Q4 2021 Howmet Aerospace Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the Howmet Aerospace fourth quarter and full year 'twenty 'twenty. One results conference call. My name is Natalia and I will be your operator for today.
As a reminder, today's conference is being recorded for replay purposes.
I'd now like to turn the conference over to your host for today, Paul Luther Vice President of Investor Relations. Please proceed.
Thank you and Italian.
And welcome to the Howmet Aerospace fourth quarter and full year 2021 results conference call.
Bye John plant Executive Chairman, and Chief Executive Officer, and Ken Jacobi, Executive Vice President and Chief Financial Officer.
After comments by John and Ken We will have a question and answer session.
I would like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause 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 .
Thank you Katie and good morning, everyone.
Let's move to slide four.
Well, let me say in the quarter for you.
The environment was challenging with the new variants of all mcfall emerging the day after Thanksgiving.
Unfortunately, once we take time to understanding the changing nature of the pandemic, we find that the virus appears to be weakening, albeit it's quite transmissible.
Clothing also continued to test us with reduced build zero build with a sudden eight seven wide body aircraft as recertification is once again delayed and unclear.
Despite these impacts havent performed well.
With revenues at 1.2 dollars 5 billion, improving well above last year and in line with Q3.
Adjusted EBITDA improved both last year and sequentially and was $296 million with an EBITDA margin of 23%.
We were pleased with the margin exit rate for both Q4 and the second half of 2021.
Sales picture is one of strength in commercial aerospace narrow body production.
The defense and IGT sales.
Bind with constrained sales of our high performance wheels segment.
The supply chain constraints.
The Miss in the commercial truck manufacturing business.
Clearly, it's delta omicron variants of the virus impacted production operations.
Nevertheless, we were able to bring through a good level of efficiency.
Turning to the balance sheet now and the cash flows the company adjusted free cash flow was a record at $517 million for the year.
Well ahead of both last year and guidance with the convert.
Bush and rate of 117% of net income.
We also made incremental voluntary pension contributions in the quarter and.
And if we exclude these contributions adjusted free cash flow would have been 123% conversion of net income.
For your information the <unk>.
Free cash flow conversion has continued in the last three years at a level well in excess of our long term guide of 90%.
The year end cash balance was $722 million and reflects both the good cash flow conversion and the fact that in the fourth quarter <unk> repurchased $205 million of shares at an average price of $30.32.
The fourth quarter average diluted share count reduced to $431 million.
The year end diluted share stood at $428 million.
The repurchase of shares continued in early 2022 with a further 3 billion shares purchased $400 million during the month of January .
As of the end of January the diluted share count has been reduced to approximately 425 million shares.
And finally, the 2021 tax rate was reduced but the work we've done on the effect was one cent on earnings in the fourth quarter.
We look forward to 'twenty to 'twenty two.
Then I'll provide commentary when we get to the outlook section of my presentation.
Well I'll hand, the call over to Ken Giacobbe.
Okay.
Thank you John .
Let's please move to slide five.
Fourth quarter total revenue was up 4% year over year and flat sequentially.
<unk> aerospace increased to 44% of total revenue.
Which is an improvement sequentially, but far short of the pre COVID-19 levels of 60%.
Commercial aerospace recovery continued in the fourth quarter with commercial aerospace revenue up 13% year over year, and 4% sequentially driven by the engine products segment and the narrow body recovery.
Defense Aerospace was down 22% year over year.
And 4% sequentially driven by customer inventory corrections and production declines for the joint strike fighter.
Commercial transportation, which impacts both the forged wheels and the fasting systems segment was up 20% year over year, driven by higher aluminum prices. However, the market was down 1% sequentially as the market continues to be impacted by supply chain constraints at our customers, which is <unk>.
Emitting commercial truck production.
Finally, the industrial and other markets, which is composed of IGT oil and gas and general industrial was down 2% year over year and 3% sequentially.
Now, let's move to slide six which sums up the year nicely.
Let's start with the P&L.
For the full year price increases were up year over year and in line with expectations as they are primarily tied to long term agreements.
Structural cost reductions were approximately $130 million, which exceeded our target of $100 million.
Adjusted EBITDA margin for the year was 22, 8%, which was an increase of 220 basis points year over year.
Despite $285 million of lower revenue.
The fourth quarter exit rate was 23%.
Adjusted earnings per share was $1 and one or 31% higher than 2020.
Moving to the balance sheet, our cash balance was healthy at 722 million.
Just did free cash flow was a record $517 million, which was well above the guidance.
Free cash flow conversion was 117% of net income if we exclude voluntary pension contributions of $28 million adjusted free cash flow conversion was 123% of net income.
Net pension and <unk> liabilities were reduced by approximately $275 million, while pension and <unk> expense as well as the associated cash contributions for each reduced by approximately 54%.
Net debt to EBITDA improved to three one times.
Regarding capital allocation we.
We have taken a balanced approach.
Capital investment projects for forged wheels at Hungary, and Mexico are now essentially complete concur.
Concurrently we have been investing in automation projects and the engines and fasteners segments.
During the year, we paid down gross debt of approximately $845 million with cash on hand, and reduced annualized interest costs by approximately $70 million.
We also reinstated a quarterly dividend of <unk> <unk> per share of common stock in Q3 of 2021.
Lastly, we repurchased approximately 13 4 million shares of common stock for $430 million with an average acquisition price of $32 seven per share.
To sum it up during the year, we enhanced our profitability strengthen the balance sheet.
We're balanced in our capital allocation.
Let's move to slide seven to briefly cover the segment results.
Engine products year over year revenue was 9% higher than the fourth quarter.
Commercial aerospace was 39% higher driven by the narrow body recovery.
Defense Aerospace was down 26% year over year, driven by customer inventory corrections and production declines for the joint strike fighter.
Operating profit increased 10% year over year, and operating margin improved 20 basis points. Despite adding approximately 150 employees in the fourth quarter, which now brings our total employees added since Q1 to approximately 950 employees.
Now, let's move to slide eight.
As expected fastening systems year over year revenue was 3% lower in the fourth quarter.
Commercial aerospace was 15% lower as we continued to experience production declines for the Boeing 787.
Commercial transportation was up approximately 46%.
Year over year Fastening systems was able to maintain segment operating profit on $7 million of lower revenue.
As a result operating margin improved 50 basis points.
Now, let's move to slide nine.
Engineered structures year over year revenue was 12% lower in the fourth quarter.
<unk> aerospace was flat as the narrow body recovery was offset by production declines for the Boeing 787.
The defense aerospace market was down 26% year over year and flat sequentially.
Year over year engine structures was able to generate 3 million more in segment operating profit and $27 million of lower revenue.
Primarily due to permanent cost reductions and a favorable $2 5 million nonrecurring adjustment related to a customer contract negotiation.
As a result operating margin operating margin improved 260 basis points.
Finally, let's move to slide 10.
Forged wheels wheels year over year revenue was 15% higher than the fourth quarter.
Approximately $28 million of the $31 million revenue increase was due to higher aluminum price pass through.
Pass through of higher aluminum prices did not impact operating profit dollars, but unfavorably impacted operating profit margin by approximately 350 basis points.
On a sequential basis revenue and operating profit were essentially flat.
Commercial transportation demand remains strong, but volumes continued to be impacted by customer supply chain issues.
Aluminum prices were flat sequentially, resulting in minimal impact to sequential operating profit margin.
One final comment on the second on the segments.
The incremental profit flow through for the segments in Q4 was 30% year over year and can be found in the appendix.
<unk>, 30% includes a 55% increase in aluminum prices year over year, which adversely impacted the incremental profit flow through.
If we adjust for aluminum prices incrementals were above 70%.
Now, let's move to slide 11.
We continue to focus on improving our capital structure and liquidity.
In 2021, we took actions to lower our annualized interest cost by approximately $70 million through a combination of paying down gross debt.
Approximately $845 million with cash on hand, and also refinancing higher cost debt with lower cost debt.
Gross debt remains at $4 2 billion.
Net debt to EBITDA improved to three one times, despite cash used 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 the guidance I'd like to point out a few items that you can find in the appendix.
First.
There's a slide in the appendix that cover special items in the quarter special items for the fourth quarter were a net charge of approximately 53 million, mainly driven by cost of sales associated with noncash pension plan settlement charges.
There's a slide in the appendix that summarizes the share repurchases that occurred in 2021 as well as the share repurchases in January of 2022.
The remaining common stock share repurchase authority sits at $125 billion as of.
During <unk> 2022.
Finally.
And the reconciliation of adjusted free cash flow, you'll notice the cash receipts from sold receivables is $0 in the fourth quarter.
As a result of restructuring our accounts receivable securitization program in Q3, 2021 cash receipts from sold receivables will be zero going forward and the entire impact from the sale of accounts receivables will be in cash from operations.
Therefore, starting with Q4 of 2021 and beyond the definition of free cash flow will be simple a simple.
Simplified and be cash from operations less capex.
Please note that the net cash funding from the sale of accounts receivable has been $250 million since Q4 of 2020, which means that the sale of accounts receivables as neither been a source of cash or use of cash in 2021.
So with that let me now turn it back over to John .
Thanks, Ken.
Move to slide 12 for our guidance for 2022.
The leading indicators and travel continue to show improvement.
Notably for domestic travel.
You need to hold the view that we will see an acceleration in revenue growth. During the course of the year following a fairly flat Q1 compared to Q4.
The engine products business has the recovery to date.
And we now expect the engineered structures business, you will see lower revenue in the first half of 2022 due to the continued delays with the 787.
Fasting systems is expected to show growth in the first half of 2022, starting in the fourth quarter.
In terms of specific numbers, we expect the following.
The guidance for Q1 revenue at 1.3 billion, plus or minus 20 million EBITDA of 295 million plus or minus $9 million.
EBITDA margin of 22, 7%, plus or minus 30 basis points and EPS of 29, plus or minus a penny.
And for the year, we expect revenue to be five points, six 4 billion, plus or minus $80 million EBITDA at $1 3 billion, plus or minus $35 million EBITDA margin of 23% plus 30 points basis points and minus 20 basis points.
To increase to $1.37 plus or minus 6%.
Cash flow to be $625 million, plus or minus $50 million.
Moving to the right hand side of the slide we expect the following revenue to be up approximately 13% versus 2021, driven by commercial aerospace commercial transportation and the IGT market.
The 2022 revenue guidance includes more than $125 million of material pass through impacting margins by at least 50 basis points.
And for clarity the price increases are excluded from the $125 million pass through.
Adjusting for the $125 million of material pass through in the incremental EBITDA margins hold nicely in the 30% to 35% range.
Adjusted EBITDA is expected to be up 15% versus last year.
Adjusted earnings per share to be approximately 36% versus 2021.
Pension and <unk> contributions of approximately $60 million in yeah.
Capex should be in the range of $220 million to $250 million.
And that continues to be less than depreciation and amortization, resulting in net source of cash.
Just your free cash flow compared to net income.
Approximately 110%.
Incrementals adjusting for the metal between 30 and 75% as previously stated.
So let's move to slide 13 for summary of our 2021.
In conclusion haven't delivered really well in 2021.
And I know that the challenges that we overcame.
EBITDA and EBITDA margin increased with a Q4 exit rate at 23%.
Operational productivity was healthy.
Costs reduced by $130 million.
Prices like pricing was improved during the course of the year and well above inflation recovery.
Free cash flow was excellent.
For further share buybacks of 104 hundred $30 million or $13 million 13 million shares while also improving the net leverage of the company and reducing gross debt by $845 million and Furthermore, reducing interest carrying cost of $70 million, thereby improving few.
Your free cash flow yield of the company.
Furthermore, pension and OPEC gross liabilities were reduced by $440 million, which is another huge step and the improvement in the balance sheet of the company.
Net liabilities by $275 million.
Lastly work performed on the tax rate showed improvement with the Virginia rate reduced by 250 basis points to 25%.
Thank you and now let's take your questions.
Thank you.
Now begin the question and answer session.
We request that you limit yourself to one question.
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We will pause for just a moment to compile the Q&A roster.
Your first question is from the line of Robert Spingarn with Melius research.
Hi, good morning.
John I wanted to ask you about what we've been hearing on castings and forgings potentially being a bottleneck with capacity ramp from some of the Oems and other folks in the industry could you talk about that.
Yeah.
Probably just give you what I.
It seemed to be the way I think all three levels in response to your question I'd, probably just cover the first two.
At least my simplest.
No Ceos that have commented publicly.
Contacted me two registered any concerns whatsoever.
Well I could leave it at that.
But I think I'd like to go a little bit further.
I'm really glad is recognized.
Just how hard and how exacting production of such products all.
And it's a it's a good job that there is inventory in the pipeline at many levels.
Starting with completed engines at Boeing and Airbus and also in the pipeline between us and the engine manufacturers.
I think it will be also great to recognize the lead times with scheduled commitments to backup the skyline to the aircraft production in full.
Assuming that these volumes are are required.
And then the third level of commentary would be I'll say, commenting on the whole supply chain labor, but at both these skills response times et cetera, but for right now.
We have no recognition of this as a significant issue in any dimension.
Well I think that's a fair point that there is so much uncertainty in the production rates and the other the other thing I'd ask on this.
If the competition might not be able to keep up does this present an opportunity for you.
Obviously, it's always depends upon the pop.
In question.
Our expectation is that the spot business will pick up in 2022, and <unk> and that will be to our benefit.
Hopefully we can respond the same way that we were able to respond in 2019 and pick up that additional business should it should it occur.
And I think that's probably as far as I can go at this point Robert.
Fair enough. Thank you John .
Thank you.
Your next question from the line of Tom <unk> with Cowen.
Hey, Thanks, guys.
I was wondering if you could just.
Spell out.
Quantify the change in guidance.
From the Q3 earnings call, obviously, the sales taken down but.
What are you now embedding in terms of 787 rate Triple seven right just some of the moving parts.
Relative to what you previously provided.
Yeah. So.
<unk> metals.
That revenue line and the volume increases.
So.
Close to that 12 to 15 that I previously called.
And the reason for it being at the lower end of that is established the 787.
And the lack of visibility that we have.
Regarding that aircraft.
Oh my notes, but.
Our customer hasn't provided.
And he saw that skyline, and therefore, we have to make our own assumption of volume.
<unk>.
In addition, I'd say, there's a little bit of an inventory overhang.
Yes, 35, given that a while.
We supply to schedule during 2021.
I know that the Lockheed did not build the full quantity of aircrafts. So while the aircraft production is going to increase in 2022 and an increase in 2023.
And that's great, but we got to put enough of a bit of an overhang in the early part of 'twenty two and then we'll see the volume improvements as we go into 'twenty two 'twenty three when that overhang hopefully will no longer be there around the globe.
It'll be late twice in the first part of this year.
So those would be the you say that there's a couple of comments regarding the revenues.
'twenty two.
Other parts of the year.
Does that cover it well, thank you and just a bit more.
Okay. That's very helpful and just to follow up on Rob's earlier question on pinch points.
Have you seen any pinch points upstream with respect of nickel billet or.
What have you given the P C P striking carpenter having the.
The outage the unexpected outage at reading I don't know how do you feel about E. L F.
Nothing on nickel I recognize the carpenter.
Martha.
And I think that's going to be a little bit of a pinch point in in.
The first half of this year.
Nothing dramatic that we see at this point, but definitely having some impact.
Thank you.
Your next question is from the line of David Strauss with Barclays.
Yeah.
Thanks, Good morning.
Hey, David.
Hey, John So I guess within that 11% revenue growth John that you're talking about could you give us an idea of client and market you know what you're assuming I guess.
Aero defense.
Commercial transportation being the big ones, maybe industrial if you want to throw it in there and then on <unk>.
On on Max can you give us an idea of what you produced in 2021, and what you're assuming for production in 'twenty two.
Yes.
Yeah.
So by end markets commercial Aero, who is going to be up in 'twenty, two led by narrow body.
But not a lot happening on wide body with 787 being the complete wildcard in all of this.
IGT should be continued to be healthy.
I believe to be up in the year.
In commercial transportation for our wheels business.
It will be up a nice thing.
My chain constraints ease that we can see a fairly healthy second half of the year in that business in a really great.
2023.
The weak points at the moment would be.
Defense for US I think it's going to be.
Flat to slightly down.
Yeah.
With most of that playing out in the first half of.
'twenty two.
And oil and gas too difficult to call at this point, we are hopeful for the improvement.
Got that.
So that covers that they need the end market.
737.
I haven't got the exact numbers, but maybe what I'm sure I think he can can.
Get them, but essentially.
Well, we know the the production for all of last year.
The increase in the second half of the year.
Sure.
I didn't I wasn't that works, that's a 14 I'm gonna recognize we're all of them, but the numbers I've seen thrown around we've seen that improvement, but again, we've been supplying it below that level.
The remains of the inventory is being taken.
It can easily be four.
In the engine segment.
And that's.
Hopefully he can assist showed healthy growth for us this year.
Again strengthening as we go through the year when we see the sort of the rate increase and there's no inventory left in the pipeline to get to get burned off.
And then should we can feel more confident and do continue to raise the rate that would be that would be great for us in above what we had.
We've guided.
Spares just to comment on that that's going to be healthy for us this year by way of percentage increase so I'm thinking.
On the commercial Aero side, maybe something like a 30% increase in our after market revenues, 30% plus.
As you know, it's coming off a fairly low base. So.
The dollars are beginning to be to be interesting, but still well below previous levels in 2019.
Yeah.
In terms of.
David the exit rate on the 737 in Q4.
We were at about 17, 17 aircraft and as we look at.
Into 2022.
With what we said last quarter, probably low <unk> in the first half and low <unk> in the second half.
Alright, Thank you for all the detail guys.
Okay.
Our next question is from the line of Robert Stallard with vertical research.
Thanks, so much good morning.
John to follow up on this 787 issue you've taken the 787 out completely from your 2022 revenue guidance and then secondly, excuse.
Excuse me Thats, an accurate forecast kind of use this capacity for other stuff.
We have assumed I mean, it's just a ballpark number about 35 aircraft.
<unk> for the year.
Just a guess.
With very limited production it may be zero production.
The first quarter.
And then assuming that something but not quite sure what so we ballpark to the.
35 level.
In terms of those.
So actually facilities.
If you take the <unk> flows that go into the engine was clearly I mean.
Well that will release casting capacity.
The dies are dedicated to that Eric I've said no. They just don't they could be changed over there.
And for the most part.
That type of a fasting system titanium structures are all dedicated to the aircraft will be it's you know the platelets enough capacity to produce for other customers.
This flight tight so.
Eddie bolt fastener.
Yes.
They do use them elsewhere, but we have already.
Made provision to.
The production rates or anything else versus no. There's no upside in 787 being done we can fly the aircraft to to get back certified and in production to start in lift and that would be very helpful to us.
Yeah, that's great. Thanks, so much Joe.
Thank you.
Your next question is from the line of Myles Walton with UBS.
Right.
Thanks. Good morning, I was wondering I don't know, if it's Ken or John but on the cash flow, obviously, a better performance in 'twenty, one and then 22 still at pretty elevated levels of conversion I guess the question is why aren't you building more working capital.
As you're ramping up into the double digit growth likely this year and next year are there customers.
Payables are coming in or excuse me receivables coming in.
Our pace in PFS coming in better than you would otherwise historically wanted or or are we just setting a new bar for cash conversion versus the 90% long term target.
No change to long term guidance just that when you've got.
I'd say.
Capex below D&A for a period of time, the well that's healthy we expect.
As I guided the pension contributions to be lower in 'twenty two than previous year.
So we are expecting some working capital build and should.
Should we hit our marks in terms of.
I'll say receivables and payables.
Then I'd be quite excited to use increased working capital in.
On the back end of the year, because that would mean, a very healthy exit rate and the great momentum going into 2022.
Working capital drag for us is not the biggest deal.
Given the strength of margin.
We'd much prefer to see the improved revenues.
Having said all of that we do hope to further improve our inventory efficiency during the course of the EBIT.
What we do.
And that is helping us reduce the E E.
Rates are pro rata, the working capital drag from the from the increased revenue.
So in summary, there is a working capital drag on cash flow.
We tried to improve efficiency, but would love that drag to be even higher.
Does that show spend particularly in the second half of the year.
Yeah.
And Myles what I would add to that this is Ken.
As John said, it's it's.
Modest cash burn in working capital, but as we exited 2021, we built some inventory specifically in the engines business on some of these key platforms in order to get ahead of the ramp. So we think we're in good shape.
Okay and did you acquire any inventory from the supplier who.
Have you been liquidating in the fourth quarter.
Small amount yes.
Thanks.
Thank you.
Your next question is from the line of Seth five men with J P. Morgan.
Hey, thanks very much.
So I wonder if you could comment on.
Maybe not the exact number but in a relative sense D. A L.
L T A's.
Our coming up.
This year relative to I don't know, maybe if they're three to.
Five years on average.
You'd think about 25% coming up each year.
Heavier year, a lighter year and kind of what is.
Is there much expectation for what that might be able to do.
Liver.
This year yeah.
So consistent with what I've said previously our two.
2021 was a big year for us.
You saw that.
But through the third quarter was a cumulative.
The.
Definitely in the <unk>.
Price, excluding inflationary pass through.
The Q4 number will be issued as we issue per se.
At this time.
And for 2022, the book of LTA.
Will not be as big as 2021 again consistent with what I previously said.
Nothing's changed.
Well through our negotiations, but not completed for 'twenty, two but well through and our expectation for the price improvement.
Exactly in line with.
These statements.
Great. Thanks very much.
King.
Your next question is from the line of Noah <unk> with Goldman Sachs.
Hi, good morning, everybody.
No.
John .
I heard your comments on the math of the pass through versus the pricing in terms of what that does to margins but.
The midpoint of the EBITDA margin guidance is a little constrained year over year.
Seems like sort of the high end of the EBITDA versus the low end of the revenue we get to the 35% incremental but a lot of different places in the ranges don't get that incremental you've been speaking to so maybe youre just trying to tell us there's there's risk to revenue, but you feel good about your operating performance, but just wanted to get your latest thinking on your.
Incremental margin potential versus what you were saying last quarter.
Yeah, well the last quarter I gave you 35, plus or minus 5% approx.
We're well within that so I think it's it's exactly in line I don't think anybody is going to argue for a couple of percent with all of the variables around us.
Those will be on the crop production disruption and I could talk about inflation. It took about recovery of inflation aka took about 787 F 35.
The management of elite won't be inventory and also things like container divided policy never mind the cost of containers. So there's a lot of stuff going on.
And within the overall context of uncertainty then.
I think the the guidance yes.
Exactly in line and we will see how things Pan out during the course of the year.
Not accustomed to.
Disappointing.
The most important might not disappoint myself.
So at the moment I think we were in line I think the most important thing is.
We are passing through we can pass through.
The significant material changes.
So that's the important thing it's not a you know what.
Excuse me for trying to reduce margins.
Excellent.
And I was wondering to get to to non conversation, we've given you a range where.
We will take this.
And hope to deliver improved margins in 'twenty three just in the same way as we deliver the improved margin in 'twenty to 'twenty, one and 'twenty. One as you know it was a 200 plus basis points improvement over 20.
The way, we've guided you to I think 23% mid point, which would be an increase over 2021.
And fastening didn't see that as much in 'twenty, one and is further below pre pandemic here now that the revenue has stabilized there or is that where there's the most upside left moving forward.
Well I am certainly optimistic for our fastener business, because that's a good margin business.
I'd be a lot more bullish about it if I knew more about the seven to eight seven.
While I don't I'm going to be fairly cautious I still think that given.
I mean, when you when you go into like sort through this given I think in the Q4 revenue slightly down but margin up and if you think margin up by in wide bodies down and said makes up about him and give him the differential that makes it profitable aircraft.
Really credible a creditable performance for that business.
Okay. Thanks very much.
Thank you.
Your next question is from the line of Christine Lee Whack with Morgan Stanley .
Hey, good morning, guys.
Tom.
Rockstar.
Hum.
How do you think this will pan out.
And Australia.
And is that a right point potential pinpoint for you how are you thinking about all of that.
If anything I didn't note comments in the press for from Boeing regarding concerns about geopolitical stability are the impacts of titanium.
And.
Should those concerns.
True material real then that'd be great for us because.
We've got titanium capacity.
We'd be happy to commit to a long term agreement with <unk>.
With that customer or indeed, any others. So.
If there is geopolitical uncertainty whether it's for the defense.
Contractors or for civil Civil Aerospace production, then I think that's it.
Yeah, we'd.
We'd be happy to take your calls.
So I think all of them.
Following up on that and how much capacity do you have for titanium how much of the aerospace industry plenty of neat should it come about.
Well, it's clearly not the whole of V. S MTO demand that's for sure.
It's like those who come to US we'll get the contract locked in the capacity, we're able to offer.
Our reuse of a revolt and also titanium sponge, which for the most populous comes from Japan is not affected by the geopolitical uncertainties.
And I would certainly want to guarantee for myself, but I got access to titanium.
Thanks, John very helpful. Thank you.
<unk>.
Your next question is from the line of Matt Akers with Wells Fargo.
Hey, good morning, guys. Thanks for the question.
Could you kind of share your thoughts on head count additions at this point of view.
There's a lot of people in 2021.
Are you sort of covered for this year or there are a lot more that you need to add that to support some of the ramp up later this year.
Hmm.
Trying to.
Put head count.
Secret fluids businesses.
I'll say the early movers in the aerospace recovery ma'am.
Have you seen a just under a number of 950.
In our engine business.
We think we're going to start adding in a class of the business shortly.
Oh, and you are adding that fastener business.
So trying to get ahead of that all the recovery that we see.
In terms of access and the availability of labor so far it's been okay, I'm, saying that about 70% of it come from.
People that were recalled and therefore, 30% from a professionally but.
For us.
My expectation is that it.
Things work out.
Obviously, we expect them probably recruiting.
Additional similar number probably somewhere between 800000 people enjoyed the cool stuff.
2022.
If things work out well will be on the upside the bus and if not will be on the downside, but we'll keep it.
Adjusting it as we are as we see fit drilling during the year.
Got it.
Again, if you think about what we said to you today is that we've tried to be thoughtful about the addition of labor to be ahead of the curve in training and taking those costs out. So that we are not unable to meet our customers' demand and these especially in this very difficult parts to manufacture I already talked about.
But also we took the time and effort on.
Cash cost of building some additional inventory such that we could protect some of the volume ramp that we expect coming and we think that the demand I'm not sure it could be it could be quite healthy enrolled and get stressed about I production. We want to be ahead of the game and that's where we think we are currently.
Yeah.
Great. Thanks, John Thats helpful.
Thank you.
Your next question is from the line of Timna Tanners with Wolfe research.
Yeah, Hey, good morning.
Follow up on asking about capital allocation I know you mentioned that 20.
21, whereas the balanced approach.
Ed mentioned, you don't see a lot of Capex needs I guess really just remaining trying to get an understanding of how youre looking at dividends versus buybacks versus refinancing and other opportunities. Thanks.
Yeah.
My guess at this point as well.
Give them a healthy cash flow will still be a returning money.
Note.
To shareholders during.
2022 in fact, if you think about it we've already.
We've already done 100 million in the first few weeks of January so that gives you an idea of our confidence.
Confidence in spend.
The cash flows of the company.
Will feel our way through the year and let's see how we go.
But cleaning if all things go as we expect that we'll be buying additional shares back during the course of the year with a cadence or yet to be to be determined.
But we have plenty of authorization to do so.
We are also going to make sure we put the business appropriately and that taken care of and a slightly higher capex number.
Before.
Alright.
Yes, but when we get to our first quarter, which will be reporting to you in early may.
Just take a view of the dividend and whether they feel as though that would benefit from being lifted or not or just do a sense check as we go through so I expect a bottoms up approach but.
With probably more share buyback.
The dividend in terms of any cash flow implications for for the company.
But I am willing to consider all things my guess is that when we exit.
2022, we're going to also help improve the leverage once again.
A similar order of magnitude of tons compared to 2021, So I think we can harvest them.
Compensation will be going to <unk>.
<unk> considered a dividend.
And improve our debt structure and improve our leverage as we exit 'twenty two and 20.
2023 up in a really good way.
Okay, great. Thanks for the detail.
I don't believe I, just talked about 2023, and it's only it's only the start of 'twenty.
Right.
I must be getting carried away.
Your next question is from the line of Phil Gibbs with Keybanc capital markets.
Hey, good morning.
Well.
Our question was on was on the pricing evolution safe to say that that last year pricing gains were about $80 million.
And I think you already said this year is probably going to be something a bit a bit less than that is that fair.
Yeah.
Well the second part is how can compensate on the first part because that'd be like Hey, you know a week at this time.
Okay.
So you talked about the pass through.
Largely I would think largely in the forged wheels business for 2022.
But aside from the labor Bill that you expect over the course of the year.
Any any other incremental inflationary factors that you guys have.
Maybe at a bit higher level than you were expecting three months ago or something that but you don't have hedged out.
Energy costs are high that's for sure, particularly in Europe .
So if you were to go to.
Almost any country in Europe , all of them, having differential percentages than the cost of energy.
Because of their I'll say policy towards renewables etcetera.
I'll say security of energy is causing that to be an elevated level. It's also higher in the U S, but nothing like the increases.
Whether they're in Europe . So.
Troy attention to energy is a is one thing and of course, we will somebody with a wider dreadnought inflation increase.
That's the.
I guess, that's about it really.
And then just.
Second part to that energy comment that you. Just made are you are you are hedged in terms of your your your energy exposure there or are you feeling.
The brunt of the spot market generation.
You can assume that it's pretty costly to hedge energy and the school will be carrying additional energy costs. During the course of the year.
And those which are let's say are not covered by our customers are all contained within the guidance, we've given and as I said our guidance is within the incremental range already provided when you just forgot micropump sorry.
Thanks, Sean I appreciate it thank you.
Okay.
Your next question is from the line of Paradise mess around with a beer in Zurich.
Thanks, and good morning on your Capex guidance and recognizing it's below depreciation in 'twenty, two but is there any larger project.
That you're undertaking that's worth flagging.
No I mean, there's no significant project at all so there's no capacity expansion for example, they're not engine business as we've had previously.
Cadbury commented that we finished the capacity expansion in our wheels business and in Hungary.
In Monterey, Mexico. So that's also behind us and expect to see the benefits the benefits of that capacity available for our customers as we go through the year and particularly into next year. So that's all good if there's one theme I think we have got to have an elevated spend.
Compared to previous years.
It'll be the culmination of many of the automation products that we have.
It started throughout the company.
And I'd be willing to commit to.
Those additional targets like stimulated and in many cases those are those projects because I really do feel that's going to pay dividends for us.
In terms of meeting our.
In gestation of labor.
So taking out those inflationary costs for the future in terms of just managing our productivity.
So I think going along with that productivity will also gain because of improvements in our quality indices.
You probably recall from previous previous earnings calls I.
I have noted the improved quality and delivery from from time of death on us two or three years and we'd like to continue that path.
I think automation is going to be key to do so well be going through the volume ramps.
We also in the next two or three years.
Yeah.
Interesting. Thanks, and then just a quick follow up on your comments regarding the aftermarket sorry, if I missed it but did you say how big your aftermarket business was last year in 2021 .
I did not but to clarity right now on the call in defense and aerospace I think the.
Mark we called out 2019 was about 400 million and that's close to 500 million. These days.
The 400 million, which was in commercial and industrial that dropped the depth.
Let's say the pandemic to to about 100 million more or less.
And compared to say 2020, once or traction improvement in the back end of the year and it's on that.
And aerospace business, where I believe we can have a 30% plus.
<unk> and <unk> in 2022.
Actual spuds.
Narrow body and wide body.
Yeah.
Got it thanks, Sean.
Business Jets as well cause business, yet is really going very well.
Got it pretty clear.
Okay.
Your next question is from the line of George Shapiro with Shapiro research.
Yes, good morning, John .
Okay.
For the last couple of quarters you've been.
Bit less in revenues than you thought, but the margins either have been as good or better than what you've been guiding to so how long can you continue to do that if we see a recovery somewhat slower so the revenues continue to be a little bit.
Less than expected out there.
Okay.
Suddenly if you'd say compared to.
What I would have liked to have seen in the back end of 'twenty 'twenty. One then.
Revenue would have been a disappointment, but as you know we can only supply that Michelle custom as well.
I think all of us recognize that I mean, the if you call out one one instance, rather than go through everything and 787.
Overshadows everything in the backend of the year.
Particular, effectively production going to zero in the fourth quarter.
So.
Yeah revenue lines. The disappointment most important thing to me is that despite despite oil and within that could you know containing that through our cost reduction programs in our efficiency. Despite all of the impact of army crop.
On the production disruption that indeed provide plug.
Plus if you also want to pile on you cannot all of the additional protection that we tried to provide our employees. So we can maintain production.
There's like testing regimes, and we'd probably be whipsawed as you know by mandates and government court.
So again a lot going on.
And if you look at the guide for the first quarter, it's not really that.
Go through closely and you'll say well part of the revenue, let's say maybe tough material pass through so there's not much volume.
But when you adjust for that material, you'll see the margin is.
Right on top of.
Where we.
Exited the second half of 2021 .
So at the moment with what we're telling you is we think we can continue to convert effectively.
Well, yeah, I'll say waiting for the volume and then for me the really interesting bit is what happens in our second quarter second half.
<unk>.
We will know a lot more as we go through and we see a firm missile production schedules, but we know we're getting a little bit more optimistic for the second quarter and certainly we see more optimistic of our second half even though when you think about it in the round. It's never good to have you, yes, you're back end loaded, but that's always going to be the nature.
When you're in a recovery situation.
Suddenly the commercial aerospace market is.
And in recovery, it's going to be that way through 'twenty, two is going to be that way through 'twenty three as well.
So I'd say all good George.
With the moment trying to hold things together.
And if we have held things together, while well I'd say the market hasn't been kind to us by way of volumes and then should.
Should we get a little bit of a with the increased savings we had in Q3 and I'm hopeful we can vote.
Or maybe enter the sunny uplands as like as I think.
Yeah.
Okay I know it's been impressive performance I was just wondering.
How long do you keep it going if you don't get the revenue.
Yeah, well I guess I.
I guess I mean I keep.
If you want light light a candle up might make me proud that I'll walk.
Because.
Operating with our with the.
The lack of and the headwinds we've had over at all.
Few quarters, a year or two years.
It's been tough, but maybe the answer is we've converted we've done what we should do and delivered.
And I'm looking forward to the volume increase.
Each will happen is as strong today, but will happen during 'twenty two at some point.
Thanks, very much I think it's also important to keep the big picture in mind, Despite all call only a.
A little bit of stuff that you deal with the big picture is that.
That's just considered.
Revenues are going up.
In recovery the commercial aerospace business is it going to improve narrow body is leading the way volume increase, but it's from Airbus and Boeing and hopefully stronger for Boeing and hopefully you know aircraft will start being delivered in China. Shortly for narrow body I mean, it's all good so let's keep it keep focused on that.
On the Big picture here.
Very helpful. Thanks, very much.
Thank you.
Your final question is from the line up of Noah <unk> with Goldman Sachs.
Hey, John I, just wanted to try to better understand what's going on with the 700 itself out I'm a little surprised by your comments that.
And you're sort of not hearing much from them I mean is that surprising to you I know, there's a lot of inventory, but they're talking about restarting the underlying production rate, presumably they need to give the supply chain that info. So so what's going on there and then putting their comments aside what's your assessment of what's happening there and why it's taking so long and when it starts back up.
Oh I don't know is my assessment count so much at all.
Yeah.
But you know I think it bodes assessment makes a lot of difference.
My take is.
Sure.
Boeing rightly don't want to get ahead of the FAA and providing commentary.
I don't think that's been helpful.
In the past and therefore, I think are cautious line is being taken.
And.
My thought is.
That.
Is it the I'll call it the MTS Italian laying auto problem is is behind them.
Our solutions.
Dom.
The gaps which are of the age of the ship.
All being worked through.
The issue around the Dol just been solved on its being worked through.
And I think the.
The order to the supply base in terms of supplier conformance has been completed.
And so there's a lot of milestones, which I think are being done.
Everybody's a bit snake pit, all making predictions.
Our predictions for the aircraft.
And.
My hope is that during this quarter is a latest study in the second quarter is the FAA certification and then I think that those aircraft will.
It will be slow English to you that the fundamental demand for this.
Composite wide body aircrafts at its efficiency.
It's a great aircraft so.
If you just look at some of the summit cancellation of schedules by the airlines they need those aircrafts.
So as it gets re certified production will begin to lift from the let's assume the pending them is all being done currently.
And we're gonna see rates of five in the second half of this year.
Twice a month that is so I think that's the way it plays out but I'm not in control of those events at all and I'm just trying to give you.
Are you.
Albeit it's a view that you know.
It doesn't cost that much really.
No it does and Thats helpful and I guess, given the inventory they have and then after production rate would start pretty well and maybe be there for a bit.
While it may sound surprising to me that they're not giving you a schedule, but they don't.
They don't necessarily need to because the reason, they're going to restart at such a low rate combine that with a sensitivity of being out of the regulator and that that would explain that but what the communication is right now even if things are going to start relatively soon.
Yeah.
Do believe they need to get back to a five a month.
Overall.
And if we're not careful there's going to be if we ended up at zero.
The period of time.
And it's going to be really difficult to see.
To get production rates up for that aircraft.
It's a difficult aircraft to build as we all know that was an aircraft where not only was the fundamental technology change put out was combined with the supply chain change of great notes back in 2000 and.
Let's call it eight nine timeframe.
When you think about all the different subs around the world.
But let's say.
As far away as Japan.
Lots of other countries as well.
Then there that does.
This inventory in the system all the way through.
That'll take a bit of burning off.
Okay. Thank you very much.
Thank you.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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