Q2 2021 Howmet Aerospace Inc Earnings Call
[music].
Yeah.
Yeah.
Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace second quarter 2021 results.
The name is Catherine and I will be your operator for today.
As a reminder, today's conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Paul Luther Vice President of Investor Relations. Please proceed.
Thank you Catherine and good morning, and welcome to the Howmet Aerospace second quarter 2021 results Conference call I'm joined by John Plant Executive Chairman and co Chief Executive Officer told the whole co Chief Executive Officer, Ken Giacobbe, Executive Vice President and Chief Financial Officer.
After comments by John told you and Ken We will have a question and answer session I would now.
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 companys actual results to differ materially from those 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 and our discussion reconciliations.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix and today's presentation.
With that I'd like to turn the call over to John.
Thanks, J T. Good morning, and welcome to the second critical.
I'll start with an overview.
Second quarter per 4 months.
And then pass to <unk>, who will talk more to our market and.
And then Ken and we will provide further financial detail.
And also plan to talk to the ESG and.
And we will do so and in about once a year going forward and then provide guidance and talked to guidance for the third quarter and.
Full year 2021.
So let's move to slide number 4.
Let me start with some commentary on the second quarter, which.
Which was the first comparable quarter full hammock post separation with no pro forma numbers.
Revenue was $1.2 billion and in line with expectations, while EBITDA EBITDA margin and earnings per share exceeded our expectations.
Adjusted EBITDA was $272 million and adjusted EBITDA margin was on par with Q1, 2021 and Q4.2000 2022 per cent.
And the addition of costs to prepare for the second half ramp up and commercial aerospace production.
Earnings per share excluding special items was 22 and.
<unk> ahead of our expectations.
And historically, the first half as being a cash outflow for the company.
The increased operating performance focus of harm and that's led to improved margins and Huntsville, and cup and control and capital discipline, which generated $160 million of cash and the first half of the year.
We expect continued cash generation and the third and fourth quarters.
Year to date, we have reduced debt by approximately $835 million.
By completing the early redemption of the 2021 notes and Q1 on the 2022 notes in Q2 with cash on hand.
These transactions reduced 2021 interest expense by approximately $28 million.
And approximately $47 million on an annual run rate basis.
It helps with increased 'twenty 'twenty, 2 free cash flow.
In the second quarter.
We continued to return money to shareholders with the completion of a 200 million share buyback program.
The weighted average acquisition price was $34.02 per share on approximately 5.9 million shares.
The second quarter and cash balance was $716 million.
And lastly, we continue to focus on reducing legacy liabilities.
Year to date, we have reduced our pension on opioid liabilities by approximately $160 million.
Moreover, 40 year pension and <unk> expense is expected to improve approximately 50 per cent compared to last year.
Now, let's move to markets and performance on slide 5.
Q2 revenue was 5% last year over year and.
And in line with our expectations on a year over year basis commercial aerospace was 31% less driven by lower aircraft builds spares on the lingering effects of customer inventory corrections.
Commercial aerospace continues to represent approximately 40% of total revenue compared to pre COVID-19 levels of 60 per cent.
The commercial aerospace decline is partially offset by a continued strength in other markets.
The industrial gas turbine business continues to grow and was up 13% year over year, driven by new builds and spas.
Muscle transportation business was up 89% year over year as it rebounds from customer shutdowns and Q2 of 2020.
And truck demand remained strong.
And those months through that I would and supply chain issues with several components, which are in short supply.
At the bottom of the slide you can see the progress on price cost reduction and margin expansion and cash management.
This increases are up year over year and continued to be in line with expectations, let's say on tied to long term agreements.
Cost reductions are also in line with expectations with a $37 million year over year benefit which reflects the decisive actions, we started and the second quarter of 2020 at the onset of the pandemic and continued through last year.
Year to date structural cost reductions on $98 million, which have essentially achieved already a target of approximately $800 million.
We have a space decremental operating margins continued to be very good that's only 19%.
And we'll segment had an incremental margin of 47 per cent.
EBITDA margin expanded by 310 basis points year on year, driven by price and favorable cost flexing and fixed cost reductions and the team delivered strong margin expansion. Despite a reduction in revenue.
Capital expenditure was $36 million for the quarter and.
Can use to be less and depreciation and amortization, resulting in a net source of cash.
Lastly, free cash flow was $164 million for the quarter, resulting in a record first half.
Now, let's move to slide 6.
Adjusted EBITDA margin for the quarter was 22.8 per cent and consistent with the last couple of quarters on approximately $43 billion of less revenue.
The margin results overcame both the effects of the low revenue and the cost of many additional employees to meet the increasing production and demand coming in the third quarter.
Q2 revenue at $1.2 billion was in line with expectations, you can see the benefits of Iraq and since the start of the pandemic and Q2 and if so.
310 basis points on EBITDA margin expansion, while revenue was approximately $58 million and less in the same period and.
And let me hand, it on to tell all of it to give an overview of the market.
Thank you John.
Please move to slide 7.
And some more details about our year over year revenue performance.
Quarter revenue was 5% less driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter.
Commercial aerospace was toward the 1% less year over year in line with our projections as expected inventory correction continues.
Defense Aerospace was essentially flat and the second quarter as we are on a diverse set of programs with the joint strike fighter B and approximately 40 per cent of the total defense business.
Commercial transportation, which impacts both to force wheels, and the fastening systems segments was up 89% year over year at second quarter of last year, but significantly impacted by customer shutdowns.
Finally, the industrial and other markets, which is composed of IGT oil and gas and general industrial was up 13%.
<unk>, which makes up approximately 45 per cent of this market continues to be strong and was up a healthy 13% year over year.
I will now turn it over to Ken to give you more detail to be able to find it.
Thank you tell them, let's move to slide 8 for the segment results.
As expected engine products year over year revenue was 7% less and the second quarter commercial aerospace was 17% less driven by customer inventory corrections and.
Reduced demand for spares commercial aerospace was partially offset by year over year increase of 13% and IGT.
And the IGT business continues to be strong as demand for cleaner energy continues.
Decremental margins for engines were 12% for the quarter and so we hired back approximately 300 workers to prepare for the anticipated growth and the second half of this year.
And the appendix of the presentation, we have provided a schedule, which shows each segment's incremental or decremental margins for the quarter.
Now, let's move to fastening systems on slide 9.
Also as expected fastening systems year over year revenue was 20% less and the second quarter and commercial aerospace was 42% less.
Like the engine segment, we continue to experience inventory corrections and commercial aerospace.
The industrial and commercial transportation markets within the fasting systems segment were both up approximately 45% and year over year.
Decremental margins per fastening systems were 31% for the second quarter and segment operating profit margin was approximately 19%.
Please move to slide 10 to review engineered structures.
Engineered structures and year over year revenue was 30% less and the second quarter.
Commercial aerospace was 45% less driven by customer inventory corrections and production declines for the Boeing 787.
Defense Aerospace was relatively flat.
Year over year.
Decremental margins per engineered structures or 12% for the quarter.
And lastly, please move to slide 11 proportionate wheels.
Forged wheels revenue doubled year over year as last year's results were impacted by customer shutdowns.
On a sequential basis volumes were down approximately 7% due to customer supply chain issues.
Courted revenue was essentially flat.
Sequentially, driven by a 20% increase and aluminum prices.
Although higher metal cost per pass through to customers to avoid the profit impact you will see a reduction and EBIT percent, resulting from the pass through.
Segment operating profit margin was approximately 27% and year over year incremental margin was 47% and <unk>.
<unk> margin was driven by continued cost management and maximizing production and low cost countries.
Please move to slide 12.
We continue to focus on improving our capital structure and liquidity and the first half of the year and we completed the early redemption of our 2021 and 2022 bonds with cash on hand.
Gross debt stands at approximately $4.2 billion all debt is unsecured and the next maturity is in October of 2024.
Finally, our $1 billion 5 year revolving credit facility remains undrawn.
Before turning it back to John to discuss ESG, and 2021 guidance I would like to point out that there is a slide in the appendix that a cover of special items and the quarter spec.
Special items for the second quarter for a net charge of approximately $22 million, mainly driven by the costs associated with the early redemption of the 2022 bonds completed in early May.
Now, let me turn it back over to John.
Thank you, Ken and let's move to slide 13.
Moving to ESG and encourage you to read our sustainability report found that hammer dot com and the investors section.
Well, how much aerospace and <unk>.
Mental social and government and she is about generating meaningful change for a more sustainable future proofing.
Moving on diversity and inclusion inside our company and and the communities and which we operate.
Regarding employee safety.
Maintaining attention on safety through certain operational conditions presented by COVID-19.
Total recordable incidents continues to be significantly better than the aerospace and defense industry average.
<unk> thousand 20, we had a 20% year over year improvement in late $2.0.71.
Additionally, 84% of all locations worldwide and without a lost work day incident.
Tremendous testament to the dedication and focus of our workforce.
We continue to underscore the importance and.
Diversity equity and inclusion and our company.
The value of the rich diversity of expertise.
Grounds and viewpoints to fuel our innovation and growth.
And make it to improving diversity of employees.
Total levels.
Simply we were recognized by the 50.50 women on boards organization for our commitment to broad diversity.
And in addition to gender diversity, we also partnered with key external organizations, including the human rights campaign, and nationally spy and corporate counsel and diversity, but best practices to review and continuously improve our initiatives.
With respect to sustainability.
Is this more evident than and the products that we provide to our customers.
And that's a project technology has helped reduce fuel consumption and.
And emissions contributing to the aerospace industry school or a smaller carbon footprint.
5 specific areas on the bottom left on the slide.
The commercial aerospace next generation jet engine technology reduces fuel consumption by approximately 15%.
Moreover, how much increased content on composite aircraft of 2 times contributes to light weighting solutions and reduces fuel use a composite aircraft or approximately 20% more fuel efficient.
Comparable metallic aircraft.
For forged wheels.
Aluminum wheels off price times stronger than steel.
Being 47% like that.
Customers can realize up to 1004 hundred pounds of weight savings and retrofitting and 18 Wheeler class 8 truck from steel to aluminum wheels.
Her IGT habits products continue to enable hub and higher operating temperatures.
But and also pressures increased low deficiency towards approximately 64% and reduce nitrogen oxide emissions by approximately <unk> 40 per cent.
Lastly for renewables habits, fastening systems used with solar panels, and good strength and clumping by 5 to 10 times and reduce installation time by up to 80%.
Moving to stem education, and inclusiveness and might ease.
Dedicated to increasing stem opportunities and education and the local community to the high met the Aerospace Foundation grants to institutions and schools and also because we would need a commitment to support our 6 employee resource groups with strategic focus on community culture and curious.
Let me now move to slide 14 third quarter and annual guidance.
The leading indicators for air travel continued to show improvement, notably for domestic travel.
And this includes online searches for air tickets and.
Increases in flight schedules across most of the world and the beginnings of some international travel.
Orders for aircraft by Airlines on Assembly partners on <unk>.
Kris and rapidly.
Expectations on how much will transition into revenue growth and the third quarter continues.
And approximately 15% and commercial aerospace and total revenue guidance of approximately 9%.
We look forward to managing and leading this exciting gross faithful hi, Matt after the devastation of the pandemic on the industry.
Gross is expected to continue into Q4 and into 2020, 1 'twenty 2020.2 and beyond.
See concern businesses.
And that we expect increases in the engine business, notably starting in the third quarter, followed by structures and the fourth quarter, and fastener and stopping and the first quarter of 2022.
In terms of specific numbers and we expect the following for the third quarter.
Revenue of $1.3 billion, plus or minus $20 million.
EBITDA of $295 million, plus and minus $10 million.
EBITDA margin of 22, 7% plus or -40 basis points.
Earnings per share of 25, plus or -2.
And for the year.
Expect revenue to be $5.1 billion plus or -50.
EBITDA baseline to increase to 1.17 billion.
Plus or minus plus 15 -25, EBITDA margin to increase to 22, 9% plus 10 basis points and minus.
It goes on to -20 basis points.
Earnings per share increased to 19, 9 plus or -3.
Cash flow baseline increased to 450 million plus or minus $35 million.
Moving to the right hand side on the slide we expect the following second half revenue to be up approximately 12% versus the first half 2 and.
And by commercial aerospace.
Defense and IGT.
Second half year over year incremental margins of over 50% compared to the prior year.
Price increases will continue to be greater than 2020.
And the cost reduction carryover of a $100 million.
It is and where do you achieved with some potential modest upside.
Pension contributions.
Contributions of approximately $120 million.
We've got on reducing cash pension contributions by approximately $40 million based upon the American Rescue Plan Act.
Capex should be and the range of $200 million to $220 million compared to depreciation of approximately $217 million.
Adjusted free cash flow conversion continues to be in excess of net income and approximately a 100 per cent.
Lastly on.
As announced last month, we have reinstated a quarterly dividend of <unk> <unk> per common stock starting in the third quarter.
Now, let's move to slide 15 for a summary.
The second quarter was solid.
And it's described as a quarter to get through.
For the volume lift and the third quarter.
And with better than expectations with improved margins and excellent cash flow.
The net recruitment of production arthritis, and the second quarter was approximately 300 people principally in our engine business.
And we of course will continue to manage costs very carefully and this recovery phase.
And the second half we plan to recruit and another net 500 people.
Equity is strong and we have healthy cash generation.
And third quarter outlook is for revenue to be approximately $100 million hot and the second quarter with margin somewhere between 22, 3% and $23.1 per cent.
For the second half, we expect extra costs, however year over year.
Incremental margins are expected to be over 50 per cent.
Consolidated EBITDA margin for the second half.
Liked it to be 22, 6% to 23, 2% setting a platform for a healthy 2022.
And overcome overcoming the drag actually.
Increased labor costs from the recruitment I talked about on that.
Cost of the net effect of the metal recoveries.
And very much on that and I propose to take your questions.
Thank you and now we will begin the question and answer session.
As a reminder, please press 1 to be held and the Q&A queue.
First the pankey, if he would like to bring him on this front and you can't do.
And request that you limit yourself to 1 question.
Our first question comes from the line of Carter Copeland with Melius research.
Hi, good morning, gentlemen.
He called out.
John I wondered if you could kind of give us some color on the composition of the hedge you're adding back to the system on our.
Some of these former employees are are we knew I know last quarter, you talked a long haul and.
And training expectations and wanting to get the productivity.
To the right level from the Star just any color you can give us on on how about on adding back resources is gone.
Yeah. So we are we've talked to about 300 people in Q2.
And as you recall I said, we'd add these people essentially no net outflow.
And they can see that.
Sales did not increase and so it was exactly in line with expectations for the revenue side.
And we mentioned that we would possibly recruit a 4 to 500 people and the second quarter. So we're a little bit below that.
And that was essentially us keeping tight control on the cost going forward.
The majority of the.
Employees that we've recruited so far on it.
In fact, the majority and the third quarter will be for the engine business.
So far about 3.
3 quarters of the increase has come from people that we called from previous employment.
And the whole quarter on a new employees.
I expect that blend to change as we move through the next let's say period of time.
And maybe.
And maybe to a 50.50 and then the majority will refresh of employees and I think as we exit the year.
To give you a roadmap for the second half as a first Q3 will be principally engine and then we'll be looking to selectively and our structures business.
And the fourth quarter and also for a faster businesses and we get tool and they are looking into 2022 to be ready for that so about 500 people I think we are planning for the for the second half so getting towards a thousand and for the for the year.
Great. Thank you for the color I'll stick to 1.
Thank you.
Your next question comes from the line of David Scharf with Barclays.
Thank you and good morning.
David.
John.
Could you comment on or give your perspective on the the Airbus right narrow body rate increases that day.
I've been out with proposing out in 'twenty 3 'twenty 4 'twenty 5 what that can mean for you all from a revenue perspective.
Does that allow you to kind of grow above the prior peak of $7 billion on revenue and I guess, how well are you capacity to handle those kind of rates.
Okay.
So.
Let me talk narrow body and total assets.
And most important.
Really metric for the next 18 months or so.
And so it's 2019 the combination of.
The Airbus <unk> hundred 20, and the Boeing 737 Max is.
Peaked at about 100, maybe a fraction of the over 100, maybe 105 and are in a couple of balance and so that would be a let's say the price aggregation of the 2.
Clearly the mix is changing currently with the view that the.
And bus is is moving to 47 and January and then 55 on the Midland of the year.
So Boeing is still planning to raise production too I think just over 30 and that's great 31 in January of 'twenty 2 and.
Has been sort of that off to it at this point.
So the the combo total is in the mid eighties and.
And so you can see for 2020.2.
There's still a very significant increase on on.
And the last a year well last night and day.
This year.
So the percentage increase it's enormous.
It still isn't back 2019 levels and then.
And.
It's right on the Midland and towards the end of 'twenty 3 we are up and the in the mid sixties for Airbus.
And we don't yet know for and flowing but you could envisage that we will be right back on.
100, and maybe it may be breaking through the 105 barrier on a combined basis.
And at that point and time and with the potential further rate increases.
Should it be.
Bus.
And.
Our aspiration is to go to 70 and on above so.
That's the roadmap that but for 18 months, while we're getting to 100 and it basically just puts us back and the same territory and before you beat it and so we have certainly adequate capacity for all of that.
If you do that and also you have to blend and what's happening with bought wide body.
And it's probably a little bit too early to say, but I expect probably by the second half of 'twenty..3 that's wide body will be picking up and in fact I also think that we'll see some benefits as we go into 2020..2 so for example, <unk> 787 and returned from 2.5 months from its current and.
The production level and that would also be and increase for us. So my expectation is that we will see what I call 3 volume lift we will see the lift from us being below current bill and rate just because parts of it and take out of inventory.
And so we'll go through a rate situation, where we will sell a ship set of aircraft parts equipment and aircraft. So it can be volume and this 1.
And the diagnostic volume this too which is the a the increase that we have to make to continue to pace with the rate splits all being talked about so let's say Boeing going from 14 to 20 to 31 and from Airbus going from 40 to 55. So those are both very healthy.
Creases on and then of course for this to be done.
And then inventory has to be booked back in the system. So I expect that during 2022 and into 2020.3 we can see.
And if it's above right because the inventory just has to be put back into the assistance and guarantee these levels of on the aircraft production.
So when you put it all back together and I'll, just say and pick a moment in time, so let's pick.
On the 23 to 24 and then my expectation is that all other things being equal we will be at.
That's a rate of revenue above 2019, and basically with the content increases that we see.
Even though we have a built in loss.
And the net benefit on price is that on a like for like basis, we'd probably be closer to the 7 and half to 8 but he and equivalent.
And equivalent production of aircraft.
That's very approximately but obviously, there's a lot of changing parts amongst all of that as we go through the next 2 or 3 years.
But the way I look at it David is that we got 3 years.
Significant gross and look forward to and then maybe on the Midland the decade.
Reverting to the more normal for a 5% depending upon what end market demand is at that time.
Thanks for all the color John and I was great.
Thank you.
Yeah.
Okay.
Yeah.
Your next question comes from the line.
And with Cowen and co.
Yeah.
Hey, guys. This is Dan on for Catherine and good morning.
So.
Hey, How're you doing so my question is actually a pretty similar but I wanted to ask.
And.
From a different perspective, what will be.
And your greatest challenges and meeting the narrow body production ramps and I guess and the short term to medium term.
And also.
Would you see any benefit on.
And I guess at least on the labor side or anywhere else from depressed wide body rates.
That would maybe allow for greater utilization on the narrow body side work or is that not really relevant here.
Well you have to break it down between Okay machine tool capacity by that I mean, essentially and I say casting machines or coke machines on the.
And I'll tell you the.
Tooling that goes with the specific partner on those.
In terms of our machine tools.
We have.
No problems whatsoever in terms of capacity.
Because.
We've already made.
100, plus narrow bodies and in 2019 and as you know, we suddenly and our engine business.
Put a quarter of a $1 billion of investments in place to take that capacity up.
And so and then of course the classy just came in and then the pandemic hit us and so we've carried that capacity.
For the last let's say 18 months now and and therefore, you know its still totally available to us. So we in terms of machine tool capacity, we could take back to 400, plus narrow body rate all the wide body rates on the significant increase above that and so in terms of.
Our plants and equipment, we have essentially no restrictions whatsoever and that's also gives me confidence that we can still operate.
For a year or so with capital expenditures below depreciation because possibly eccentric already on that.
Further to your question, though is that until we know the exact mix of Macquarie.
Requirements, it's difficult to say on the tooling side. So again for the next 18 months I see no see no problems at all in terms of meeting customer demand and if we took narrow bodies and let's say 105 level combined.
And no problems.
Only when we if we were to add the lets say if.
And a bus we're getting to 75 and if Boeing.
Jack.
50, and so we're talking 125 aircraft per month.
And clearly at that point, and we'd hope we'd be out of balance and certainly in terms of tooling and go and diet capacity for the for some of the bus Pops and muscle additional tooling would have to be have to be put down to to cope with those and that volume.
Volume scenario should it finally be confirmed.
So.
The way I think about it for next couple of years.
We have no capacity limitations.
Apart from the ability to onboard and labor and training and effectively to do well outside of the.
And software side.
But in terms of hard plant and machinery deposits highs and then we'd have to be thinking about increasing to Odyssey.
Yeah.
Your next question comes from the line of.
And then with J P Morgan.
Hey, thanks, very much and good.
And guys.
On 1 or 2.
Good morning wanted to ask a quick question about.
About forged wheels, and just to make sure I understand.
Materials.
Dynamic there and how to.
And going forward I guess can you talk about what.
And what happened to kind of the the real demand.
Sequentially from Q1 to Q2, and how to think about the trajectory of that and then when it.
And when it might pick up again.
But let me break it down between fundamental end market demand and then demand that we saw so the.
And the order intake for class 8 truck and try and has been and it's an extraordinary level for some time and.
So the backlog is truly extraordinary.
And Ah.
And in Montana, and the demand is there such that confidence over.
Balance of year and in fact, the whole a 'twenty 'twenty 2.4 per month.
And so transportation businesses is really high.
And so it's like a great outdoor Kentucky, I don't think we've ever seen it too strong.
The issue that we had and the second quarter was a little cool and despite the extraordinary and market demand.
To and fishing, where we did not supply not because essentially we were unable to supply, but we took a large amount of down days and it was different by and.
And customer because they were unable to complete assembly of trucks due to missing parts and whether it was missing.
As for Windshields, all the structural components of course, the 1 that is everybody is very familiar with is the issue of electronics and semiconductors.
And so we have a lot of partially built trucks, that's all day.
And which are in play and feels around the price of the U S on and in Europe.
And ER and even some of those are delivered to dealers with pops missing until they can go back and retrofits and I'm sorry.
And so what I'm trying to do.
Picture on the market for us as well.
Great and market, but just short term supply constraints by our customers couldn't get parts. They couldn't build and we were taking days down and he enrolled there just because they said.
So chip because we can't build anymore and gotten up places like that.
That resulted in a 7% volume reduction for us.
Delivered on product in Q2 compared to Q1.
Let's call it $18 million worth of revenue and.
Volume, which happened to be made up then.
On the buy basically repricing for metal to metal escalators that we have.
And I'm coming up to the volume shortfall. So essentially says if you take a on a percentage basis and you take our EBITDA.
And.
Q1, and divide it by the U S. A.
And as revenues and you flex it by 18, and you can see that that totally accounts for about 200 basis points of margin impact. So the way you should think about the second quarter for Wales was we had a 7% volume drop.
And also are.
Metals impact and basically if you adjust for those 2 actually the margin was respectable.
And if you want to extrapolate a little bit further.
And we didn't call it out because we tend not to pull such things up and in fact, if you were to adjust for that.
Call, It 18 and $20 million at the hub level.
Basically and muscle pass through just on wheels alone.
And in fact, our our EBITDA margins would have been just over <unk> 23 per cent.
So a significant improvement on Q1 on a like for like basis will be masked by just the just.
The fact that.
Your denominator goes up on the new budget goes up because of the way we recover metal.
So that walks you through both wheels on and pharma.
Okay. Thanks.
That's very helpful. And then I guess as we look to the second half do you see the volume continuing to go down because of these bottlenecks continue on.
Or can you kind of kind of volume kind of stabilize at this level and.
And just wait for that your customers to be able to handle the increase in demand and that might show up in 2020.2.
Yeah.
I think we're going to have a similar.
Q3 to Q2 on the on the truck side that would be my thought.
Cool.
And just because part shortages haven't really east yeah.
And I do think that we're going to see.
Best of luck and guess what some of those will begin to ease towards the backend of the year.
So I'm, hoping for a fairly robust the fourth quarter on the wheels.
And although you stay healthy and all the strategy, but the answer is no but my thought is that it should be getting better and then and like a really good 2022, because it sounds like the order books are.
And the backlogs just increasing just because the demand on the.
And just the inability for truck manufacturers to satisfy the market at the moment.
Great. Thanks, very much truck and.
Thank you.
Our next question.
Robert Spingarn with credit Suisse.
Hi, good morning.
John I wanted to ask you about spares or probe and despairs, a little bit both commercial airfoils, and and defense airfoils, and just get a sense for how those have trended March to June quarters, especially since another supplier surprised us with a downtick the sequential downtick on supply chain issues.
And I don't know if that's relevant here, but.
I understand the business isn't very big but what are you seeing trend wise, both commercial and defense spares as we go through 'twenty 1.
So as you know we have to guesstimate that isn't the biggest number for us, but we actually saw a small uptick in AR and the after market demand for airfoils and it looks like.
And quarter.
Context of how much and nothing material at all.
And we all.
Planning and.
On the scheduling that we will have and.
And increased second half and and in airfoil aftermarket going through our customers on let's say Gee and and partner with me.
So well the percentage.
I think it's Oh come on.
That won't be suddenly and you're willing to the double digits and percentage of increase again, it's not a huge numbers.
Got it.
And it's pleasing to see that demand on.
And Ah Yeah, and then.
All goes well and again as we exit this year into next year.
So.
And I bifurcated, the the strength that we saw and and defense and IGT spares.
Do you need all the way through with with no real left off on that slide that's all.
And so let's say for the strong growth in 2020.
2021, but so the commercial aerospace business has been very very muted.
And Q1 and small increase in Q2, and we're seeing Hypersound high percentage increases, but it doesn't it becomes and materials in dollar terms until 2022.
And other than the bottlenecks you mentioned a few minutes ago are there any supply chain and areas that we should.
And just be focused on anywhere in the business that could be disruptive.
No. There's nothing that we see are the problematic for for how much at all and they'd be scanned on supply base last year.
And out of concern and basically to.
Disappeared.
Yeah.
And late fall.
And currently we don't see any any supply constraints.
Full metal inputs to do any of our plants and.
And we are securing supply as best.
As we know for what we believe on market demand as we go.
And of the year, because you start thinking more about lead times were and just causing our customers to be a hole coming in and trying to give greater visibility for the schedules for those parts, which I expect the wall and spent a significant amount of them sort of metal availability and the system well on.
The day 12 months studies and that is tightening.
And and clearly I think for some of our product range that we will see those lead times go out and.
Beyond the 6 months to non and 12 months well certainly as we move into 2020..2 so we really have to plant.
For those but that's only covers part of the product's looking like.
Where we have those really extended lead times.
And as those tightened and should we expect any margin pressure or these are all under L. T A's and and so not an issue.
Non issue yeah.
Thank you.
Okay.
Your next question comes from the line of Robert Stallard with vertical research.
And thanks, so much good morning.
And the money Ralph.
John You mentioned, a destocking and your commentary and I was wondering if you could run through on the latest situation is that how it could differ from aircraft to aircraft model and what sort of visibility you have on when this could and.
Yeah.
Okay.
So based on part of what we've been doing with us.
And so a few quarters in terms of what is the true level of availability and also to some degree. It's also depends now as we go forward the safety stock.
And this would also like to carry.
Hum our facilities.
Sickly on narrow body by the by the end of this year there is no.
And it country left system.
And then digital and situation.
And he told me and isolated pockets because essentially as these rate increases take effect and the second half of this year, that's just chewing up and the remaining part.
The available.
And obviously, we would have to see through web.
Tier 1 situation direction and air frame manufactured per boat and engine manufacturers try to like yourself swap and the engine and the system as well.
So it's different on wide body.
By the end of the year Hum.
And if you remember the number but let's assume it's we still have some trapped inventory and missed it in the system and.
And we will be carrying nothing something but no less and about $50 million of trapped inventory and our system, which will liquidate during 2022, but for the narrow body and the way to think about is essentially there's no trapped inventory and off system left on that.
I think there'll be very little if any and all.
And the systems left for narrow body.
As we transition through the amount to be tightening each quarter.
Yeah, that's great. Thank you very much.
Okay.
Your next question comes from the line.
Oh, sorry.
Hi, Good morning. Thank you could you comment on the I guess, the 1% decline for defense and the quarter and what were kind of the big moving pieces. There and you know what are your latest thoughts on F 35.
And going from here Okay.
And so I think a broader perspective is better on on defense and then we sort of either.
And the Claude described and what buckets and the here and.
So we read that maybe Lockheed.
Building this quite as many as they had thought and that happened last year on and seems to be this year in terms of maybe supply of ethane.
Ability on it.
The COVID-19 on workforce, we're not sure.
But at the I mean, the Housebuilding and increase machine and 2020 and 'twenty 'twenty 1.
We are seeing well I think lockheed's talked about on a slightly reduced 2022 compared to the previous forecast so maybe on.
On the call it.
And 169 down to 150 and on or something.
It's still above 121 on.
So we see steady growing F 30, fives and <unk>.
Last year this year into next year.
And then pretty study for the whole and couple of years and for.
And for US if there were to be reduced by 5% or so lets say and 24 or 25 Oh yeah.
And.
And then that would be when the increase and suppose would be encouraged and 50 far engine programs. So we expect to spud as requirements to become quite significant for that aircraft as we move towards the middle of the decade, and so you would probably look at it as the F 35 on a combined.
So early on after market and it continues to improve and increase like for a full hub out.
Over the next few years.
Yeah, and you do nodes and additional orders whether it snows.
So just tell me what the order of 36 aircraft or Eaton and the proposed defense budget that was actually lifted by our I think our the Senate to to have a slightly higher increase in quantity of basketball 80, fives and was in the original White house budget. So.
It's trending fairly well for us at this point and time.
On the on the here and now you also have to pick through the seasonality of the defense orders and they always tend to be able to get life and the first half.
And the second half of the year and we saw that again significantly and in Q4 of last year.
On the defense demand and was a was filled basically on the use of Dolby music from the.
Budget. So when you have to blend and through from assets that you'd lost 35, 40 percentage of total and defense sales.
And if I called it and I would say pretty stable year on year, maybe with a slight increase and increasing towards the back end of the year and then we will see some healthy sign it's a bold beats too early to really define 'twenty 'twenty 2 yet so.
Health and science for somebody on the other military programs.
But we're looking at.
Oh yeah.
So on a match enough for you all.
Yeah, No that's great Yeah, I think thanks for the color.
Okay.
Your next question.
That's right.
Correct.
Thank you and good morning, and John I was wondering if you have any sense that's too.
How much of your commercial aerospace businesses regional and business jet so basically how much it's not a boeing or Airbus linked.
Yes, I mean, we we have a significant exposure to boost yet.
And how do they go to.
But.
I'm not sure we've ever really disclosed it so who will comment on this call and all.
Oh, when I look at it and see whether we go okay, well, let's say and to hold back if we have.
I'm not aware that we actually have broken out the whole segment down.
And for you.
But to play and if you're if you called us any any business jet.
And you'd see on highly represented the ritual.
Well, that's our engine products or indeed any of the structural across the products.
Understood and and maybe if you could just talk.
Talk a bit about what you're seeing and the industrial segment that business for the second half.
But OEM and debt and the aftermarket and that business.
Yeah.
And so I'll break it down and central team and I'll say industrial industrial gas turbine on back on.
Oil and gas.
And the IGT flow into the business is very strong and there are situations.
Actually just taught make enough at this point and time and therefore essentially it's on.
And I'll just make more.
And that's both for.
The new larger blade for the mutual funds, which I've mentioned and.
And my earlier comment which is.
Provide gas turbines, which on the new.
Fundamentally higher outflows on lower emissions and both pulp and nitrogen oxide.
And so we have a very strong and the demand for off on a significant backlog.
For all of our customers, whether it's G evens on sell though.
Central.
And that's also combined with a very strong basketball for alcohol predecessor products.
And it was not.
Well, it's not as big blades, you're trying to put it that way and it's still a pretty big bedroom and aircraft, but not as big as the new legislature.
And every large oh about engine.
On the net surplus.
And supply situations, so it's easier for us and we do have very significant demand.
Because the natural gas a bunch of particular are all being worked hard and given the relatively attractive I'll say a day.
Fuel content of natural gas compared to oil and oil coal and.
Certainly and they're low emission and deep mode, but they also.
And I believe me thing.
So a very healthy situation that oil and gas the leading indicators of rig counts are going up very significantly, but we are not currently seeing increasing demand yet, but I guess, we're not inventory burn off situation on.
And therefore, I guess hope that.
Turning to and increase for us and in 2020.2 and then.
And in General Industrial is you'll say, it's like it's also continues to be strong, but not as strong as the OTT market.
Really it honestly.
And just to.
And so it's more plants a million and sort of equipment. So these are just not fungible to hear from us on aircraft basically.
I appreciate all the collector on thank you okay. Thank you.
Your last question comes from the line of George Shapiro with Shapiro research.
And yes, John I wanted to pursue a little bit more defense because sequentially. It was down 16% and engines were actually down 20%. So it's just something odd this quarter that made it deteriorates so much relative to Q1.
No there's nothing special Oh, George I mean, we were down I think sequentially.
Sequentially, we were down on last year as well.
And we always take the hub this NAV.
Stronger Q1 middle of the year, it's not so strong and then you basically are.
Very strong backend to the you on defense.
And softer market raws and defense I read that causes that.
Let's call it India seasonality so nothing in particular at all whereas nothing we'd lost.
So it's just on.
Are you satisfied with just the way it is.
Okay, and then can you disclose.
The mix of sales between narrow body and wide body and <unk>.
2019 versus where it is today and is there any difference in profitability.
And the 2 separate between the 2 businesses.
Okay.
And the metrics kind of on -19 was like 55 per cent Boeing versus Airbus, which wasn't question narrow bodies, but for wide body was.
Just fractionally over 50% of narrow versus wide theyre very similar numbers of sales being moving around.
Last year or so.
In terms of underlying profitability.
And very similar but I give the edge to wide bodies being slightly more profitable.
We are you know.
Different volume variety situation.
So a wide body will be a little bit more profitable, but nothing that knocks the AR and the.
The whole company I'd have joined and if you were to have the extremes that we are facing at the moment.
In terms of a differential ability narrow and wide I'd be surprised if it made more than 1 percentage points on our margin.
On the.
And as you look at it and.
If if though.
So it's not nothing of great note and fully taken account avia and any of the I'll say forward looking though we haven't given me a 22 year.
Is that.
The way we've called on second half is that we see and more.
Margins improving it's it's it's already taken on in.
<unk> and Dupont that difference and I mentioned the soft in terms of the you know you get a dollar and recovery of metal for a dollar of input costs and you fully recovered, but it still and you.
It's your margin and I've called out that was probably were taken out 22 points.
The 23.
And similarly, the steak and accounts of the changing blend and I'd be saying with narrow body coming back strongly and we're still saying that it's.
The expected margin improvement.
Despite the fractional mix change.
And there are no further questions.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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