Q3 2021 Howmet Aerospace Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace third quarter 2021 results. My name is Erica 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 Erika good morning, and welcome to the Howmet Aerospace third quarter 2021 results Conference call I'm joined by John Plant Executive Chairman, and Chief Executive Officer, and Ken Giacobbe, Executive Vice President and Chief Financial Officer.
After comments by John and Ken We will have a question and answer session I.
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.
Okay.
Thanks, J T. Good morning, and welcome to the call.
We'll move quickly through the slides and then get to your questions.
First let's summarize the headline numbers starting on slide number four.
Revenue was 1.28 billion adjusted EBITDA of $292 million and the EBITDA margin was 22, 8%.
Each number was within the guidance range provided.
Good morning pull it simply year over year revenues increased for the first time.
The revenue was led by commercial aerospace up 15% year over year.
And COVID-19 contributing to a total increase of 13%.
Of note the hub at <unk>.
Leading the increase was edgy products as previously forecasted.
The company was also able to overcome the challenges once again of the Boeing seven nights up build rate declines on the supply chain issues limiting commercial truck production.
The southern light Sevan affecting last thing systems engineer.
The engineering structures in particular.
Aluminum prices continued their upward surge with aluminum regional premiums increasing by over $400 per metric ton sequentially.
Impacting the margin rate by 20 basis points.
Adjusted earnings per share excluding special items was 27 cents cash generated in the quarter was $150 million.
Hey, al securitization was unchanged at $250 million.
On a sequential basis.
Third quarter revenue and adjusted EBITDA were up 7% and adjusted earnings per share up 23%.
Moving to the balance sheet and cash flow.
Adjusted free cash flow for the quarter was strong at $115 million, which results in a Q3 year to date free cash flow at a record $275 million.
Ken will provide further details about that actions in the quarter, which included the bomb tend to refi by nuts to fundamentally low interest cost and thereby improve future free cash flow yield.
Combination of debt options in the third quarter combined with our first half results.
<unk>.
We will reduce annual interest expense by approximately $17 million.
In the quarter, we also repurchased approximately 770000 shares.
Our common stock for $25 million, which increases share repurchases year to date to approximately 7 million shares for 225 million.
Net result of all these actions plus the reinstatement of the common stock dividend on the $150 million cash inflow, resulting in a cash balance of $726 million similar to the us at the end of Q2.
Lastly, we continue to focus on legacy liabilities.
Have reduced pension I know pet liabilities by approximately $119 million year to date.
Moreover, year to date pension and other expenses have reduced by approximately 50% compared to last year.
Please move to slide number five.
Revenue for the quarter increased 13% year over year and 7% sequentially.
As expected commercial aerospace was up 15% year over year, and 16% sequentially driven by the engine product segments and narrow body aircraft production.
Commercial transportation, namely wheels was up 38% year over year.
Volume was impacted by supply chain constraints limiting the commercial truck production.
The volume reduction in the wheels business was offset by metal recovery dollars.
The industrial gas turbine business continues to grow and was up 26% year over year, and 6% sequentially driven by Newbuild since bus defense Aerospace was down 11% year over year driven by reductions in the joint strike fighter build was up 3% sequentially from the second quarter.
At the bottom of the slide you can see the progress on price cost reduction and cash management.
Price increases are up year over year and continued to be in line with expectations.
Structural cost reduction topics. He did our annual target of 100 and $100 million.
Q3, structural cost reductions with $23 million year over year and $121 million year to date.
Every segment.
Achieved a strong year on year margin expansion, that's revenue increase for the first time in a year in aggregate.
In the third quarter and your products has an incremental operating margin of approximately 70% and forged wheels had an incremental operating margin of approximately 45%.
Systems and engineering structures, both had higher EBITDA on lower revenue.
Fasteners, how that operating margin expansion of some 630 basis points, while structures was up 210 basis points.
As a result, how much adjusted EBITDA margin expanded a full 800 basis points year on year, driven by volume price and structural cost reductions.
Adjusted free cash flow for the quarter was $150 million.
Year to date $275 million.
I said previously.
Securitization is unchanged from the start of the year.
Lastly, we have lowered our annualized interest costs by $17 million through a combination of paying down debt refi.
Refinancing low to low cost debt.
Please move to slide number six.
Adjusted EBITDA margin for the quarters 22 points, 8%.
Resenting, an 800 basis points improvement compared to the third quarter of 2020.
The margin for the third quarter was consistent with the last few quarters. Despite the cost of adding employees to meet the increasing production demand.
Perfect.
On margins of the higher aluminum prices in.
In the quarter engine products added approximately 500 employees net which now brings the total to 800 additional employees hired for that segment during the second and third quarters.
It continued to refuse the headcount required you know other segments to adjust for future demand requirements.
Now, let me turn it over to Ken.
For further details on revenue by market on the detailed financials.
Thank you John please move to markets on slide seven.
Third quarter total revenue was up 13% year over year, and 7% sequentially commercial aerospace increased to 42% of total revenue, which is an improvement sequentially, but far short of pre COVID-19 levels of 60%.
The third quarter marked the start of the commercial aerospace recovery with commercial aerospace revenue up 15% year over year and 16% sequentially.
Aerospace was down 11% year over year, driven by the joint strike fighter and up 3% sequentially commercial.
<unk>, which impacts both the forged wheels and fastening systems segment was up 38% year over year, However, flat sequentially. After we adjust for the increase in aluminum prices.
Finally.
The industrial and other markets, which is composed of IGT oil and gas and general industrial was up 14% year over year and down 2% sequentially IGT, which makes up approximately 45% of this market continues to be strong it was up a healthy 26% year over year and six person.
Sequentially.
Let's move to slide eight for the segment results.
As expected.
Products year over year revenue was 24% higher than the third quarter commercial aerospace was 50% higher driven by the narrow body recovery.
G T was 26% higher as demand for cleaner energy continues.
Aerospace was down 8% year over year, but up 7% sequentially.
Incremental margins for engine products, where approximately 70% for the quarter. Despite hiring back approximately 500 workers to prepare for future growth.
Operating margin improved 200 basis points year over year.
In the appendix of the presentation, we have provided a schedule, which shows each segment's incremental margins for the quarter.
Please move to slide nine.
Also as expected fastening systems year over year revenue with 6% lower in the third quarter <unk>.
Commercial aerospace was 25% lower as we saw continued experience continued production declines for the Boeing 787 and customer inventory corrections that.
Commercial transportation and industrial markets within the fasting system segments, where approximately 55% and 19% year over year, respectively.
Year over year fastening systems was able to generate $14 million more in operating profit while revenue declined $17 million.
As a result operating margin improved 630 basis points.
Please move to slide 10.
Engineered structures year over year revenue was 3% lower than the third quarter commercial aerospace was 13% higher as the narrow body recovery was partially offset by production declines for the Boeing 787.
Aerospace was down 21% year over year.
But was flat sequentially.
Year over year engineered structures was able to generate 4 million more in operating profit on $7 million of lower revenue.
As a result operating margin improved 210 basis points.
Finally, please move to slide 11.
<unk> forged wheels year over year revenue was 34% higher than the third quarter.
On a sequential basis revenue and operating profit were essentially flat.
The segment was able to overcome a 4% decrease in volume due to customer supply chain issues limiting commercial truck production and a 13% increase in aluminum prices to maintain a healthy operating margin of approximately 27%.
Year over year incremental margins for forged wheels were approximately 45% for the quarter.
<unk> margins were driven by continued cost management and maximizing production in low cost countries.
Now, let's move to slide 12.
We continue to focus on improving our capital structure and liquidity I would highlight three actions.
First in the first half of the year, we paid down approximately $835 million of debt by completing the early redemption of our 2021 and 2022 bonds with cash on hand.
The annualized interest expense savings with this action is approximately $47 million.
Second in the third quarter, we tendered $600 million of our six 875% notes due in 2025 and issued $700 million of 3% notes due in 2029.
The annualized interest expense savings with this action is approximately $20 million.
Third with cash on hand, we repurchased $100 million of our 2021 notes through an open market repurchase in Q3, and then October which neutralized the gross debt impact of the tender and refinancing.
The annualized interest expense savings with this action is approximately $5 million.
As a result of these actions we have lowered annualized interest cost by approximately $70 million and smoothed out our future debt maturities.
At the end of Q3 gross debt was approximately $4 $2 billion, which is similar to Q2.
Net debt to EBITDA improved from three five times in Q2 to three two times, despite the deployment of cash for debt refinancing share buybacks and dividends.
All that is unsecured and the next maturity is in October of 2024.
Finally, our $1 billion revolving credit facility remains undrawn.
Before turning it back to John to discuss guidance I would like to point out that there's a slide in the appendix that cover special items for the quarters.
<unk> items for the third quarter were a net charge of approximately 93 million, mainly driven by the costs associated with the bond tender and refinancing completed in the quarter.
Now, let me turn it back over to John.
Thanks, Ken.
The leading indicators for air travel continued to show improvement, notably for domestic travel, but also we notes the two.
Sure.
<unk> requirements or restrictions being lifted for certainly transatlantic travel.
Starting this month.
As expected have met transition to revenue growth in the third quarter and.
And we expect year over year revenue growth will continue into the fourth quarter and 222.
With a growth of approximately 12% in commercial aerospace and total revenue growth in the fourth quarter of approximately 6%.
Growth is expected to continue.
In 2022.
As expected the engine products business began to grow notably in the third quarter.
We expect modest modest sequential growth in Q4 for engineered structures. Despite continued delays with a 78 seven.
Testing systems is expected to show growth in the first half of 2022.
In terms of specific numbers, we expect the following in.
In terms of guidance for Q4, I'll just call out in the mid points, which you can read the slide revenue 131, 5 billion EBITDA of $300 million EBIDTA margin of 22, 8% earnings per share of 29.
And for the year, we expect revenue to be a $5 billion plus or minus <unk>.
EBITDA at 1.135 billion EBITDA margin at 22, 7% earnings per share increased to one dollar.
And cash flow of $450 million.
Moving to the right hand side of the slide we expect the following second half revenue to be up approximately 8%.
The first half driven by commercial aerospace commercial transportation and IGT.
Q4 sequential segment.
Segment incremental operating margins, we expect to be in the order of 28%.
This increases will continue to be greater than 2020, the cost reduction carryover of $100 million.
As already commented is exceeded.
Pension contributions of approximately $120 million in Capex should be in the range of $180 million to $200 million compared to depreciation of approximately $217 million.
Adjusted free cash flow compared to net income continues to be approximately 100%.
I'd now like to preview some initial thoughts regarding 2022.
In Italy approximate total revenue guide would be for an increase in the annual revenues of 12% to 15% led by a recovery in commercial aerospace.
In aggregate current views that we see an acceleration during the course of the year following a fairly flat first quarter compared to the fourth quarter. This year, except for increased revenues due to metal recovery.
We'll refine this view and provide guidance on earnings call in February 2022.
Now, let's move to slide 14 for the summary.
We delivered strong performance in the third quarter, which was in line with guidance.
Growth was very healthy.
On year and sequentially Inc.
Incrementals were truly exceptional and the company's margin you see in the top decile in aerospace.
Q3, smart start to Mark the start of the commercial aerospace recovery.
Moreover, we delivered sequential improvements in both EBITDA and earnings per share.
We will continue to manage costs very carefully during this recovery phase liquidity is strong and we have very healthy cash generation.
The fourth quarter.
Our revenue outlook is 30 million higher than the third quarter with margins of approximately 23% we set the platform for a healthy 2022.
Adjusted earnings per share guidance was increased.
Reflecting lower interest cost.
Thank you and we'll now take your questions.
Thank you we will now begin the question and answer session. As a reminder, press star one to be placed into the Q&A queue press pound. If you would like to be removed from the queue. We request that you limit yourself to one question.
Our first question comes from the line of SaaS Iceman with J P. Morgan Your line is open.
Oh, thanks, very much and good morning, everyone.
Thanks.
I guess, maybe starting off if you could tell us where where.
Or do you expect to exit the year on.
In terms of rate on the two major narrow body programs on 737.
On <unk> hundred 20.
Okay.
<unk> hundred 20.
45 rate.
Buses called out, let's see it seems to be the right number.
Terms of Boeing I've seen so many numbers.
Really hard for us to know exactly what's the correct club so I'm going to go with the published Skyline at 14 aircraft per month.
See reports of last.
Last July on the 60 number which I didnt recognize that now.
<unk> number so.
I don't know so I'm going to stick with my my 40, with the expectation that lifted and in the first quarter next year.
Okay, very good I will oh obey the moderator and six one and I'll get back in queue. Thanks.
Okay.
Our next question comes from the line of Robert Stallard with vertical research. Your line is open.
Thanks, so much good morning.
Rob.
John I think I'll follow up on <unk> question with regards to the Boeing 787.
Where are you at the moment and what have you baked into that 2022 revenue number with regards to what the 787 deliveries could do thank you.
Okay. So.
First of all.
Our original expectation.
If you went back six months was 787 would continue through this year.
Five months.
Clearly with with Boeing wanting to.
Just in the in the latter part of the year.
As far as we can see Boingo witness zero build condition or for 90 days.
Well, if we just get the rate for the fourth quarter too.
So it has been it's been a zero build will be built.
But maybe before.
Two to average that too I don't really know.
There's some speculation that maybe they have built it to but it's pretty opaque to us.
The most important factor is windows recertification occur because whether they'd be able to don't build is going to come out of inventory.
And we've seen inventory shrunk as well and so.
Supplies into the sudden eight seven have been low and we expect them to continue to be low in the whole quarter.
And then the question is what will the rate.
In in.
In 2022.
Uh huh.
I thought at this point.
Is that maybe a 2022 and you'll build might be 48 aircraft don't know.
We've had to make some guesstimate.
That's provided for in the 12% to 15% volume increase that I talked about it in revenues.
As our initial thoughts for 2022.
And that takes account of what we think the balance of probabilities across all of all.
All of the end markets that we are that we serve.
And maybe I'll just continue to be first to give better color is when you consider.
The overall uncertainty in.
In the industry regarding liquidate your liquidation of inventories and in particular the.
Wide body.
And the fact that will probably be flat for the 12 months.
The supply chain issues, which are certainly very newsworthy put out are real.
And indeed caused.
Truck production to be lower in the third quarter. That's also combined with the annual shutdowns in Europe, and then of course this saga coal zero build condition, which is only two on the seven to eight seven and I think the the sequential growth.
Lease is outstanding.
And all we're doing is not debating the fact, a recovery, but what's the exact angle of the slope of recovery.
And that's about it really well.
Just one clarification John E. Therefore, assuming that the destock on the 787 is now done and you are basically going to be following the Boeing build rate.
Yeah Yeah.
You tell me what the build rate is gonna be.
I'll tell you the lease stock.
If it is where I find myself, so I'll try to be clever about the response to the question but.
But.
You know I I spy.
Find myself in the position.
You know we've been grappling with.
Moving end markets geographic with all the different end markets moving at different rates, whether it's industrial commercial transportation or commercial Aero defense when you've got all of these things moving around.
You overlay that with some very specific issues at Boeing.
Which we know about but none of us knows the recertification date and exact Boeing has not provided that guidance either themselves.
That's very helpful. Thanks, John.
Thank you.
Our next question comes from the line of Myles Walton with UBS. Your line is open.
Thanks. Good morning, I was wondering if I guess one detail on one question.
Question about 'twenty, two and the detailed one I think the.
I think the structures business was more anticipated to be a fourth quarter growth and obviously you saw some pretty pretty great sequential growth here in structures in our commercial Aero in particular could you.
Talk to why that happened a little bit sooner and then secondarily. The defense expectation for 2022 can you just benchmark where that isn't that kind of 12% to 15% topline.
Yeah.
So let me do restructure first I think that the yeah, the growth's, a little bit hard in the third quarter.
It can be seamless of a fulsome.
And then depending on the 787.
Could see some inventory correction in the in the first schools that don't know enough yet to really know.
Simply defense of course, we all know, there's a little bit of seasonality to that.
You do get a second half lift generally which is a little bit of pay it back in.
First quarter.
Usage, all easy places for defense budgets for for spreads in particular.
Defense for next year.
I'm guessing at this point, but I'm not going to get too far into 'twenty, two but I'll.
I'll say fairly flat if anything given what raytheon's said about the the rate reduction in engine, but they see on the let's say the original equipment side.
And then that will be fairly muted for us and then maybe there'll be some pick up on the spot side. So it's a it's difficult to really low.
And then the question is to what degree will see level loading from the from Lockheed on.
On the overall business. So best guess at the moment I'd say, we shouldn't be anticipating too much by way of a defense.
Defense growth next year, but we shouldn't be expecting a good growth in terms of the narrow body commercial aircraft production and continued growth in IGT.
Also we do anticipate someone's lease supply chain constraints will be affecting the commercial truck business too to move away.
By the second half of the year.
Okay. Thank you.
It contained in that 12 to 15, best guess and I'm doing what I call. It our best guess wrong when I guide at this point.
Fair enough. Thanks al.
You're welcome.
Our next question comes from the line of David Strauss with Barclays. Your line is open.
Thanks, Good morning.
David.
So John.
The announcement here recently that you've decided to stay on a bit longer maybe maybe a little bit of color on on your thinking there and how might.
You no longer how might longer might that be thanks.
Well, sorry to disappoint you, David if I might be wrong, so there's going to sort of play your life, a little bit longer than that.
No basically the are they the color I'd give you is that the the board concluded that the tolga wasn't demonstrating the leadership they felt necessary to succeed myself simplest that thanks, great credit to the board that they are they stepped up and made a determination on an exercise that judgment is part of it.
The important thing is that our board does.
I've said that I'm willing to to continue to lead how met through the aerospace recovery as I talked about all with all the different changes in old lease end markets.
That we've covered already but sunny discuss again, then I think that's hopefully be to the benefit of the company.
With no specific and dates provided.
So yes.
Looking to you for some time.
Alright, perfect John Happy to have you around.
Thank you.
Sure.
Okay.
Our next question comes from the line of Kannan <unk> with Cowen.
Yeah.
Hey, Thanks, good morning, guys.
Hey couple of questions there.
Maybe a two part question I was just curious you gave.
Paul Park range for sales for next year do you want to venture a guess on your EBITDA margin.
Adjusted EPS just to calibrate people in front of the formal guide that's going to happen next quarter, just maybe if you could talk through some of the moving pieces.
I don't really want to get that far ahead of myself gosh I feel positive about next year.
I'm convinced the.
I'm convinced myself anyway. So you know that when we do guide it'll be a it'll be a healthy cool.
For next year.
Without again, saying why exactly what mean by healthy because I don't want to give specific numbers for for increased EBITDA right.
Earnings per share, but so right now you know.
Spitefully I'll call it uncertainties and of course as you know many companies has still not provided much by way of guidance or sometimes none at all.
So we feel confident enough to give me what we've already given you and I feel confident enough to say that.
2022 will be healthy for us.
And that will be combination of both the for both.
EBITA run for cash flow.
Okay and one other thing we've heard incrementally some concerns about.
In the auto industry related to magnesium and what have you I. Just I'm curious is this are you seeing incrementally.
More difficult pinch points emerge I mean, just I know since last quarter. It sounds like things have gotten tougher on the supply chain.
Massive user we've we've already covered through the next few months.
No big deal to have Matt.
Okay. Thank you very much.
Thank you.
Okay.
Our next question comes from the line of Matt Akers with Wells Fargo. Your line is open.
Yeah, Hi, good morning, I actually kind of a follow up on that last one.
I guess you know some of the concern that I've heard of is has been magnesium shortage essentially close to do kind of less aluminum and I guess is that an area where were you guys are seeing any risk of a lack of material availability or just kind of how how long are you covered with what sort of inventory that's available yeah, I really don't believe that.
We're gonna be.
It's calling out.
Lack of magnesium is an issue.
To us meeting any any guy that would give you at all.
We looked at it recently I caught the exact numbers, but both of them look at the map we use.
And then the.
I'll say the contract commitments with golf.
Okay territory, so it's not.
Top of mind in terms of my lawyers.
You talked on the Aero side don't really have much by way of input materials concerns at all.
And the only time I have a concern because the way it affects our customers on the commercial transportation side.
Yeah.
Got it okay. Thanks, that's helpful.
Okay.
Our next question comes from the line of Heritage and that's right where the barren Burke Your line is open.
Thank you good morning.
I had a question on your metal pass through so EBITDA margins are somewhat affected in the wheels business because of the aluminum pass through.
But in the commercial aerospace business, we don't see similar going back even though nickel prices have been very high and I'm sure. The other metal prices also went up.
Is it because just that metal prices much smaller component.
In aerospace or is there some difference in how revenues recorded in the two businesses.
No. It's I mean, the principal is exactly the same person so I rarely call out things. So for example, you don't hear me talking about bad weather in Texas, You don't hear me talking about you know particular press going down.
I don't talk too much about labor or are they sort of stuff. It's just want to close just normal course of business and indeed for the for margins. If you look at nickel cobalt all of these metals into our aerospace segments have also had very significant increases.
It has aluminum into some of the the bulk is in our structures business and some elements of titanium and titanium that can be pretty muted.
Aggregates.
So I just look at all of those things and say yeah.
I tend not to call it out much.
It's just that.
It was on the last call, but as Seth from J P M.
I was asking specifically about wheels in the the margin and it's very noticeable for that segment.
And so he had to comment about it and basically this this quarter is exactly the same so there's a mental impact so last quarter. It was like at the company level. So I don't I don't really get into it at the segment level. It was 30 basis points on this quarter, it's about 20 basis points of impact.
Coolers up for the for that wheels segment, obviously you wanted to.
Be saying to use things like well $22 eight radius twenty-three they found it a bit more on for aerospace it is higher than that but it's like I don't think it's worthy and so just don't call me just move on and our job is to manage these things and one day when metal begins to abate and goes the other way.
Maybe I won't be calling it out when things are really good either so that's about it.
But if you wanted to bring it.
You used to use 20 or 30 basis points for aluminum impact on the total holdco.
So year to date.
That's great to hear thanks, Sean.
Thank you.
Our next question comes from the line of Noah <unk> with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
No.
John I just wanted to.
See if I could make sure I understand where were fastening systems is and it's kind of a sequential.
Process since it.
It started to decline later and I think we still have some inventory destocking.
It sounds like Youre expecting that to be kind of flat sequentially in the fourth quarter and then.
I think previously you talked about it growing year over year in the first quarter, which would require a decent sequential step up.
Is that the right shape and just maybe you could talk about where that segment is in terms of snapping back to the actual end demand.
Yeah, if you listen to my words carefully.
But too early I actually use with first half of the first quarter.
By sleight of hand, but I'll, just I'll call it a dozen.
We hope it about it is the previously we've said that the the Destocking and in particular, the the washout through widebody would likely be completed by the end of the year and we start to see improvements in the first quarter of next year.
To be a little bit more cautious today.
And essentially all going to hang it all 78 seven.
Because as I said earlier I don't know exactly what the build but then neither does anybody else, even though the exact build and so my assumption is that.
It is.
Less likely that it'll be bucket right five in January and so based upon that I'm going to say, it's more like a Q2.
The effect, but again you told me seven to eight seven and I'll tell you what fasteners does cause a significant under license that business.
My assumption is the rest is pretty flat.
Wide body, but improving on narrow body, so it's really difficult to be precise.
Any of this at this point in time, that's why.
All I know is the.
Recoveries occurring revenues are going up and the only thing we really debating here is just what exactly is the angle.
Cause us to make a judgment around labor and puts the rest just falls into place.
The angle of the upswing.
So I just think that's yeah listen, let's not get too wrapped round on mid Utah and the answer is good things that are occurring.
And a lot of moving parts, but generally things are looking positive.
And it sounds like that's probably hit its low watermark, given 80 sevens already.
Down and then to your point, it's a debate around timing and pace of recovery, but it probably doesn't need to go lower based on everything you just said it's difficult to go below zero.
Right.
Okay.
Yeah, but I mean, I'm I'm anticipating.
Participating somehow going to be built but again, it's not that we know precisely exactly.
Exactly what bill rate case, but say the amount of I'll just say, yes, I can believe you saw that on average for two for the quarter without knowing the exact shape of our production whether it's just a.
One or two or is it zero and then three or four.
So it doesn't really matter.
Mostly just before I didn't know how much of it.
Sure.
Yeah. They they these are the critical thing is Wednesday certification.
She is the sky is begin to turn blue.
The things just began to feel a bit better and that's why I started giving you a broad calibration of where I think we're going to head towards next year.
There are no inventory destock left in that segment.
Well. It is there is well they just got to build out into the you know down to let's call. It let's.
Let's call it two level yeah.
Correcting inventory again.
Okay.
Alright, thank you.
Thank you.
Our next question comes from the line of Phil Gibbs with Keybanc capital markets. Your line is open Hey, John and Tim Good morning.
Yeah, I think Stonewall.
Talk a little bit about what you're seeing in the aftermarket, particularly as it relates to the airfoils.
<unk> side, and then and then also whether or not we should expect you to have some price increase opportunities next year.
Okay.
First of all we did see an uptick in AR in the after market demand in our core.
In Q3.
We're expecting a similar.
Sort of improve.
Improvements in the fourth quarter. So overall, it's a it's good to see but of course as I've explained before because the the level comes off a really low level and when I talk about an increase was percentage. It's notable it's not exactly great in terms of dollar films.
Our forces that continues on that generally you know commercial aerospace airfoils.
Foils that will continue to show further growth in 2022.
But then within the overall law school commercial aerospace clearly business Jets is doing quite well.
And you know we are I'll say at the moment not segmented health.
Healthy.
And we expect to see improvements in our in narrow body as we move through the next few quarters to quite a healthy level.
2022 so I think then the dollars do become more significant for us.
Because similar percentage increase on a margin the largest dollar base begins to become more material.
Price increases my statement too so I think the 2022 be a it will be positive.
Not as big as 2021.
That's not in terms of a difference in a.
And he put more in terms of the just the base for a deal.
That's the.
What I'd say about that subject.
Thank you and then as a follow up.
Ken on the interest expense side.
What should we be modeling relative to the $63 million level that we saw in the in the third quarter on a run rate basis looking ahead with all the moves you've made congrats Alex.
Yes.
The way I would look at interest expense for next year about $235 million substantial action that we took on the debt profile this year.
Talked about on the call so around 235.
For next year seems to be in good shape.
Thank you.
Our next question comes from the line of Josh Sullivan with the benchmark company.
Hey, good morning.
Hey, Josh.
Just curious on the conversations around the overall cost reductions essentially for the F 35 program.
Howard.
Are those discussions reaching your desk, yet either on price volumes Redesigns, just curious how you're navigating that.
Uh huh.
Got it.
<unk> on that.
Uh huh.
More over a year ago.
No update.
Since then I mean the.
The Oh, even public.
Public about our E L T a redo pricing settled Oh.
On that program.
So nothing nothing going on at the moment.
Okay. Thank you.
Okay.
Our next question comes from the line of George Shapiro with Shapiro Research. Your line is open.
Morning.
John just a quick couple for you.
As the ship set value over 787 between $6 million to $7 million in that way, we can obviously put in our own expectations for what the build rate's going to be next year.
I've never been willing to call out ship set value as George.
Yeah.
Those guesstimates at that but it's not a place I don't want to go because calling out ship set bodies of people trying to model things up and down when they don't know exactly what they all want to eat but you'd take put and takes I think just.
Clouds, the whole position I think I'd much rather keep people focused on it.
The big relevant numbers, which essentially is how I got it.
The basically in a P. D. O is people are going to go up or down around that you know I always think I'll give you a really good solid SKU.
View of it and you know I don't want to get ahead of me.
Hello Man, that's that's how to think about it but ships that body isn't that a bit.
Got to go.
Okay, and then just a follow up on your comments in the wheel business. You said you expect the supply chain initiatives to maybe resolved by next year. So can you just tell us the ballpark as to how much you would expect that wheel business to grow next year. If that's the case.
At the moment I'm convinced myself that we're going to see supply chain issues through the first half.
Next year.
I'm not subscribing to everything magically changes almost most of January she said no, but the day in our lives.
And but I do think that things begin to ease as we go through the back end of the year, whether it's a lease the.
The chip shortages begin to ease or whether it's rented and missile whether its class in all of these things.
He's been working on that four.
Six nine months and so a bit by bit.
They do get resolved capacities brought supply chains, and how people come back to work and vaccination rates go up it's a labor availability, let's say it in Malaysia It gets better.
And so on so you know the end market demand for full commercial truck she is like really high.
And so this quarter, what we saw was the.
Some of our major customers have actually.
Yes, I've given up trying to build on three shifts and have intermittent build.
All in all for every few days, it's so cool customers completely abandoned its the shift.
Except that.
For the next.
Uh huh.
Alex if he is I kind of just operating on two shifts reassess again in <unk> and 'twenty two my expectation is that the bulk orders.
Ships have been very high.
Those will be further improved when 2022 pricing these amounts for our four end markets for those trucks.
So that's why I'm, giving you my best estimate of what I think it's going to happen, but there's no I mean I don't have a special Factset. That's private to me just like you just like looking at all of the factors, which have been constraining supply in saying you know what.
What do I think most a balanced view and I was gonna go when it begins to materially improve in the second half of next year because demand is there.
And what we don't build it will just get you to the backlog with the backlogs what do your normal cyclicality to twenty-three backlog.
Our next question comes from the line of SaaS Knifeman with J P. Morgan Your line is open.
Great. Okay. Thanks, Dan. Thanks, Thanks for the follow ups I guess, John maybe to go about the margin question in a less direct way you've talked about.
Alright.
No that's okay kind of a target sort of incremental.
For the business as a whole is is there any reason to think that 2022 should be significantly above or below that sort of.
You know targeted incremental level yet.
In the past.
No I don't think so you know my.
It clearly was not going to be the sort of Incrementals you saw in the third quarter, which you already have a fabulous.
The fact that we don't only cold it but did it is a it is good.
I think best guess for next year is that that that normalized.
Normalized sort of level that we've talked about in the past.
That's used it's used to with 35% plus or minus.
The apply that to the volume side of the whatever the volume is and then you know what I mean, you just fractionally for the whole issue of dull a national and a dollar of revenue.
In terms of recovery. So that's a that's a one way you can get it wrong, but I think I'm, assuming we do our stuff operationally and Oh.
And keep it on the full incremental even though no.
That's gonna be a that's going to be really good if we do that.
Right Okay.
Very good.
Either John or Ken if you could maybe run through some of the you know not operational but sort of.
Moving pieces, we could think about Burger for cash next year, so kind of pension capex tax working capital and I'll have a go to the big strokes and then let Ken refinements. So.
My guess is the <unk>.
Capex will when we got it it will be a bit higher than this year, but still a source of.
Gosh compared to depreciation.
I think cash taxes will be higher that's just a function of profit.
So that's another piece of the equation working capital it depends on the slope of the recovery boiler I guess it'll be a slight drag.
Pension and I agree it will be lower cash costs.
'twenty.
'twenty one.
That's as much as I've got you okay.
You know, we got a few with each of those numbers is the.
At the moment, we're still refining it as we go.
But our view of the demand side, Ken anything you'd like to supplement that a bit more granular than that.
The only thing that I would add to that is just the work that we've done on the pension that old Pep side. So to your point this year.
Cash contributions for pension and OPEC about $120 million.
Think it's gonna be less next year success and you saw it in the.
In the materials here.
What we've been doing on pension and <unk> this year and that always benefits next year, but just a couple of items. If I start first with the balance sheet side of the equation. The liability has gone down around $180 million for pension and OPEC.
That that's significant that the combination of.
Company actions that we've taken as well as you know the asset returns that we had last year that flow into 2021.
And then our contributions.
But the little known fact as well is we have been.
Spending a lot of time to reduce our gross.
Liability for the pension last year, you saw us move around $320 million, either a newer ties ing or buying out certain programs.
We intend to continue that this year, probably another $230 million of gross liability reduction.
And our our gross liability so that'll help us out.
And then we're also assuming everything right now all these numbers that discount rates stay where they're at.
If we looked at where discount rates finished last year was about a 2.5% and if you snap the line today it would be about $2 eight so the 30 basis point improvement that's gonna help we've shared our sensitivity in the past about a 25 basis point improvement.
Improves our position by about $90 million, so hopefully that stays where its at but definitely doing a lot of work on the balance sheet side.
Let's see how that flows into the P&L, our pension and <unk> expenses are this year.
Year to date are about $12 million, that's a 50% reduction to where we were from last year.
Not only P&L, but as we've talked about that will all help us out from the cash contribution side next year. So we anticipate.
As we mentioned to be lower than $120 million.
Yeah.
I think the.
Gross liability reduction is probably.
Just fundamentally underappreciated, I mean, well over well over half a billion of gross liabilities come off the balance sheet, which inherently reduces volatility to both mortality the interest rates going forward. So I treat that as a really outstanding outcome with essentially very little cash used to like to achieve that.
Hum.
It's hard to draw a line between that exactly in value, but it does matter in terms of what that gross and then they'll also have the net liabilities.
For the company.
Great Great and then since we're in the second round here, if I can I, if I can overstaying my welcome.
It sounds like you're done hiring for for this year you know it is.
There were where are you set for in terms of of people in terms of how far you know sort of into next year before the next you know the next round of adding folks might come.
Yeah.
It's difficult to exactly know at this point are you know as you said.
We've taken on.
So a net 800 into the engine business.
You asked me before that's what we would've been hiring.
In Q1, I'm, not really sure if I call. It today I think.
We probably will be towards the end of Q1.
They wanted to take a cautious view on all of that I mean, there's a lot of stuff. That's got to play out here I mean, it will be on SUNS I talk to.
I'll give you a piece of information you Didnt ask for it just because it.
It is interesting.
I way of information a vaccination rate is.
It's over 70% across the across the company. So between 70 and 75, so that's been responding fairly well.
So the encouragement that we've been providing to our workforce to provide protection for everybody.
We hope it continues to improve.
Okay.
Great.
Okay. Thanks, Thanks very much.
Our next question comes from the line of David Strauss with Barclays.
Alright. Thanks.
I don't think you've mentioned this John but 2022 price negotiations, where those stand today, how far you're through that and what my pricing look like relative to 'twenty one.
Exactly in line with what I previously said it is a 22 will be a lower year.
And then 2021 by a button being by the significant demand. It is still the still be healthy but.
Just to the I'll call it the natural flow of the LTA renewals.
So I would say all in order there.
From the previous Oh.
I'll say dialogue.
What was your part of your question properly.
I think that was it.
Yeah, I think that was it.
Yeah. It is.
As a follow up I think you know you've got some relief too.
To do higher level of them.
Cash return between dividends and share repo, but what about the potential to even get more relief just given where your balance sheet is and.
You know the cash generation looks like they will come through.
Next year.
Well first of all we are we know we've suddenly increase the both the authorization on the scale of baskets that we have to do that.
Critical to that in terms of utilization of those baskets as.
The view of the industry and the strength of view of the industry.
And the maybe.
Maybe some of the current on subjects it'd be great to see things recede.
We need to break here about the solid recovery of the narrow body business.
And recertification I think it'd be great to see.
Let's say the 737 certified in China suddenly seven weeks. So do you feel like that's.
Globally.
To build condition.
And then I think things that gave us the confidence in our deployment.
If I if I roll myself full would let's say yeah, you know I'm I'm, not really sure whether that depending upon.
Exactly want all died too by the way is calculated for next year.
I don't know, whether they will be much by way of restrictions.
A year from now.
Hmm.
If any.
But I I'm not sure that you would change the mindset of what we'll be prepared to do so I think we'll.
As you know getting take a forward view of what our language will be you know how.
How much we deploy what's the comfort with doing so.
And basically to provide a balanced set.
Set of returns to a secure to stay.
Stakeholders shareholders in particular.
Alright, thanks, very much Sean.
Yeah.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yeah.
Thanks.
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Uh huh.
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Oh.
Okay.
Okay.
Okay.
Okay.
Okay.
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