over the last.
The year or so so healthy gross the.
But the but.
The most part of the.
Bass or possibly sell through to the.
All of our own shops through our customers.
Dropped off a cliff in the.
In the second half of last year.
So basically we see limited demand.
But still eight am on like commercial business jet on some very modest levels of spreads business.
And the pick just from the US is close to half of this year is pretty much the same as it's back.
Back half of last year, so compared to 100 million of courts of take more like the 20 million.
Of course, it can be below that could be above it just depends on the quarter.
Pause just bouncing around with small numbers.
In the second half of this year.
We are expecting a modest lift, but not planning and try and think of significance.
In that business are in.
In the second half of this point, but that's a little bit higher than that.
Compared to the $20 million of quarter thinking more like that the 25 to 30 million of course, the it doesn't move the needle for us at this point in time I think it will in the in 'twenty two.
So all of the guidance I've given you just essentially a.
Some of it in the commercial aerospace part of our business is coming off of the early demand.
Okay. Thank you very much.
Cool.
Your final question is from Noah <unk> of.
Goldman Sachs.
Oh, you're back on back.
Also charged of Baltimore.
One question on <unk>.
I totally never violate the stick to one question rule. So I came back just kidding.
John but the the last time, a commercial aerospace was on a similar point in its cycle. You know you know sort of looking at the early part of the recovery.
The fasteners market was just volatile and it turned out the.
You know it was because of a lot of use of distributors and just kind of from maybe a long path from from the the.
Part of OEM to the airplane OEM ing it.
Ended up just taking a long time to recover and was just kind of from Messi.
In hearing you talk about the inventory destock, maybe last thing a little longer there maybe you could just help us get comfortable that.
The issues that drove that last time around or are in the system again in and I guess, how worried are you about that and that goes on.
Well I I don't know it was like can give.
Give you any more comfort I ask I wasn't thinking around when the last cycle really at the.
So I don't know we've done a lot of assets in that business to try to grow not just you know the demand, but also through the through distribution.
The at the moment.
I think it's good and clear that we've called it out of being probably a couple of quarters behind where the.
We think of some of the other parts of our commercial aerospace business of beginning to respond.
So I think that's a fairly.
Thought through on quality view of the market at this point I recognize the day, we do have.
The extended change. So for example, part of our if you just take the the the North American business and so I'll just confine my comments to the <unk>.
Yes, we will supply directly to Boeing so that's part of the demand relative to supply into it if the company the spirits and therefore, it's another step in the supply chain.
And what we are clear on is the you know.
We've been supplying the low rate of something.
The time.
We.
Not trying to be optimistic.
We're going to see that recover in the AR in Q3 of Q4, we've been saying, it's it's a it's a couple of quarters behind them the.
And do think that it will begin to recover or will the maybe even the.
The.
Maybe it's the bullet comment the.
The also means though is it's not like I said I think we're going to see significant demand increases for our pass of the business in 2022.
The best I can guide you at this point in time.
Without the perfect visibility the I.
I guess, we'd all like but we don't have yeah.
Okay. That's helpful and just one more while I'm on here on.
The cost you have referred to to sort of.
The prepared to.
Her of growth come back hiring et cetera.
Is there any range of an absolute dollar number you could put on a mattress a week of them compare that to the cost out number you've had.
Well it's of course, it's the cost out number is essentially a bull on the structural cost takeout, where all of the variable cost side the.
The cost of the employment that I'm talking about bringing to the business is essentially on our variable cost structure. So you detail on the songs completely different parts of buckets in the P&L from.
And I just consider the like direct labor, we flex in accordance with the production requirements.
To give you a picture for a second quarter than we were thinking of let's say around 400 people a couple of 500 people to bring into the business in the during April may and June to prepare ourselves for what we've talked about.
And recognizing the the.
Many of those islands will be necessary the productive.
As we go through so you can begin to work on you know if you're just the Pla on average our direct labor cost per employee for the sort of numbers on average them through a quarter you can see the sort of cost.
Of course that we're talking about this being the but I believe.
That's essential for us to be able to then.
Chief of the yields the incremental margins that we've talked about which is really.
What this business is all about on the way, we should think of it.
So actually I should just think of it as your structural cost out number you've spoken to them, obviously variable cost type of tethered to revenue, but that youre going to have some variable costs. The lead the revenue recovery as you anticipated.
Exactly so put us on books will be taken on.
Pairing say go to waxing on the.
I'll say the type of slurry tanks.
And then the most boring of testing machines on lines, so that all of that of course.
So we can take the production once we go into it.
The Q3 and Q4.
Okay. Thanks for taking my questions.
Okay. Thank you very much and I think that concludes today, but I felt like the operator to conclude it force.
We have no further questions in queue.
Ladies and gentlemen, thank you all for your participation. This concludes today's conference call you may now disconnect.
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Hum.
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Yeah.
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