Q1 2022 Howmet Aerospace Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the home and it was space first quarter 2022 results conference call.
My name is Eli and I will be your operator for today.
Yes, It would mind that 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 sir.
Thank you Eli good morning, and welcome to the Howmet Aerospace first quarter 2022 results Conference call I'm joined by 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.
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.
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 to today's presentation.
I would also like to point out that starting this quarter, we're moving our segment profitability measure from segment operating profit the segment adjusted EBITDA. We will use this measure to assess the segment's performance going forward. We will continue to provide depreciation and amortization by segment, giving investors the ability to count to continue to calculate segment operating profit.
EBITA for previous periods segment profitability are included for comparison purposes. You can find these numbers in our earnings press release and on slides 19, and 20 in todays presentation deck with that I'd like to turn the call over to John .
Yeah.
Thanks P J good morning, everyone and welcome.
Please move to slide them before.
The first quarter was another strong quarter for him.
Revenue was above the high end of guidance.
Which was near the high end of guidance, which provided a very healthy start to the year.
As expected revenue was a little higher than the fourth quarter of 'twenty, one with higher sales to commercial aerospace due to narrow body programs.
These were partially offset by sales to the Boeing 787 platform and EBIT inventory takeout will structures on the F 35 program.
Revenue played out as expected and the good news is that we now have a new Boeing Sky line production plan for the 787.
The other good news is the improved outlook for Covid with large reductions in cases and deaths in the western World.
This has led to reduced testing for international travel, which is an important precursor to the pickup in wide body commercial aerospace programs.
The tragic Russian invasion of Ukraine.
Led to further increases in commodity inflation, notably for oil and materials.
The effects of this will be outlined in my guidance comments.
Moving to specific numbers revenue for the quarter was $1 3 billion, an increase of 10% year over year, which included additional material pass through of approximately $40 million.
Clearly this pass through was excellent. However, it does unfavorably reflected in the EBITDA margin percentage by 70 basis points year over year.
Without this effect Q1, EBITDA margin was 23, 4%, which was well ahead of Q1 of 2021.
On a sequential basis. We also had an EBITDA margin improvement of 10 basis points adjusting for material pass through.
Adjusted EBITDA was strong at $300 million.
Earnings per share of 31 both of them.
Which were ahead of the midpoint of guidance.
Free cash flow in the fourth first quarter was essentially breakeven and resulted in cash on hand.
$522 million after buying back $175 million of shares in the quarter.
This buyback included an additional $75 million opened above the January buyback of $100 million noted in our February earnings call.
The average diluted share count improved to $425 million in Q1, with an exit rate of 423 million shares.
Firstly, we reduced pension and <unk> liabilities by approximately $200 million year over year.
And reduce cash contributions by approximately 60%.
I'll now pass the call commentary over to Ken to detail the market dynamics and provide commentary on segment performance great.
Great. Thank you John please move to slide five for an update on the end markets first.
First quarter revenue was up 10% year over year.
The commercial aerospace recovery continued in the first quarter with commercial aerospace revenue up 29% year over year, and 4% sequentially driven by the engine products segment and the narrow body recovery.
Commercial aerospace was 44% of total revenue.
And although an improvement from 2021.
Continues to be far short of the pre COVID-19 level, which was 60% of total revenue.
Moving to defense Aerospace revenue was down 16% year over year, and essentially flat sequentially driven by customer inventory corrections for the F 35 <unk>.
Commercial transportation, which impacts both the forged wheels and fastening systems segment was up 10% year over year, and 4% sequentially driven by higher aluminum prices.
Finally.
The industrial and other markets, which is composed of IGT oil and gas and general industrial was flat year over year.
Going deeper within the industrial and other markets sector IGT continues to be strong and was up 14% year over year and 3% sequentially.
Please move to slide six.
Let's start with the P&L with the focus on enhanced profitability in.
In the first quarter, we had a healthy start to the year with adjusted EBITDA of 300 billion, which exceeded the guidance midpoint.
<unk> was 22, 7% and in line with guidance <unk>.
Excluding the year over year revenue impact of higher material pass through EBIT margin was 23, 4%.
Incremental flow through of the higher revenue was in line with expectations at 33%.
Adjusted earnings per share was strong at 31 up 41% year over year.
Moving to the balance sheet free cash flow for the first quarter was essentially breakeven while building approximately $85 million of inventory in anticipation of the commercial aerospace recovery.
Cash on hand was $522 million after buying back $175 million of common stock.
The average diluted share count improved to a Q1 exit rate of 423 million shares.
On a year over year basis, net pension and <unk> liabilities were reduced by $200 million in cash contributions were reduced by 60% to $13 million.
Annual cash contributions are estimated to be approximately $60 million versus expense of $20 million.
We continue to focus on reducing pension and OPEC gross and net liabilities.
Comparing to the Europe separation in 2020 annual cash contributions were approximately $240 million are expected to improve to $60 million. This year a substantial improvement.
Additionally, expenses expected to be reduced from $35 million in 2000 $20 million to $20 million this year.
Moving to capital allocation, we continue to be balanced in our approach.
How much improved financial leverage and strong cash generation. We're recently reflected Moody's April 27 credit rating upgrade from <unk> to <unk> one.
Capital expenditures were approximately 94% of depreciation in the first quarter with productivity Capex focused on automation projects in engines and fasteners segments to improve yields and mitigate labor risks.
We purchased approximately 5 million shares of common stock in the quarter for $175 million with an average acquisition price of $34 per share.
Lastly, we continue to be confident in our free cash flow and paid a quarterly dividend of <unk> <unk> per share of common stock.
Now, let's move to slide seven to cover the segment results.
As previously mentioned starting this quarter, we are moving our segment profitability measure from segment operating profit to segment adjusted EBITDA.
We will use this measure to assess the segment's performance going forward, while continuing to provide segment DNA in the appendix.
Moving to engine products year over year revenue was up 18% in the first quarter.
<unk> aerospace was up 45% driven by the narrow body recovery.
IGT was 14% higher as demand for cleaner energy continues defense aerospace was down 9% year over year.
Segment, adjusted EBITDA increased 31% year over year and margin improved 270 basis points, while adding approximately 325 employees in the first quarter, which now brings the total add to 1275 employees since Q1 of 2021.
Now, let's move to slide eight.
Fastening systems year over year revenue was 3% lower in the first quarter.
Commercial aerospace was flat as the narrow body recovery was offset by continued production declines for the 787.
Defense Aerospace was down 24%, while commercial transportation was up 15%.
Segment, adjusted EBITDA decreased 2% year over year, while margin improved 20 basis points.
The quarter was impacted by inflationary costs and the addition of approximately 135 employees to support future growth.
Now, let's move to slide nine.
Engineered structures year over year revenue was 3% higher than the first quarter.
<unk> aerospace was 36% higher as the narrow body recovery more than offset the impact of the declines of the.
787.
The defense Aerospace market was down 26% year over year, driven by customer inventory corrections for the F 35.
Segment, adjusted EBITDA increased 5% year over year, while margin improved 10 basis points.
Finally, please move to slide 10.
Forged wheels year over year revenue was 9% higher than the first quarter the.
$20 million increase in revenue year over year was driven by higher aluminum prices of $29 million somewhat offset by lower volumes.
Through of higher aluminum prices did not impact EBIT dollars, but unfavorably impacted margin by approximately 360 basis points.
Commercial transportation demand remains strong, but volumes continued to be impacted by customer supply chain issues limiting commercial production.
One final comment on the segments.
Consistent with our expected revenue growth. We are now hiring in every segment, except for engineered structures, which is expected to commence in the second half of the year.
Before turning it back over to John to discuss guidance I'd like to point out one additional item related to tax there's a slide in the appendix that covers the operational tax rate.
In 2021, the annual operational tax rate improved to 25%.
The rate further improved to 24, 6% in the first quarter of 2022.
When comparing sequential performance the Q1 rate of 24, 6% compares to 27% in Q4 of 2021 to.
The 390 basis point sequential increase in operational tax rate unfavorably impacted first quarter earnings per share by approximately one five.
Now, let me turn it back over to John .
Thanks, Ken let's move to slide number 11.
Moving to ESG unencumbered you to read our sustainability report.
Dot com in the investors section.
Hi, Matt is committed to improving our environmental footprint.
Actions taken in 2021 have reduced harm its greenhouse gas emissions energy consumption waste water use.
<unk>.
We have funded approximately 100 projects, which are expected to reduce scope, one and it's good to greenhouse gas emissions by 21, 5% by 2024 compared to our 2019 baseline.
Hi, Matt is also committed to a safe workplace, while fostering a diverse equitable and inclusive work environment, where all of our employees can thrive.
Our safety record is five times better than the industry average.
How much was named one of the best places to work for LGBTQ equality by the human Rights campaign Foundation.
Regarding governance the company was recognized by $50 50 women on boards for having 40% of our board of directors made up of women.
Lastly, 81% of our key suppliers have sustainability programs considered to be leading or active.
<unk> portfolio of advanced energy efficient projects, and several markets and contribute to substantial reductions in emissions.
We will discuss how much IP rich portfolio.
Several of our differentiated products as how much technology day on Monday May 20, <unk> in New York.
Let's move to slide number 12 on our second quarter guidance.
The revenue outlook continues to show improvement, let me start with commercial aerospace.
Airline load factors show improvements in North America, and Europe , China is lagging but is expected to show improvements later in 2022.
This is leading to solid narrow body build projections for the Airbus <unk> hundred 20, and $3 21 on the Airbus.
321, Exelon family of aircraft.
Moreover, there is a notable order input for the Airbus <unk> hundred 20 aircraft for which <unk> has a very healthy ship set value roughly in line with the <unk> hundred 20.
We also expect to see further volume.
Tenant improvements later in 'twenty, two 2022 when we begin to transition to the improved Pratt <unk> Whitney geared turbofan engine, having both increased thrust and fuel efficiency.
The volumes for the Boeing 737, Max continued to grow with the rate improving to 30 per month compared to the exit rate in 2021 of <unk> 17 per month.
As the rate moves towards this 31 per month range, the remaining inventory overhang will be extinguished.
We also note about the middle of 2023.
Airbus <unk> hundred $23 21 rate of 65 per month will require how much to be at this rate as we transition into 2023, which is another pick up from the mid fifties right in the middle of 2022.
Revenue for the defense sector is solid and after these stocking at the structural bulkheads for the F 35, driven by lower than planned Lockheed building 2020 in 2021, we expect growth will resume in 2023.
We note the selection of the F 35 programs, where the air Force's in Germany, Switzerland, Canada, and Finland in recent months.
He is going to drive future projections.
Moving to industrial another market revenue for IGT remains strong, notably with outreach chipset values, increasing with the larger more sophisticated turbine blades for the aging blinked J class turbines.
One good aspect of the oil price increase is the expectation for how much.
This will show growth later in the year.
Class eight truck and trailer manufacturing are also expected to begin to grow as the supply chain constraints begin to ease, especially in the second half, but in fact, beginning in the second quarter.
Specifically to address numbers for Q2 on the year.
Revenue is expected in Q2 to be one $3 7 billion, plus or minus $20 million EBITDA of $310 million, plus or minus 8 million EBITDA margin of $22, six plus 30 basis points minus 20 basis points.
Earnings per share of <unk>, 32, plus or minus a penny.
For the year revenue of $5 64 billion, plus or minus $80 million.
EBITDA of $1 3 billion, plus or minus $35 million.
EBITDA margin of 23% plus 30 basis points minus 20.
Earnings per share are expected to be in the range of $1 39, plus or minus <unk> <unk>.
On free cash flow of $625 million, plus or minus $50 million.
Implicit in these numbers is capital expenditure of approximately $235 million on an improved tax rate of approximately 24, 5%.
In order to provide color on the near term revenues reflect the reduction of the Boeing 787 volumes and also increases for commodity inflation recoveries.
There is a similar impact on EBITDA and EBITDA margin.
You'll note that the guidance leads to another very solid year for have met with growth and profit improvement.
Setting the company up well to address the further growth expected in 2023 across all of our markets and especially the sort of growth in the wide body market.
Also as Ken mentioned, notably we are now recruiting in three of our four segments.
The first quarter.
So I can move to slide 13, the first quarter was a healthy start to the year.
We delivered strong results that met or exceeded guidance.
Year over year revenue grew 10% and earnings per share grew 41% free.
Free cash flow was essentially breakeven after that approximately $85 million increase in inventory to support the aerospace recovery plus the commensurate increasing.
As a result of the increased sales liquidity.
Liquidity is strong and cash generation is expected to be very positive in the remaining quarters of 2022.
The Q2 outlook for revenue is expected to be approximately $45 million higher than in Q1 with margins of approximately 22, 5% to 23% setting a platform for a healthy 22.
Full year adjusted earnings per share guidance has also been increased and now we can move to Q&A.
Okay.
Thank you.
We will now begin the question and answer session.
I request that you limit yourself to one question.
Please hold while we compile the Q&A roster.
Yeah.
Our first question is from Robert Stallard.
Very cold research your line is open.
Thanks, so much good morning.
Hey, Rob.
John There's obviously been a lot of talk about titanium and the Russian sanctions on <unk>. It sounds like you are in discussions with a lot of our potential customers. I was wondering if you could give us an idea are firstly off the timing on this why do you think these things will be sorted out and then secondly, do you think youll be needing to <unk>.
And more capex to add additional capacity. Thank you.
Okay.
So.
Let me provide a slightly broader context for for everybody on the call.
I think everybody knows that Russia has been historically the largest supplier of titanium products in the world coming from a low cost country base.
The business of BSM periods contained to the industrial military complex.
And clearly.
It's pretty tough for us.
For companies to support.
At this time given the innovation.
<unk>.
I will say casualties.
Resulting from that.
Asia.
Specifically regarding.
Inquiries, we've been responsive to many RF queues.
Of which we expect to update you later in the year our facilities, it's more likely to be a fourth quarter item and then increasingly a pickup of sales into 2023.
Currently we have not built any sales into our guidance for the year, but expect to update you in August when we provided our Q2 earnings so the zero and zero in the revenue currently but we do expect to show that when we we have got things that we are.
Yes clear on on our guide that we would give.
Give you.
Currently our facilities that.
The aerospace customers both aircraft builders on engine builders and other industrial markets. They're currently building product living off the inventories.
Albeit some of those customers do continue to buy from DSM just as normal.
Regarding capital expenditure Rob.
We have no need to to buy capital.
Taught us that we have enough available capacity to provide a very substantial supply to to the industry.
And not just the aerospace industry may be also for some industrial markets as well.
It's unlikely that at this point until I knew the full outcome of the trajectory of this conflict.
We placed capital.
So I don't want to do that and then have people forget the current situation and rush back to sourcing and in Russia.
So basically we're treating this as a serious opportunity and.
Should see benefits in the back end of the year going into 2023.
More specifically I'll give you a revenue picture if not.
On the next call hopefully.
That's great. Thanks, so much John .
Keith.
Next we have SaaS stifling from J P. Morgan Your line is now open.
Okay, Thanks, very much and good luck.
Everyone.
John .
Mentioned I think early on in the call. They talked about 787 production plan you.
You talked about wide body is a driver into 'twenty, three and I think you said.
Relatively shortly that you'd be hiring and all of the segments and so.
What can you tell us about that 787 outlook.
What gives you confidence that.
This schedule will stick.
And also that given the level of inventory at following that we'll be able to see a meaningful increase in production.
Okay.
Clearly as each month goes by and each quarter goes by our assumption is that.
<unk> getting that much closer to resolution of this we follow closely what they say.
And I noticed.
For example, CNBC interviews.
Recently at the South Carolina plant showing.
77 tails on them so.
It can be a little bit more optimistic.
Things are gaining pace to get resolution.
<unk> certification is not yesterday.
Although we again follow what the FAA assay and say that they will certify each individual claim and deliver to the customers.
We've heard that there is.
Deliveries are going to commence by the end of the second quarter.
So we have revised guidance.
And also.
Future outlook in accordance with the <unk> initiative by Boeing and essentially that's taken down the total number of 787 aircrafts produced this year from I think 35 down to 24 or 25 something like that.
And taken that revenue hit, but as you see maintained guide for the year.
Clearly, we will feel a lot more comfortable when we see those deliveries actually commence roles in CSA, they're going to be commenced because that will be.
Absolutely clear sign that Davis.
I will say retrofitting and correction of the planes and then the current production is.
Okay condition.
So I think we should be optimistic for the future.
As I said before it's a great aircraft.
This is clearly a customer need for it.
And I think to gain the economics around <unk>.
Good Buddy.
<unk> transportation.
Passenger transportation for the world, we'd need that aircraft.
And so we're optimistic that the current skyline is the one that's going to happen.
Great. Thanks very much.
Okay.
Next we have Myles Walton from UBS. Your line is now open.
Thanks, Good morning, John you mentioned inflationary effects bring to the business I Wonder if you can just delve a little bit deeper of what maybe is not getting covered in your pricing and then also I noticed that the.
The metal pass through.
Outside of the wheel segment, I guess, it's about $11 million in growing whereas that disproportionately following.
Well, we've seen increases in the last year from aluminum nickel cobalt.
More recently titanium.
<unk> plus is a rare <unk> rhenium et cetera, so it's been pretty widespread the commodity inflation.
And you'll have noted the halting of nickel trading during the last quarter.
Sort of recommenced.
All statements that we've made previously.
We pass through 95%.
Our metal.
Holds.
<unk>.
And that's been seem to hold as we move through.
The last few quarters.
So that's to the good.
On the labor side, we know we clearly we seek to offset that in terms of productivity as we do each year and then clearly some of the other costs, we are seeking to pass through as well.
We'd have some agreements.
But again I would not really detailed lives out and don't plan to do so today, but they do cover things like the cost of natural gas and electricity and freight et cetera et cetera.
So.
Clearly the management of inflation is is key.
And I think the the good news is you've seen.
Hi, Matt to maintain its margins.
<unk>.
In a flat.
It would have posted increased margin.
The the secrets or the key too.
To all of this is can you move through this inflationary period stay whole in terms of your absolute profits.
If you can also.
Increment margin or at least not go backwards fundamentally then that's that's a huge success in this environment and that's what we're seeking to do.
Okay, and the $125 million placeholder, what is that currently and in 2022 four.
You can assume it's probably up $50 million at this stage give or take these are very approximate numbers because it will change on a daily basis, but clearly.
The 125 was was correct three months ago or two months ago.
Since then things have moved on I think you know that.
The effects of the the more that Russia launched on Ukraine.
Also had a fundamental effect on commodity prices.
Starting with oil, but also into metals as well and so it's moving rapidly at the moment again.
Albeit I am hoping that some of this volatility begins to quieten down as we move into the second half of the year.
Thank you.
Yeah.
Next we have David Strauss from Barclays. Your line is open.
Thanks, Good morning.
Okay.
Hey, John So the the head count increases it seems like you are hiring back faster maybe than.
You had initially talked about.
Order or two ago, so could you just.
Talk about kind of what the plan is for for head Count now I guess, where do you stand in each of the businesses relative to where you were pre pandemic and the plan from here and then Ken can you just talk about.
Working capital how you would expect the Q1 build to kind of unwind during the course of the rest of the year. Thanks.
Okay.
So.
In the second quarter of last year, you will recall us.
<unk> statement in a higher.
I think it was four or 500 people, which we started with and then continued this is in our engine products business.
At the end of the word recruited some 950 net additional people.
And I think.
We're seeing early as we did in providing the base level of training is clearly you can see to pay dividends.
And you are looking at our engine margins today, which.
I have shown.
The good outcome in the light of us taking on some of that.
And last year.
We continue to recruit in the engine products and the.
In the first quarter of this year.
I'm going to say about another 250 heads but.
Against an approximate number.
Wheels as you know we already started recruiting even before engine and that has continued.
And as I mentioned earlier in my in my remarks, we do see the start of some improvement in the commercial truck builds in the second quarter.
As a precursor to a stronger second half in that business and on our robust 2023, so again.
Leading this too to recruit.
Increasing head count in that business as well.
I think the developer.
A surprise to US was the decision that we made.
Mid Q1.
To commence hiring in our fastener business.
And that's a little bit ahead of what we thought.
Because of the demand outlook that we see again starting in Q2.
The balance of the year. So those are the three.
Businesses.
There are recruiting, albeit you know about 100, I will say that it couldnt be vessels is about 130 heads give or take.
So a modest step, but an important step.
Then preparing the ground as we did prepare the ground for our engine business a few months ago.
The only business so far.
We have not taken any recruitment steps on it in our structures business as well.
We burn off in in the first half of this year.
Some of the overhang, particularly on the <unk>.
Titanium and aluminum bulkheads for the F 35 program.
But you have a view that mid the mid to the second half of the year. So let's call. It end of Q3 early Q4, and obviously that will be financed as we get closer to the time and we expect to commence hiring and some of that is also tied up in it.
In the locking down of the scale of the additional orders for titanium, which we expect to talk to you about in August . So so again in summary, three three hours of recruitment.
And.
And our expectation.
With strong.
<unk>.
Normal structural tax the resumption of the 787 in the second half of production.
And some improvement in on F 35, plus the titanium should enable us to consider recruitment in the second half.
Ken if you want to just touch on inventory, yes. So David Good morning, Your working capital question, So I'll start with.
Cash for the quarter was free cash flow for the quarter was essentially breakeven embedded in that number was working.
Working capital burn of around $140 million.
Biggest chunk of that was inventory.
$85 million of incremental inventory to get ready for the euro.
Build here, so we want to be prepared for our customers be able to deliver on time and in full youll see that working capital number in <unk>.
And as we go through the year as John mentioned, each quarter should generate positive free cash flow Q2 to Q4 as we exit the year.
We've protected that will have midpoint of around $625 million of free cash flow embedded in that number is around a $50 million burn associated with working working capital, we'll make a call as we get through the second part of the year that we want even build more inventory to be a good problem for us to have.
But right now it's about a $50 million cash.
Cash burn as we exit the year $625 million of free cash flow and that's our free cash flow conversion of net income of over 100%.
Great. Thanks very much.
Okay.
Yes.
Next we have Christine Li Wang from Morgan Stanley . Your line is open.
Hey, good morning, John following up on the titanium question earlier I mean, we've.
Seen Russia, turnoff gossypol in Bulgaria, and when you kind of think of ways, Russia could potentially pressure the west I mean DSM deal with annual revenue was only about one 5% sorry, $1 5 billion and you can't ship, you know 99% of an airplane.
Deliverable airplane when you think about that in.
In that context.
Much urgency are you seeing from your customer base.
To solve the V S M P L problem.
Again, we have a bit of a bifurcation there is.
I'll say customers, which are continuing to buy <unk> and those which have decided to take the step.
Either voluntary or because of sanctions of quality certifications that BSA.
<unk> will no longer be part of the supply situation.
So where are we at the moment is they've placed a lot of inquiries on us we've been responsive to those inquiries in the last couple of months.
Laying at.
Uh huh.
Our commercial response to those requests.
We are in that decision, making process with the customers.
Which of the orders that they want a place with us and therefore, what we plan to fulfill as we exit this year and going into next.
Clearly that was a buildup of.
Of inventories.
In recent months as people assess the conflict was potentially.
About to occur and.
And also just before sanctions is I think a lot of inventory was pulled out of <unk>.
It was available in that organization and so clearly that's given a level of security stocks that.
We'll be burns off over the next few months.
But clearly.
There is going to be a supply situation you're managing for us.
Some of our competitors.
I guess on the.
Call. It Q4 is the expectation.
On into 2023.
And given the attentions for those customers who have taken the decision that this NPA will no longer be call. It sounds the supply situation.
I just cannot imagine moving back given what I expect to be ongoing tensions with Russia, I don't think that any.
I was going to say on what it is.
Maybe that was now but what we can all go back to normal I don't I don't think that's a realistic scenario.
For us and indeed my notes.
Sampling Europe , taking steps now to gain increased energy independence give.
Given the threats that have been exactly as you mentioned are you, saying that the cessation of gas supplies into Poland et cetera, et cetera and.
Just by way of supplemental information clearly the price of natural gas has skyrocketed in Europe , and there may be a factor of 10 and clearly pressurizing.
Industrial companies and including how match as we cope with these <unk>.
<unk> prices.
Great and John if I could do a follow up question. I mean, you you as you highlighted D. S. N P O as a low cost provider titanium. So for you to take on incremental work do you need to see customers change existing economics, where maybe they don't award you sole source contracts going forward forward take a have a take or pay.
<unk> type contracts to make it more attractive.
I don't think that.
So source needs to be adding systems, I think a long term contract with guaranteed share.
As a requirements contract is important.
Certainly have no intentions of just picking up a spot business for a moment in time. So it will the most important thing for myself as to see longevity of contract through into the future.
Such that any efforts that we make by way of.
Bringing equipment back online and recruitment of people is therefore, the long haul I've known tensions are recruiting people and then two to terminate them just for a moment slash of business.
Great. Thank you.
Thank you.
Next we have Gautam Khanna from Cowen.
Your line is open.
Yeah.
Hi, good morning, guys.
Good morning Ghansham.
I'm wondering if you could you know theres been speculation or discussion about forgings and castings.
Pinch points in the supply chain I'm wondering.
If you guys could talk about whether that's presented opportunity for you guys to pick up share or did you see an increase in past dues. This quarter, maybe if you could quantify it.
Then as a follow up.
I just wanted to get your views on.
Leap production next year. So maybe you know your thoughts on the 737 Max.
Might go.
Just because at some point you gotta be ahead of that to your point earlier and.
You talked about the <unk> hundred 20 neo.
What's your view on the Max.
How about how how.
How much and how quickly that lives above 31. Thank you.
Okay, So let's deal with.
Castings and forgings, because there has been commentary.
Hum.
Some of our customers in fact published in the press.
They see that as a pinch points.
And I'm going to repeat what I've said in that it's great now.
Some of our customers recognize just how difficult an exacting these products off.
Somebody can just turn on or off because of the skill.
And knowledge that needs to be brought to bear to make these products in volume with the tolerances.
<unk>.
I'll say specifications.
That's our extraordinary.
So.
Seeing that comment.
I know that one of our customers commented this week in that earnings call that.
They have seen some concerns around the titanium castings and restricted some of their build I suppose the developed good news for US is that we don't make titanium casting so.
That puts that to bed.
In terms of volume.
Certainly volumes are up you can see that in our engine business and continued to be strong both in the current quarter and outlook.
Clearly.
There are always going to be pinch points.
And when you look across the tens of thousands of different part numbers that we supply is.
Uh huh.
It's over the next 18.
Months two years three years, no I have no doubt that we'll have pinch points.
Will occur.
I've seen some of the details.
Intimate with some of the some of our plants.
Those are all set.
And anything that gets tight so I tend to be.
Intimate with what's going on.
My sense is that we've been asked because of the changing volumes that.
Little bit higher than I've seen in terms of engine build.
So I think that's well I suspect that we're being asked to produce a little bit more than our normal share, which I guess is good but inevitably as we tried to provide commitments against those some of those commitments are going to get tight and indeed have got tight.
Again for.
For one customer which is commenting in the press is that I know at the end of last month that will.
Path available to be delivered.
Just required quality sign off but just left on our docks. So clearly they were not needed by that customer in terms of picking up for any urgent requirement. So.
General suite through would be we're in relatively good condition inevitably some pinch points here or there.
<unk>.
And I expect this.
We will begin to see and in fact, we are expecting to see some spot business.
In the second half of this year.
The customer schedules on us so maybe luca because.
We may have a supply ability, whereas others may not given our investments into the two new engine plants that we made over two <unk> during the 2019 year going into early 2020.
In a relatively healthy position.
<unk> seen the hiring that we've done now let's call. It about 200 people into our engine business and it's all been to provide our ability to respond to the industry.
And clearly part of the inventory increase that Ken's talked to the $85 million that we put into inventory in the first quarter.
A significant amount of that is in our engine business such that we can respond to future demand.
So I hope that gives you a pretty good picture over castings and forgings and have met currently.
The second part of your question concern the Max.
Whereas Mexico, Inc.
Really that's more a question for Boeing than it is for a full <unk>.
We are clear that the 31 is the number for this year.
Hi.
Thoughts about it is that.
Assuming that.
737, Max deliveries do occur into China in the second half.
Which is an important step that we still wanting to see.
When that occurs in the inventories of Max aircraft reduce that Boeing.
Then I'll have some confidence in the rate may tick above 31.
Boeing have been in contact with us and talked about a higher number.
And we know for the engine manufacturers of a potentially higher number but.
But at the moment.
We are not responsive to that given the fact that we have no skyline.
Right.
<unk>.
Are you seeing greater than 31 and for me the way I think about it which again may not be correct, but it's the way I think about it is that.
The gating item is still a risk of the Max into China in the in the fleets for Chinese.
Lines and when we see that.
Confidence, we will begin to increase.
I guess that will trigger for us the thoughts around further recruitment to support leap engine production as we go forward into the future.
Thank you.
Okay.
Okay.
Next we have Robert Spingarn.
Melius Research your line is open.
Good morning.
John .
On these large structural castings that we've heard about.
Just referred to is there an opportunity to get into that business or be move further into that as the as the competitor.
Maybe just simply not be able to catch up.
Only in the short term not only where it's currently dual sourced wood, we have the opportunity.
If we don't have the current tooling for the for the required specific dies. Then there is no possibility of us being responsive to that it would take.
I will say some time to prepare tooling and game quality quality certification for any increases in that maybe we have an ambition to further increase our share in that in that segment, but.
It's not a it's not really a short term except witness a dual source contract.
Right I guess, the reason I'm, bringing it up is for all very long time. The other guy is dominated that business and there's really been no reason for how map to try to go there, but I'm wondering if this whole situation creates a window and maybe as LTA is expire or a new engine comes along.
This is something you want to pursue.
Yeah.
In.
2015, how.
That should be built a second plant in La Porte, Indiana facility.
Which we are not sure why but we call it <unk> two.
It's not very innovative because the first one was called <unk>.
But basically at that time.
First plant may be relatively smaller structural castings and I'll get this number wrong, but I'm going to save up to 20 inches in diameter and we are.
We make a virtue of making round castings structural castings.
We have an expertise in that and BC two we increased the capacity.
Capabilities to make larger structural castings.
And of course, those assets might be up to maybe up to 40 inches, but again, that's probably a very approximate number need to be a refresh my mind about exactly what size. We can so clearly we have the capability and capacity to move into it further in that segment and take onboard and.
They have been taking onboard some of the largest structural castings.
We're not at the theatrics streams of agonists a $50 <unk> currently.
So that facility is seeing increased work we have been recruiting.
Loss in both.
Sounds like the plant so at that site and continue to do so in the future.
And we.
We expect to see good things come from that.
So hope that upon LTA renewal that we'll see increased business again coming towards that plant.
Any timing on that last part.
No nothing that I want to comment on today, but.
<unk>.
Let's say, it's not this is not a one year thing it's so over the next.
I'll say two to four years.
Okay. Thanks very much.
Okay.
Next we have no <unk> from Goldman Sachs.
Your line is open.
Hi, good morning, everyone.
Hey, Noah.
Okay.
John could you spend a little bit more time on the engine products margin in the forged wheels margin just given.
We had a decent variance versus what we were looking for in the quarter and so how sustainable without engine margin and what does it take to get towards.
Recovered as you move through the year.
Okay.
So.
First of all as a general rule, we don't guide that's a subsegment level.
And didn't provide that guidance in the first quarter.
So.
Not surprising any I'm going to say.
Pretty much exactly where we thought we would be.
It comes off the first of all the volume leverage that we are seeing.
Engine business.
And the reason why we expected that if you remember we signaled it.
About recruitment.
We talked about metal pass through.
On the upside benefit relative to volume.
And so.
For us.
The segmental strength was.
Im going to say.
Pretty much in line.
If anything towards the top end of if not the top end of what we thought was possible.
And clearly.
What we'd like to see.
<unk> maintained during the course of this year and if we're able to take another step next you will all well and good, albeit we're not again talking guiding at the subsegment level.
So the wheels again, we had flagged to you.
And the yes.
The increase in metal would have a significant very significant effect on the margins in that segment.
And with the price.
Price of aluminum I'm, just going to refresh everybody is.
18 months two years ago that was about 19 $100 a ton.
And Pete.
Peaked in the first quarter and hopefully it's peaked because he was $4500 of pumps and more but more than doubling of the metal inputs to that segment.
And again I think I've told you that we would be resetting prices in that segment. Every six months is probably one of the long lead items in terms of.
I'll say, a repricing for base metal and that takes effect and took effect on the first of January a signal to you.
So the reset to the increased metal prices at the second half of last year reflected in the first quarter of this year was exactly in line with what we said and I think Ken called out like 350, 360 basis points of metal impact on that.
Reconciles it exactly for you and so again, we see it all in order to pull.
All of that segment as well.
So.
It's the one segment that we have which does have higher metals.
Volatility.
And in normal times I'm going to say, that's not really very significant and not significant for the company.
Really at all but when you've had such extreme movements I think anybody that's going from below 2002.
Well in the between four and 5000.
We might book as an extreme movements and we've seen I think quite extraordinary movements in all sorts of commodities in recent times.
And you can start with oil at $40 $50 a barrel to over 100, we've seen at 125 is now like 100 full.
These these things are moving at a pace so.
At a sub segment level everything that you saw is something that we had anticipated and secondly, we've got.
The crystal ball of foresight for everything because we don't.
Same time, what we planned for our engine business occurred what we said was going to happen for the margin.
Our wheels business occurred and so for US It was just exactly as planned.
I appreciate all that detail helpful. Thank you.
Thank you.
Alright, and next we have Matt Akers from Wells Fargo. Your line is now open.
Hi, good morning, Thanks for the question.
Just on the wheel business, maybe to cleaning the metal price.
How much is volume, they're depressed now versus what it would be.
Some of these supply chain constraints weren't in the way or how do you know how.
How much upside is there.
Lift and also.
Sounds like Youre seeing some positive signs of that in the Q2 and then maybe the second half owner if you could elaborate on what youre seeing there.
Yeah.
I forgot the exact number for truck build this year.
But I'm going to take us a swag at it and say I think we're going to see a minimum of a 15% volume lift as we go into next year.
And it could be higher than that I think is tremendous pent up demand for four trucks now I've read articles recently are saying now.
Drivers are available to the trucks and our customers in fact have not been taking orders because they cant deliver a lack of willingness by fleets to water.
The backlog is bigger than it's ever been so.
My expectation is I'll, just give like a north American number I think we're going to see some.
Some trucks level, it's like 300000 trucks may be as we go into next year or slightly more.
But it's.
It's going to be governed by the responsive mass too to capacity.
And their willingness to take on orders given the availability of a particular silicon for some of the semiconductors.
Silicon Hasnt been the only issue it's been one of tires in resins as uneven windshield as well but.
The signs are that this is beginning to ease its still very constrained, but we do expect volume pickup in Q2.
Half of the year.
Building.
We hope for but we don't yet know who's going to be a very healthy 23.
And 24.
Traditional pull ahead for emissions, which you get from a north American emissions regs change for 'twenty four I don't believe that can realistically happen in 'twenty three given the capacity constraints. So that's going to mean pretty healthy close four markets for 'twenty three 'twenty four for both North America and <unk>.
For Europe .
Maybe what I'm talking about trucks, so I think it's it's probably.
Reasonable to give you like a headline outlook for the future.
Even the.
Kevin.
The requirements for Cotwo action in Europe than the <unk>.
Changes, which are being brought to bear over the next.
Yes.
Five to seven years for commercial trucks in Europe .
In terms of.
Different.
Our slate power.
Generation.
From fossil fuels, but maybe from.
Electrification or hydrogen engine, but whatever it is.
Then that's taking place and all of that is really friendly towards us because youre not going to invest in very expensive new powertrains take onboard some of those costs and waste solutions involve heavy battery packs without taking the advantage of.
The massive reduction in weight coming from aluminum wheel. So my expectation is that those volume changes.
Because of those.
Emissions requirements are going to be.
A very healthy two the share of aluminum wheels.
Penetration against steel over the next.
All the years up to 2030.
Because of these changes so I just wanted to give you that as a supplement to just the here and now volume this year and into next.
Yes, that's great color. Thank you.
Thank you.
And next we have Phil Gibbs from Keybanc capital markets. Your line is open.
Very much.
Good morning.
Well.
There was a 26 million sequential pickup in engine products revenues and a $23 million pickup in operating income despite.
Further head count additions I think you made mention of that what drove the near dollar for dollar conversion for revs into profits was that a lot of pricing a lot of mix timing of costs.
Just trying to think about that.
I have my guess is all of those things is that we've got volume leverage.
We also.
Price healthy.
Efficiency.
Sure.
Our operations as well so basically every aspect of that business whether it is.
The top line in terms of unit price or just efficiency and then volume leverage to the upside every one of those things.
<unk> was coming to bear to give us the outcome that we saw which as you saw was above guidance for the whole company and some of that came from came from engine. So we are quite pleased with it.
And our job is.
Can we operate at that level.
Going forward and hold it for the next couple of quarters.
Let's see whether we can take further steps.
Remains to be seen yet I'm not ready to commit or are just commentary I've just given you guidance at the company level, which shows the EBITDA improvements in absolute profit and revenue so.
Good.
And John I, just wanted to double check a comment you made earlier you said anything you may win in titanium from an RF SKU standpoint is not.
Embedded in either your revenue or or or Capex thoughts for for this year.
Yes zero in the revenue line and I have no capex at all.
Regarding titanium, but at this point.
So there'll be no change at all for that on the Capex line.
<unk>.
And according to how we.
How successful we are all there so its going to reflect in.
The robustness and believe ability of customer schedules as we get into the back half is that all reflect that in guidance when we get to August .
Thank you.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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