Q4 2022 Howmet Aerospace Inc Earnings Call
Speaker 2: Good morning and welcome to the Hell Met Aerospace 4th Quarter in full year 2022 earnings conference call.
Speaker 2: All participants will be in a listen-only mode today. And should you need any assistance during the call, please signal a conference specialist by pressing the star key forward by zero.
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Speaker 2: I would now like to turn the conference over to Paul Luther, Vice President of Investor Relations. Go ahead, sir.
Speaker 3: Thank you, Joe. Good morning and welcome to the How Met Aerospace 4th Quarter in full year 2022 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer and Kenji Kobie, Executive Vice President and Chief Financial Officer.
Speaker 3: 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.
Speaker 3: 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 today's presentation, references to EBITDA and EPS mean adjusted EBITDA, excluding special items and adjusted EPS.
Speaker 3: excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion.
Speaker 3: Reconciliation 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 .
Speaker 4: Thanks PT and welcome everybody to the the HEMET Q4 EMS call. Let's start by dealing with the headline numbers on slide 4.
Speaker 4: For the fourth quarter revenue accelerated as we exited the year and it was above the high end of the guide at 1.51 billion, up 18% year on year.
Speaker 4: Commercial airspace continues to be strong and was up 29% in the quarter.
Speaker 4: EBDA was $336 million, the hand of the guide.
Speaker 4: Revenue and EBITDA continue to improve sequentially for the 6th consecutive quarter.
Speaker 4: The strong operating EBIDAR was mitigated by a couple of below-the-line items that Ken will cover in his commentary.
Speaker 4: Earnings per share was at guidance at 38 cents, which benefited from the strong EBITDA and the Q4 tax rate, which mitigated the below the line items.
Speaker 4: For the year, despite the choppy back cloth, year-over-year revenue was up 14% and EBITDA was up 12%, which drove a healthy earnings per share growth of 39%.
Speaker 4: Moving to the balance sheet and cash flow, pre-cash flow was within the guided range at £504 million and as commented on the previous earnings core, included an inventory build for commercial aerospace to help smooth production act as removed between years.
Speaker 4: Despite the image above, pre-cashable conversion continues to be strong at 91%.
Speaker 4: Liquidity is healthy with year-end cash balance on hand of 792 million and this was after share buybacks, bond repurchases and dividends.
Speaker 4: In the quarter, an additional $65 million of common stock was repurchased, and the 40-year repurchased at common stock was $400 million.
Speaker 4: The December 22 fully diluted share count exit rate was 418 million shares, which is an improvement of approximately 80 million shares since the start of 2019.
Speaker 4: This was accomplished while reducing net debt over the last four years as well.
Speaker 4: There was also some minor repurchases of bonds in Q4, taking the 40-year repurchases to 69 million.
Speaker 4: The bond repurchase program continued into the first quarter of 2023, and by the end of January an additional $26 million of bonds were repurchased at a small discount to par.
Speaker 4: This continues our plan of reducing interest costs year on year and going into 23, it will be lower than 2022. And this is despite the global rising interest rate costs. And hence we set ourselves up for a fundamentally different approach to most companies where interest costs will be lower for the coming year.
Speaker 4: We've improved how much leverage ratio, which now stands at 2.6 times net debt to Ibitar, compared to our long-term targets of just on the two terms.
Speaker 4: All of her mites there is on secured and that fixed rate.
Speaker 4: Hermit's 1.1 billion, Revolver is ungrown.
Speaker 4: At the top level, we were pleased with the year.
Speaker 4: We exceeded the initial EPS guide for the year again and in the case of 2022 we faced an extremely choppy back cloth of below-build expectations of both aircraft and engines compared to initial expectations.
Speaker 4: Furthermore, the extraordinary optic inflation was overcome despite its margin impact and all of this talks to the performance and resiliency of Hamad.
Speaker 4: can we'll now detail the 2022 performance and then I'll cover the outlook after that.
Speaker 5: Thank you John .
Speaker 5: Please move to slide 5 for an overview of the markets.
Speaker 5: Revenue was up 18% year-over year for the fourth quarter and up 14% for the full year.
Speaker 5: The commercial aerospace recovery continued throughout 2022 with fourth quarter commercial aerospace revenue up 29% year-over-year and up 28% for the full year driven by engine products, engineered structures, and the narrow body recovery.
Speaker 5: Commercial aerospace has grown for seven consecutive quarters and stands at 48% of total revenue, but continues to be sure of the pre-COVID level, which would 60% of total revenue.
Speaker 5: Fence Aerospace was up 13% in the fourth quarter, driven by year-end seasonality, and down 3% for the full year, driven by customer inventory corrections for the F-35.
Speaker 5: Commercial transportation, which impacts forged wheels and fastening systems, was up 12% year over year in the fourth quarter and up 14% for the full year, driven by higher aluminum prices and higher volumes partially offset by foreign currency.
Speaker 5: Finally, the industrial and other markets, which is composed of IGT.
Speaker 5: oil and gas, and General Industrial was essentially flat for the fourth quarter and for the year.
Speaker 5: For the fourth quarter, within the industrial and other markets, oil and gas was up 22%, IGT was up 2%, and General Industrial was down 10% on a year-over-year basis.
Speaker 5: Now let's move to slide 6.
Speaker 5: We will start with P&L with the focused on enhanced profitability.
Speaker 5: for the fourth quarter.
Speaker 5: We had six consecutive quarters of growth in revenue, EBITDA, and earnings per share.
Speaker 5: Revenue, IBA, and earnings per share exceeded or were in line with guidance.
Speaker 5: For the full year, revenue was up 9% year-over-year, excluding material pass-through of approximately 225 million.
Speaker 5: EBITDA was $1.28 billion or up 12% year over year.
Speaker 5: Adjusting for the year-over-year material pass-through, EBITDA margin was 23.5% and flowed through of incremental revenue to EBITDA was strong at approximately 30%.
Speaker 5: The full year operating tax rate was 22.5% in improvement of 250 basis points year over year.
Speaker 5: earnings per share was $1.40.
Speaker 5: For the year, an up 39% year over year. The average diluted share count improved to a 2-4 exit rate of 418 million shares.
Speaker 5: As John mentioned, the strong operating EBITDA in favorable tax rate in the fourth quarter were mitigated by a few items below the line.
Speaker 5: The impact of foreign currency and deferred comp was $9 million pre-tax charge as these items fluctuate based on market conditions.
Speaker 5: For the year, the impact of foreign currency was essentially break even into Ferdinand which favorable.
Speaker 5: Final note on earnings, as expected, we did not have significant net headcount additions in the fourth quarter.
Speaker 5: However, we hired approximately 1,000 new employees to offset Q4 attrition and absorbed incremental training and production costs.
Speaker 5: Moving to the balance sheet, free cash flow for the year was a record 540 million, including an inventory bill that approximately 235 million are merely for the commercial aerospace recovery.
Speaker 5: For 2022, as well as in every year since separation, we achieved free cashflow conversion of net income in excess of our long-term target of 90%.
Speaker 5: Year-end cash balance was a healthy $792 million after approximately $513 million of capital allocation to common stock repurchases, 2024 bond repurchases, and the quarterly dividends.
Speaker 5: Year over year, net pension and OPEB liabilities were reduced by approximately 180 million, and cash contributions were reduced by approximately 50 percent for 56 million.
Speaker 5: Since 2019, net pension and op-ebiabilities have been reduced by approximately $470 million in gross pension and op-ebiabilities by approximately $1.4 billion.
Speaker 5: Net pension and opible abilities now stand at less than 5% of how much market capitalization.
Speaker 5: Finally, net debt to EBITDA improved to a record low of 2.6 times.
Speaker 5: All bond debt is unsecured and fixed rates, which will provide stability of interest rate expense in the future.
Speaker 5: Our next bond of maturity is in October of 2024 and the $1 billion dollar revolver is undrawn.
Speaker 5: Moving to capital allocation, we continue to be balanced in our approach.
Speaker 5: Capital expenditures were $193 million for the year, and were approximately 75% of depreciation.
Speaker 5: Capital installed prior to COVID-19, but is in a very strong position to support the expected commercial aerospace growth.
Speaker 5: Fourth quarter was the seventh consecutive quarter of common stock repurchases.
Speaker 5: For the year, we repurchased approximately 11.4 million shares of common stock for $400 million with an average acquisition price of $35.22 per share.
Speaker 5: Chair, buyback authority stands at 947 million.
Speaker 5: Moving to debt, we repurchase $69 million of our 2024 bonds last year with cash on hand.
Speaker 5: These repurchases will lower our annualized interest costs by approximately 4 million.
Speaker 5: Moreover, we continue to repurchase 2024 bonds in January with another 26 million of repurchases at a slight discount to par.
Speaker 5: Repurchases were made with cash on hand.
Speaker 5: Lastly, we continue to be confident in free cash flow.
Speaker 5: In the fourth quarter, the quarterly common stock dividend was doubled to four cents per share.
Speaker 5: dividends in 2022 were 44 million and we expect to increase them to approximately 68 million in 2023.
Speaker 5: Let's move to slide 7 now to cover the segment results.
Speaker 5: Q4 was another solid quarter for engine products. Year-over-year revenue was 21% higher in the fourth quarter, with commercial aerospace up 30% driven by the narrow body recovery.
Speaker 5: Descent Ferro Space was up 17%, IGT was up 2%, and oil and gas was up 19%.
Speaker 5: EBITDA increased 26% year over year and margin improved 110 basis points to 26.1% Despite the addition of new employees and the associated near-term training and production costs.
Speaker 5: Let's move to slide A.
Speaker 5: Fastening systems year-over-year revenue was 11% higher in the fourth quarter. Commercial aerospace was 17% higher driven by the narrow body recovery.
Speaker 5: Defense aerospace was up 21% and industrial was down 13%.
Speaker 5: Year over year segment EBDA decreased 3%.
Speaker 5: due to the addition of new employees and the near-term training and production costs. In the fourth quarter, Fasteners added approximately 200 new hires to offset 200 exits.
Speaker 5: Now let's move to slide 9.
Speaker 5: Engineering's structures year-over-year revenue is up 21% in the fourth quarter, with commercial aerospace up 40% driven by the narrow body recovery, plus approximately $20 million of Russian titanium share gain.
Speaker 5: Gains were partially offset by the impact of production declines for the Boeing 787.
Speaker 5: Segment EBIT, increased 10% year-over-year despite the inventory burned down of the F-35, and the continued zero to low build of the Boeing 787.
Speaker 5: Structures 2022 full year EBITDA margin was 14.1% in Lezon PAR with 2019 levels when revenue was 37% higher.
Speaker 5: Finally, let's move to slide 10.
Speaker 5: 4th wheel, year over year, revenue was 14% higher in the 4th quarter. The $32 million increase in revenue year over year was almost entirely driven by higher aluminum prices.
Speaker 5: Commercial transportation demand remains strong, but volumes continue to be impacted by customer supply chain issues limiting commercial truck production.
Speaker 5: Segment EBITDA was flat year over year as higher volumes were offset by the impact of unpraveable form of currency primarily driven by the year up.
Speaker 5: While the pass-through of higher aluminum prices did not impact EBIT dollars, it did impact margin by approximately 300 paces points.
Speaker 6: Lastly,
Speaker 5: In the appendix on slide 15, we've included some assumptions around 2023.
Speaker 5: We expect non-service pension and OPEC, OPEC, expense to increase approximately $20 million year-over-year to approximately $40 million.
Speaker 5: The increase will unfavorably impact your over-year earnings for share by approximately $0.4 per share, and is mainly due to low asset returns impacting non-service costs, which are non-catch.
Speaker 5: In addition to the increase in pension expense of 20 million, we continue to expect miscellaneous other expenses, which are below the lines, the minimal at approximately 8 million for the year, but can be volatile within quarters.
Speaker 5: Pension to no-peb, cash contributions are expected to be flat.
Speaker 5: With 2022 and approximately $56 million for the year.
Speaker 5: The FAFEC should be in the range of 230 to 260 million dollars, which continues to be less in depreciation and advertising resulting in a net source of cash.
Speaker 5: Now let me turn it back over to John .
Speaker 4: Thanks, Ken. Let's look at commercial aerospace first, which was up 28% this year.
Speaker 4: Our lines are experiencing strong growth for both domestic travel and our international travel as well.
Speaker 4: Low factors are high in the US and Europe .
Speaker 4: China is now reopened and is increasing load factors at a rapid rate.
Speaker 4: This builds momentum on top of the increased AC Pacific travel already seen.
Speaker 4: Bat logs of aircraft demand that Boeing and Airbus are at all time highs for narrow body aircraft.
Speaker 4: wide body demand is increasing rapidly and further rate increases are expected.
Speaker 4: Airlines are bringing 838s back into service to meet international demand.
Speaker 4: This is clear and inferior solution to having modern composite-based twin-engine 787s or Airbus A350s with their vastly better fuel efficiency and lower carbon footprint.
Speaker 4: The demand for improved emissions alone secures the increased build, never mind the huge demand for travel.
Speaker 4: While noting very favourable air travel demand conditions, Hamlet does rely upon aircraft built like Boeing and Herb us.
Speaker 4: while also considering that we'll see rate increases for spurs. Here we're going to take a cautious and conservative view of 2023 until we know more and see consistent aircraft build rate increases.
Speaker 4: For example, underpinning the 40-year 2023 guidance, our assumes monthly bill rates are approximately 30 per month for the Boeing 737 MAX.
Speaker 4: 53-54 for Airbus A321.
Speaker 4: Additionally, we have assumed approximately 30 Boeing 7.8.7 for the year and 65 to 70 Airbus A350 build for the year.
Speaker 4: Within these outline numbers, we expect to see strength improving in the second half.
Speaker 4: These build assumptions under PIN are assumed 17% commercial aerospace growth for the year.
Speaker 4: Now let me turn to other markets before commenting on inflation.
Speaker 4: In defence, we expect to see low single-digit increases in 2023 with less overhang from the sentence to me.
Speaker 4: F-35 structures inventory.
Speaker 4: Demand for the F-35 is strong and high builds are now expected throughout the remainder of the decade.
Speaker 4: This is further supported by both increased engine spares demand and upgrades of engines associated with the 2028 Block 4 requirements.
Speaker 4: Our business supports helicopters, drones and their space, which is a very healthy increase in revenue for us for these space related programs.
Speaker 4: and that this increasing pace I expect that will provide a lot more commentary on the space segment in the future.
Speaker 4: Gasturbine revenues are expected to grow at single digit growth, supported by an increase for the Aging-J cluster bind.
Speaker 4: I believe that everyone is aware of our very balanced IUD business which supports due power, Zim's power and also Mitsubishi Heavy which is another global business for Hamlet.
Speaker 4: All in gas should remain strong at high single digit growth or maybe low double digit growth.
Speaker 4: general industrial is expected to be down in say low single digits.
Speaker 4: Finally, we take a more cautious view of commercial transportation in our wheel segment.
Speaker 4: where the expectation is for reduced demand in the second half of 2023 notably in Europe .
Speaker 4: In aggregate fundamental demand might be down half a million wheels before the improvement of 250,000 wheels, given by penetration of aluminum wheels versus steel wheels and share
Speaker 4: sector grows continues in wheels which will accelerate the future electrification of the truck sector, especially in Europe .
Speaker 4: Turning to material and inflation records.
Speaker 4: These remain volatile.
Speaker 4: We expect the combination of material inflationary costs to be in the range of 70 to 100 million for the year.
Speaker 4: As we did in 2022, our intent is to pass through the majority of these inflationary costs.
Speaker 4: Let's turn to some specific numbers now for the first quarter of the year.
Speaker 4: Revenue we see it 1.5 billion plus or minus 25 million. Epidire of 335 million plus or minus 10. EPS of 37 cents plus or minus 2 cents.
Speaker 4: For the year, revenue is 6.1 billion plus or minus 100 million. EBITDA is 1.375 billion plus or minus 40 million. And EPS of the dollar 60 plus or minus 7 cents.
Speaker 4: Ernie Spasier assumes continued capital allocation to common stock and bond repurchases dependent upon market conditions.
Speaker 4: Our free cash flow guide is $615 million plus or minus 35 million.
Speaker 4: We set our year up with appropriate caution given recent aircraft build volatility. While at the same time noting fundamental demand, which will see further increases as we plan our pathway through the 2024 and 2025.
Speaker 4: Now let's turn to a summary.
Speaker 4: 2022 was another strong year for Hammett.
Speaker 4: Revenue increased by 14% Epida by 140 million and 12%
Speaker 4: margins were above 22% despite the extraordinary inflationary conditions.
Speaker 4: The effective tax rate improved to 22.5%, which is an improvement of 500 basis points from 2020.
Speaker 4: earning special error increase to $1.40 and by 39%.
Speaker 4: 3 cash flowing increased to 540 million, despite the inventory bills were approximately 235 million for commercial aerospace. 513 million of capital was deployed back to share buybacks, bond repurchases and dividends, and the dividends were doubled.
Speaker 4: The credit is very strong with cash on hand of $792 million and a $1 billion under all list.
Speaker 4: and average improved from 3.1 times net debt to EBITDA to 2.6 times net debt to EBITDA.
Speaker 4: Compared to our initial 2022 guide, we overcame a really good amount of headwritings.
Speaker 4: We exceeded initial EPS guidance of $1.37 while navigating unstable aircraft up till September .
Speaker 4: 225 million of material pass-through costs, and above the initial estimate of 125 million rapid non-metal inflation and new employee costs.
Speaker 4: All the while we spent in our balance sheet generated 540 million of free cash flow and deployed over 500 million to repurchases of bonds, dividends, etc.
Speaker 4: 2023 is expected to have strong growth and free cash flow generation.
Speaker 4: Since we expect similar challenges in 2022, we've taken a cautious and conservative view until we have greater visibility regarding actual aircraft build rates.
Speaker 4: We look forward to a buff trend growth in 23, 24 and 25 and that will be reflected in additional profits and cash coming from the business.
Speaker 4: Thank you very much and let's move to your questions.
Speaker 2: We will now begin the question and answer session.
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Speaker 2: We ask that you please limit yourself to one question for today's call.
Speaker 2: At this time we will pause just momentarily to assemble our roster.
Speaker 2: In our first question here we'll come from Robert Stullard with Vertical Research. Please go ahead.
Speaker 7: Thanks for watching.
Speaker 7: Rob, John , a question for you on these OEM build rates. There's also been quite a lot of talk about Airbus potentially e-longating the ramp on the A320. I was wondering from your perspective, could there actually be a help in that it reduces risk? I don't have to add.
Speaker 7: as much cost or labor as quickly as you would do normally, and then ultimately you who get better margins in that scenario.
Speaker 4: I think when you look back over our last few quarters when we've had
Speaker 4: steadier build increases.
Speaker 4: drop through has been significantly higher compared to those quarters where we've seen I say urgent or rapid demand changes and also where we've been asked by customers to drop and change on production schedules to meet maybe availability of parts they have.
Speaker 4: rather than a part of their schedule. And so you can see I think in our third quarter drop-throughs were probably in the high 30s, maybe 39%. And you saw that if you look at the track, the revenue changes in those quarters compared to the revenue changes in the higher quarters.
Speaker 4: Then I think in the fourth quarter it was that's like I can't go jack down the less calling in the
Speaker 4: So, I think steady as you go does help us.
Speaker 4: At the same time, because of the base of employment that we have has been growing, then the increment or incrementally each step of demand gets that much easier to accommodate compared to what we saw as, I think, extreme volatility.
Speaker 4: in 2022. In one sense I'd like to expand the question a lot more broadly and talk about that volatility, but I don't want to miss the point of your question, which is essentially I think steady plan for rate increases are really helpful to us.
Speaker 4: and that's when we convert best. Albeit we're setting ourselves up to do that and hopefully take also advantage of additional demand should it come towards us.
Speaker 8: In our next question, we'll come from Christine Leewegg with Morgan Stanley . Please go ahead. Hey John , just want to follow up on Rob's question on production rates here. I mean, when we look at where the other supply chain is in production rates, you've got experienced gearing towards 42 per month by your end.
Speaker 8: What am I missing? I would have thought that you guys would get more of a priority and you would get the orders in now in order to support 50 per month.
Speaker 9: Yeah..
Speaker 4: I got to try to separate my comments between that which hammock controls and that which is therefore outside of our control. And when I look at last year.
Speaker 4: We started the year.
Speaker 4: It was started the year full of optimism.
Speaker 4: So, the 22 was going to be really easy.
And it didn't quite turn out that way with lower fundamental volumes which were massed by inflation recoveries.
inflation itself within the demand we had significant volatility and schedules from our customers. And as you know, when I spoke to you in the fall, we'd seen cutbacks.
pick if our engine business and at the end of the third quarter or into the fourth quarter. We ended up carrying...
probably 70 to 100 million of additional imagery which we had not planned or expected for because customers did not need those parts. And so...
If you go back again in the middle of the year last year, we were talking with
Boeing about rate 38 and such numbers. And we're really giving ourselves up to be able to address all of that. And also I'll say schedules of engine requirements, etc., etc. that would make...
even though 30 did not materialise, even though as you mentioned now we're hearing, hearing
Spirit caller that you refer to, I think it's 38 in the summer and 42 in October . I mean that's actually great and we'd love it. There's nothing which would give us more, I will say,
pleasure and benefit than things that trade.
But we also noted that during the force quarter that
The third core and fourth core is that the actual numbers of aircraft sold, for example, by Boeing, was...
stated to be, let's say, X, and by the time you took out planes from inventory, build rates were actually, you know, more like in the 20s. And then we interpolated that maybe it was higher to the high 20s in the fourth quarter, albeit you're never sure how many were just being finished off, etc. So what was the level of actual...
I think shareholders.
It can be relied upon. So if you look at which 2019 where we have come to the exceeding 2020, I have a COVID year, 2021 we have blue past that 2022 would be despite extraordinary difficult conditions.
We achieved and exceeded that that guidance that we gave at the start of the year and so it is not like a wet paper tissue waving in the air This is something we take very seriously and And thought what can we rely upon and we felt as though those numbers which I know are
I know that below what many other people have and calling at 30 for a 737 or 53, 54 for an 8, 320, those may be seen to be low.
And if you take 30 for a 787, that might also be extremely low compared to what may be the outcome even though we know that very few were built in the 787 in the fourth quarter.
But if you take it as this is something that helps us plan the baseline of our business, sets our cost record properly and should, those are the numbers that you mentioned materialise.
then just let you imagine what that might be.
and what that might be might be, I don't know, a hundred, two hundred, probably more like a couple of hundred, towards a couple hundred and more revenue. And if you take then the incremental drop through for that.
then you would be saying wow those incremental looks great the margin rates would be about 23% because we'd set our cross structure appropriately and obviously then things would begin to look progressively brighter during the course of the year.
But that's not what we know. That's what we hope for. And so we said ourselves up with a guy which gives us a sense of security. If things turn out to be better, we're welcome at. I think you can be rely rely upon Hamette to manufacture well the operation in control.
and convert at a good rate. And so that's how we thought about it. And I don't want to be hostage to giving a guidance which could be obviously have a much more optimistic machine on it and then find myself.
being worried every month, what did they really build, etc etc. and then put ourselves hostage to not only aircraft build rates, actual production, but also the rest of the supply base if we all march to the weakest link in the supply chain. And because I don't know where everyone knows weak links are.
I choose to take some, which is fundamentally good, improving, significantly increasing, solid. If it turns out to be better, that will be great for us. I hope that gives you the context, Christine.
That's great color John . Thank you.
Thank you.
And our next question comes from Miles Walton with Wolf Research. Please go ahead.
Thanks, C'mori. John , just a clarification. Really appreciate the conservative look at the guidance. I'm sure there was frustration through most of 22. I'm just curious, does the guidance line up with your operations? And then also just maybe a comment on the responsiveness of your operations?
If things started to go better, how responsive can you be to some of the upside rates that are out there for going out of 23 into 24?
Yeah.
So obviously...
Because of the amount of people recruited last year, we have set up P-Wel, the first quarter to be able to produce at this level or above.
should it reach those heavy rates of 38 and 42,000, for example, or if Airbus are in the 5758?
For provided, we know that they're heading that way and we've got about six months in lead time. We'll be in good shape to meet it. We've been particularly good at being able to recruit labour to meet our needs. I'll recognize that sometimes the...
The stability of that labour hasn't been everything we wanted, but getting the headline numbers has been something which we've been very comfortable with, we've put increased disciplines around our own recruitment process to make sure we have a higher level of retention and improved training routines.
I think we're doing all the right things in the same way as we set our cells up for the visual aerospace ramp to be in a good condition. And so fundamentally, I believe that we'll be able to respond to meet those customer demands. Clearly...
For example, if the FAB is going to hit rate 65 to 830 in mid 24th, that's still the current number. Then again, knowing it sooner rather later is highly beneficial to us. And also the commensurate engine rate builds from our customers.
Take a one. Thank you.
Our next question will come from Seth Seafman with JP Morgan. Please go ahead.
Thanks very much and good morning everyone. I wonder if you could talk a little bit about the profitability in engine products and we saw in the first half, mid-27 type of margin and then it's come down in the second half and kind of...
Makes sense that new hires Would weigh on the profitability there But I guess when we think about what's the you know level setting on the right margin for this business I think You know there was a thought that maybe the 27 we saw in the first half was was a good margin and then with growth
You'd see incrementals above that and there'd be some expansion. But I guess from a long-term perspective, how should we think about where that shakes
Okay, well first of all let me comment on profitability in the second half that that was.
I'll say fundamentally impacted by, in fact, we, as it turned out, while we thought we'd recruited to the right, outlined demand, as you know, because of those cutbacks, not only did we not produce as much, but some of what we did produce, went in reimbordry that we didn't make the profit on it.
The worst condition we were in is that in actual fact even though across Hermet Labour was pretty flat in the fourth quarter. So we didn't Hype back with we were slightly down on labour, but in our engine products we were down significantly, so more than a hundred people down.
which is most unusual to think about. We were cutting labour given the underlying engine demand and basically because we were holding costs which we did not need to be able to use what we required. So we were in that pretty lethal band of having.
Unfortunately,
stepped up to what customers had to get you all them then didn't require. We carried access labor and that labor we had was obviously not effective as it might be because you know new labor does produce scrap so we enter it with new labor producing a higher rate of scrap combined with the cost of that. Now we do expect that
Give me actions we took.
and trim labour. We are on a steady year. We are back in recruitment modes, which we do have some course for optimism for the future. In terms of rate bills and increases, even though we've chosen to be recorded about it, is that I see no fundamental issues, not restoring those margins to at least the...
The margin, the sort of flattish EBITDA margin company wide expected for 23, that's not a function at this point of having excess labor above the production rates that are in your guidance. You're kind of appropriately sized for what's in your guidance.
certainly by the end of January , so we'll be sorting it out to bring us in the right zip code there. We believe our scrap rates are going to continue to improve. I think the guidance we gave on margin is right given the conservative demand pattern we gave.
Plus, if you picked up the words, let's put about 100 million of inflation is an unprobably mostly non-material inflation this year. We're still there to be recovered. And as you know, last year, if our 22 and a half would have been 100 basis points higher with that 300 million inflation.
that we recovered then this year it's just less than half of that. So again, taking an appropriate cautious line on where inflation might be at this point in time and hopefully it begins to become a very benign factor as we go through the year and things will begin to look better.
Great, that's helpful. Thank you.
Thank you. Our next question will come from David Strauss with Barclays. Please go ahead.
Thanks, good morning. David.
Hey John , good how are you?
Good. The 17% commercial arrow growth that you forecast, how does that look across the different segments? And on commercial transportation, I think you outline kind of your volume assumptions, but...
What should we look for in terms of just commercial transportation revenue next year, I guess, including pass through as well? Thanks.
Yeah, let me do with the latter part first, so I tend not to comment too much on individual segments growth, the anticipation thereof. But for wheels, there's an aggregate next year.
My best assumption at this point in time is a 50 to 60 million revenue decline.
And with the volume element of that being in the second half, I mean it doesn't have to be that way David It's an assumption of what
to see if there is a recession and it's impacting Europe .
I could get more optimistic about it given, also the Labour strength and recent strength in Europe , but at this point in time, you know, might as well be cautious. Right now, Bill Gates in the commercial truck and trailer business are pretty healthy and healthier probably than we'd thought going into the year.
And maybe that's because now the supply chain issues that commercial manufacturers have faced are beginning to ease and they can be able to build out some of the really high backlog that they've got. So it's no more than assumption, but if you can assume that we've got 50-60 million revenue decline in our inundant bus.
Yeah, I get that. I was just getting at would you expect
Maybe fasteners to outgrow from narrow perspective just given how you know the press the the arrow numbers still are there in that segment
If anything, at the moment...
I would expect as we move from Q1 into Q2 and 3, actually our engine business will probably show a higher rate of commercial revenue growth because I think the engine manufacturers recognise its value.
job of catch up from 22 to accomplish as well as look forward to future rate increases. So, the bid stage, it was very rough assumption against our 17%. I wouldn't be surprised to see it's a little bit higher, maybe 20% in our engine business, a little bit lower elsewhere. Where...
And then I think we haven't covered the titanium that last long, obviously factor into 2020, three years we go through it again, and everything as we go through the year.
Yes, so David, I put engines in the number one position, structures in number two, and then fasteners in number three position.
Great, thanks guys.
Thank you.
Our next question will come from Gotham Kahnat with Cowan. Please go ahead.
Our next question will come from Gotham Conor with Cowan. Please go ahead.
Got some conno, your line is open.
We can't hear you got them.
Okay, let's move to the next. Our next question will come from Robert's Spingarn with Malius Research. Please go ahead.
Hey, good morning.
Hey, good morning. Rob.
John , going back 2019, 2020 and 21, we're pretty good years for you on price.
And given that your LTA is typically three to five years long, could you talk about the pricing opportunity this year and next and any opportunity to pick up share and also if in these newer LTAs can you build in mechanisms to pass through freight costs and energy prices?
Yes So, first of all, when we file our k- which I think we are anticipating to be this evening- you'll see the final outcome for price in 2022, and that just evolves straight. If you go those like takepe.
Q's 1 through 3 and the pro-rotate for the A to, that's a good outcome there.
In 2023, I think you can expect a similar number in terms of price increase. So it's part of the methodology that I talked about for some years now and it was not a one-off correction, but more of...
the underlying ability that we have to reflect value for the HMAT products that we bring to the marketplace.
Our LTA cadence is pretty well set. We're already bidding to it now into the 24s. And so on because we're probably...
85 to 90% complete already for 2023, so that's in good shape. Most of our conversations have been, it's an an conversation, as I call it, it's an answer because there are resilience, resilience in terms of ability to build and we started to see.
now an increase in spot business availability to us, so that's again good. And clearly we've always sought in recent times to protect ourselves for those inflation elements which are not part of that 95% plus throm too, so we're in good and improving conditions.
What I'd love to do one day is to call out for you. This is the aircraft build rate and this is the amount of rates that you should increase, you know, at higher rate for Hameth. I haven't done it yet. I've just felt.
You know, we've got so many different segments to cover. And so, you know, it's been a particular stew of, you know, fundamentally relative differential rates of growth between Boeing and Airbus, between an Arab body, wide body. I felt it says it's been so many elements to the volatility.
of those demand pattern changes that come the day. And it will happen, Rob. One day, it will be in that more huge of equanimity where Boeing and Airbus settle into a future pattern, narrow body and wide body will settle into that future pattern.
I think production rates are going to come up and then steady. And then that will be like the golden days which are yet to come for all aerospace and aerospace suppliers and Hammett in particular. So I think those conditions...
are coming, they're not yet here. I'm not saying they're here for 23. You've just very clear what I've talked to you earlier this call about, but those things are going to happen. And I know whether it's back after 23 or reason 24 or is it 20, I don't know yet, but at some stage, it will happen. And I think.
Prior to that, then I'd like to be able to say this is the how met growth rate and the giving you the percentage above aircraft build and at that point I'll feel confident in giving it to you rather than having muddied by these fundamental instability of narrow body, wide body bowing, that's et cetera, et cetera. So I think that's the appropriate time, Rob.
That's great. Thanks, Sean. Thank you.
Our next question will come from Ron Epstein with Bank of America. Please go ahead.
Good morning, John . Good morning.
These are a lot of the questions I've focused on, you know, the companies use supply, but let's kind of go the other way.
How's the health of your supply chain and what are you seeing there? Give to help some of those suppliers out. I mean, what's going on there if you can give us a feel for that?
Um.
In 21 it seemed to be.
actually much better than he was by a back end of 22 for us.
And when I talk about that, where we buy base metal, we've had no issues all the way through. But where we buy somebody else's alloyed metal, that's given us heartaches for sure. And that heartache definitely increased in the back end of 22.
And that's impacted the stability and throughput, for example, of our ring segment in NGN, and it's affected our fast-to-business. And while we think we've scheduled a probe, we've heard how to do if somebody else is is forward or, you know, say metal-fintering, we've had...
two months. Now, I hope it begins to smooth out, it's been moving to 23. Again, I think it's a month away before we get a stability. But I've got a list of items today where we're in a, I'll say a low or no build condition because of availability. But I'll say I've looked more to those two areas I've talked about, which is...
Got it, got it, thank you very much.
Thank you.
Our next question will come from Gotham Kanna with Cowan. Please go ahead.
Our next question will come from Gotham Kanna with Cowen. Please go ahead. Hey, can you guys hear me?
Can he, you know, got some? Oh, terrific. Sorry about that earlier. I'm not sure what happened.
Hey, uh...
I had a couple questions. First I was wondering, do you guys have a sense for where you were on Q4 production rates by the platforms that you guided for on 23? So like where you were on the 3-7, where you were on?
320 EO, etc.
Okay, we will.
Below, I think we were below 50 on the Airbus platform, just fractionally, it's 4849, and I'm going to call it.
High 20s, mid-high 20s, on Boeing is my best guess. And these are just guesses at this point.
mid-high 20s on Boeing is my best guess. At least I just guess at this point. OK.
And 8-7, I imagine, just like 2 or 0, where do you think you were?
to one a month you can call it more like half a month.
got it. Were there big differences by the various segments, you know, engine versus fast
structures.
That's tough for me to pick all of that game back to last quarter.
Tough for me to picture all of that going back to last quarter. I think
Wide body was a particularly notable.
lower number for our fastened business in the fourth quarter so I know we will be low whatever I built on the 787.
No, I can't do for memory, across every platform in the last quarter. Go ahead, I need to think about it or make for you to have your follow question.
Okay, and I'll just on 350 as well a 350 Q4 rate. Yeah, 350, you know, that's been much more stable for us again. Built fractionally below this year we're optimistic in that, you know, we now rates between 5 and 6.
And I actually think there's a good case for fundamental demand to be well above six.
I don't know where Airbus will finally plan that second half rate and it's making to 24 but from what I can see of airline demand and particularly the amount of 747s which are flying around 838s I think if they could access
787 or 8350s, they would be desperate to do so. So I think airlines need them not only for their own profitability, but also for their own carbon footprint. I really do think there's a case for looking at that carbon footprint and we need those composite-based aircraft. So...
about there right 10 to 787 to 2026. I think that's definitely really very realistic and similarly taking a bus and up into that same sort of A33 to that sort of number. I really believe that's strong, if that's stronger.
Let's help them and I apologize for the several questions, but I also am curious, you know, a couple of years ago you gave us.
some contract color with RTX on Airfoils, F135 GTF, etc. Any update there on...
your visibility because as you know they're building that Asheville facility. I don't know if that's had any impact or we'll have any impact in the next couple of years.
In terms of, it's always difficult to really know, you know, between not part, in privy to the exact detail plans from Ray-Chi-Anne. What the big that we do know is that we are intimately improved, say, advantage engine.
and providing the organization to provide more.
content and sophisticated product there to allow higher thrust and fuel efficiency.
We are also in my comments early on, the call I spoke to 2028.4 and we are But there is nothing and not. That's all.
We're deep into both US engine manufacturers.
for the potential next generation fighter programs and the potential of engine. And so I think we're, you know, we're...
the well positioned and every one of those parts I'm talking about is a level of
sophistication higher than is in the market today. And bringing what is not only, I mean today's uniqueness, where we're the only supplier able to do it, we're taking that further.
by a continual margin to enable those upgrades to happen. And the cost of an effort by comparison to the benefit provided by, I say increased flying time and less fuel usage and increased power for the avionics is just enormous.
Did you guys say what happened to the 70 million of deferred shipments in Q4? Will that get reabsorbed in Q1 or is that through the course of the year?
Thank you. I think that will disappear very readily during the first part of this year. And maybe if volumes begin to get – we take a more optimistic volume, it may well be we might choose to –
whole summer inventory by the end of the year because we'll be looking at 24. But the moment I go in assumption is that the rates I've given will bird some of that off. And we'll see where we'll go for the second half. I mean, part of me would like to be optimistic, but I've chosen to be, you know, let's keep athletes on the ground.
and give it a god as you gave him. Thank you so much.
you gave them. Thank you so much. Thank you.
In our last question today, we'll come from Matt Acres with Wells Fargo.
I wanted to ask on CapEx, it looks like you guys are expecting a step up this year. I know it's still below DNA and below what it was a few years ago, but just what's driving the uptick and how we should think about that as we ramp up arrow production here.
Yeah, so first of all, we've taken, I'll say, and pressed down on the capex for the last two or three years and to be sub 200 million, I think was a good outcome for the year.
I do think that because of not only rate increases are coming, we feel we know not so many can instantly turn on, you have to prepare for them and provide CAPEX, not only for CAP for some aspects of the volume, but also some of the...
technical changes that we've talked about. We're also spending it again on automation and that's proving to be again beneficial to us over the last couple of years. But I think it's part of, as we move into looking at 24-25.
If it turns out to be the more optimistic scenarios that we've talked about of both Maribody rate and wide body rate, then I think for us to be in that zip code, just below inflation, build service well, and it'll be a source of cash and just blend it through the next couple of years at that level.
And if we achieve that I think in terms of CapEx usage for the business and coming up to our target utilization rates you know in good shape to achieve all of that.
Great, thanks.
Thanks. Thank you.
This concludes our question and answer session and also concludes today's call. Thank you very much for attending today's presentation. You may now disconnect your lines.