Q1 2023 Howmet Aerospace Inc Earnings Call
Speaker 2: specialist by pressing star then zero on your telephone keypad. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. To withdraw your question please press star then two.
Speaker 2: Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations. Please go ahead.
Speaker 2: Thank you, Andrew. Good morning and welcome to the HowMed Aerospace first quarter 2023 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer and Kenji Ikobe, Executive Vice President and Chief Financial Officer.
Speaker 3: After comments by John and Ken, we will have a question and answer session.
Speaker 3: 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 trial ends. In today's presentation, references to EBITDA and EPS mean adjusted EBITDAQ, excluding special items and adjusted EPS, excluding special items.
Speaker 3: These measures are among the non-GAAP financial measures that we've included in our discussion.
Speaker 3: Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John .
Speaker 4: Thanks BT and good morning everyone.
Speaker 4: Hammet's Q1 results speak loudly for themselves.
Speaker 4: Revenue was 1.6 billion, an increase of 21% year over year, and an increase of 6% sequentially.
Speaker 4: Commercial aerospace increased 29% year-over-year and 4% sequentially.
Speaker 4: Revenue was above guidance by a significant amount, which was in itself an increase, quarter over quarter. And naturally, the increased revenues required some work and capital.
Speaker 4: BPDAR was $360 million, an increase of 20% year over year, and an increase of 7% sequentially.
Speaker 4: EBITDA margin was healthy at 22.5%, again an increase sequentially.
Speaker 4: earnings per share were up 35% year over year
Speaker 4: Pre-cash flow was negative 41 million, driven by the higher revenues, and will now be followed by three successive quarters of substantial cash inflow.
Speaker 4: During the quarter, debt was reduced by 176 million from the 2024 bonds with cash on hand. And this will further reduce future interest payments by $9 million annually and hence increasing free cash flow yield.
Speaker 4: In addition, $25 million of common stock was repurchased.
Speaker 4: During the balance of 2023, shareholders can expect further steps regarding the application of cash flows and thereby creating shareholder value.
Speaker 4: All of the above. Growth.
Speaker 4: margin rate, free cash flow, and the application to create value all speak to the business and financial model of the company. I will comment further on the outlook after Ken has outlined the growth by markets and performance by each business segment.
Speaker 5: Thank you, John , and good morning, everyone. Let's move to slide five for an overview of the markets for the first quarter.
Speaker 5: Revenue was up 21% year-over-year and 6% sequentially.
Speaker 5: Commercial aerospace continued to lead Euro-review revenue growth with an increase of 29% driven by engine products.
Speaker 5: aerospace continued to lead year-over-year revenue growth with an increase of 29% driven by engine products, engineered structures, and fastening systems.
Speaker 5: Sequentially, commercial aerospace was up 4%.
Speaker 5: Commercial aerospace has grown for eight consecutive quarters and stands at 47% of total revenue, and although growing, continues to be short of the pre-pandemic level of 60% of total revenue.
Speaker 5: The Fensero space was up 11% year over year driven by the F-35 program in growth and legacy spares. Sequentially, the Fensero space was flat due to strong year end seasonality.
Speaker 5: Commercial transportation, which impacts both forged wheels and fastening system segments, was up 17% year over year and up 9% sequentially driven by higher volumes.
Speaker 5: Finally, the industrial and other markets were up 16% year-over-year, driven by oil and gas, which was up 53%, IGT up 14%, and General Industrial up 1%.
Speaker 5: Sequentially, these markets were up 15%, with oil and gas up 25%, IGT up 15%, and General Industrial up 10%.
Speaker 5: were up 15%, with oil and gas up 25%, IGT up 15%, and general industrial up 10%. In summary,
Speaker 5: Strong growth across all of our end markets.
Speaker 5: across all of our end markets. Now let's move to slide six.
Speaker 5: We will start with the P&L and focus on enhanced profitability for the first quarter.
Speaker 5: Revenue, EBITDA, and earnings per share all exceed in the high end of guidance.
Speaker 5: Revenue was $1.6 billion or up 21% year over year.
Speaker 5: EBITDA was up 20% year over year and EBITDA margin was 22.5%.
Speaker 5: Adjusting for the year-over-year inflationary cost pass-through of approximately $35 million, EBITDA margin was 23%, and the flow-through of incremental revenue to EBITDA was approximately 25%,
Speaker 5: while absorbing near-term recruiting, training, and production costs for approximately 500 net headcount additions.
Speaker 5: Earnings per share was 42 cents, which was up 35% year over year.
Speaker 5: The first quarter represented the seventh consecutive quarter of growth in revenue, EBITDA and earnings per share.
Speaker 5: Moving to the balance sheet, the ending cash balance was $538 million after approximately $218 million of capital allocation, a debt reduction of $176 million, common stock repurchases of $25 million, and quarterly dividends of $17 million.
Speaker 5: Free Cat Flow for the quarter was a negative 41 million driven by higher revenues in the first quarter.
Speaker 5: Finally, net deck to EVADA remained at a record low of 2.6 times.
Speaker 5: All bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future.
Speaker 5: Our next bond maturity is in October of 2024 and the $1 billion revolver remains undaur
Speaker 5: Moving to capital allocation, we continue to be balanced in our approach.
Speaker 5: Capital expenditures were $64 million in the quarter and continue to be less than depreciation.
Speaker 5: Capital installed prior to COVID-19 puts us in a very strong position to support the continued commercial aerospace recovery.
Speaker 5: Regarding debt, we reduced the 2024 debt tower in the first quarter by approximately $176 million with cash on hand.
Speaker 5: These repurchases will lower our annualized interest costs by approximately $9 million.
Speaker 5: The October 2024 debt tower now stands at approximately 900 million, which is below our revolver.
Speaker 5: Our continued progress on debt reduction, EBITDA growth, and healthy liquidity has resulted in an upgrade to our outlook from S&P last week from stable to positive.
Speaker 5: You can find our remaining debt towers in the appendix.
Speaker 5: Moving to share repurchases.
Speaker 5: The first quarter was the eighth consecutive quarter of common stock repurchases.
Speaker 5: Since the separation in 2020, we have repurchased approximately $928 million of common stock with an average acquisition price of $31.79 per share. Their buyback authority from the board of directors stands at $922 million.
Speaker 5: Lastly, we continue to be confident in free cash flow.
Speaker 5: In the first quarter, the quarterly common stock dividend remained at 4 cents per share after it was doubled in the fourth quarter of last year. Now let's move to slide 7 to cover the segment results for the first quarter. Engine products continued its strong performance.
Speaker 5: revenue with $795 million, an increase of 26% year-over-year, and an increase of 9% sequentially.
Speaker 5: Year over year, commercial aerospace was up 31% and defense aerospace was up 19%, with both markets driven by higher build rates and spares growth.
Speaker 5: IGT was up 14% and oil and gas was up 57%.
Speaker 5: EBIT had increased 23% year-over-year to a record for the segment of 212 million.
Speaker 5: EVA to margin was 26.7%.
Speaker 5: despite the addition of approximately 260 net new employees in the associated near-term recruiting, training, and production costs.
Speaker 5: the addition of approximately 260 net new employees in the associated near-term recruiting, training and production costs. Please move to slide 8.
Speaker 5: Fastening systems, year over year revenue increased 18%.
Speaker 5: Commercial aerospace was up 15% driven by the narrow body recovery. Defense aerospace was up 38% and commercial transportation was up 19%.
Speaker 5: Year over year segment EBITDA increased 4% as volume increases were partially offset by inflationary costs in the addition of approximately 215 net new employees than the associated near term recruiting, training and production costs.
Speaker 5: Now let's move to slide 9. Engineered structures year over year revenue is up 14%, with commercial aerospace up 39%, driven by higher build rates and approximately 20 million of Russian titanium share gains.
Speaker 5: Defense aerospace was down 23% year-over-year, driven by some legacy programs.
Speaker 5: Segment EBITDA increased 30% year over year while margin improved 190 basis points.
Speaker 5: wheels year over year, revenue increased 17%.
Speaker 5: The $42 million increase in revenue year over year was driven by 18% increase in volume.
Speaker 5: Segment EBITDA increased 18% year over year in line with the higher volumes.
Speaker 5: Margin increased 20 basis points as the impact of lower aluminum prices was mostly offset by inflationary costs passed through and unfavorable foreign currency.
Speaker 5: Lastly, before turning it back over to John , one item of note, in the appendix we've added slide 16 and have updated the improved interest rate expense assumption for 2023 from $227 million to $222 million.
Speaker 5: This change reflects the 2023 impact of reducing debt by $150 million late in the first quarter. As you may recall, we had already included the impact of reducing debt by approximately $26 million in January before we published our original 2023 guidance.
Speaker 5: Now let me turn it back over to John .
Speaker 4: Thanks Ken and let's move to page 11. Moving to ESG, we continue to leverage our differentiating technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints.
Speaker 4: Within our own operations, Hermit remains committed to managing our energy consumption and environmental impacts as we increase production.
Speaker 4: In 2022, our actions have reduced the intensity of Hammet's greenhouse gas emissions, energy consumption, water use and hazardous waste.
Speaker 4: We progressed against our 2024 greenhouse gas emission goal by achieving a 20% reduction in total greenhouse gas emissions through 2022 from the 2019 baseline.
Speaker 4: approaching already the 2024 goal of a 21.5% reduction. HANMEC is also committed to a safe workplace while fostering a diverse, equitable and inclusive work environment where all our employees can thrive.
Speaker 4: Our safety record continues to improve and is seven times better than the industry average.
Speaker 4: Moreover, Hamet was named one of the best places to work for LGBT equality by the Human Rights Campaign Foundation.
Speaker 4: We also increased our workforce by 1,500 people and invested nearly 200 million in 2022 to support the significant production growth.
Speaker 4: 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, 75% of our key suppliers have sustainability programs considered to be leading or active.
Speaker 4: I'd encourage you to read our sustainability report found at hammet.com in the investor section.
Speaker 4: Let's move to slide 12 and talk about our updated outlook.
Speaker 4: Firstly, demand for aircraft is very high and aircraft manufacturers backlogs are in very good order, both for narrow body and wide body aircraft.
Speaker 4: Spares volume and the business jet market also continues to show strength.
Speaker 4: Airline load factors continue to be very high and robust in the West with rapid growth now seen in both short haul and long haul flights in Asia. This travel led demand stimulus is further augmented by the need for modern, truly efficient aircraft given the current cost of jet fuel.
Speaker 4: and the very high cost of SAF substitute fuel. This is further driven by the commitment of airlines to meet carbon emission targets for today, 2030 and 2050, which can only be achieved by using the new fuel-efficient engines and aircraft.
Speaker 4: Current new engines fitted to narrow body jets are all looking at steps to further increase efficiency, which also helps Hermet give now capabilities in complex casting shapes to improve their management and hence fuel efficiency.
Speaker 4: The other divisions of Hermit are also benefiting by the increased use of titanium and sophisticated fastener suites required by composite wings and fuselages, notably but not exclusively for widebody aircraft.
Speaker 4: The defense market outlook is also healthy, with increased budgets and strong demand for F-35s, drones, rocket motor parts and howitzer parts. The last part of the F-35 inventory correction regarding bulkheads that resulted from the prior underbuild of the F-35 fighters.
Speaker 4: in 2020 and 2021 should be dissipated over the next two to three quarters.
Speaker 4: IGT turbine blade demands continue to be steady and turbine demand from the oil and gas sector is very high. The year started well in commercial truck. Given the backlog and steady truck ordering in both North America and Europe , it should mean that any demand drop indicated after spring is now pushed out for at least one quarter or so, albeit the normal Q3 seasonality regarding Europe will obviously apply.
Speaker 4: The required emissions performance targets for trucks in 2024, especially in the US, will apply with no ability to have a stimulated pre-build.
Speaker 4: In reassessing all of the above, plus robust engine demand seen in Q1, the outlook for the year is increased.
Speaker 4: We remain cautious about commercial aircraft build in the second half until we see clear evidence of consistent production rate increases, which will be controlled by the efficiency of both the aircraft assembly lines and the supply of parts.
Speaker 4: We, as you know, saw this effect of the effect of this phenomenon in like Q3 of 2022 and also in Q4 when Hamad delivery requirements were curtailed about customer inventors. More specifically in turning to guidance for the second quarter, we now see revenue of 1.61 billion plus or minus 10 million, EBDA of 362 million plus or minus 3 million, and earnings per share of 42 cents plus or minus a penny. For the year, if you revenue of 6.25 billion plus 75 minus 50 million, EBDA of 1.415 plus 20 minus 15 million.
Speaker 4: earnings per share of $1.67 in midpoint plus 3 cents minus 2 cents. And free cash flow increased by 20 million to 635 million plus or minus 35 million.
Speaker 4: share of $1.67 in Bitcoin plus 3 cents minus 2 cents. And free cash flow increased by 20 million to $635 million plus or minus 35 million. Please move to slide 13.
Speaker 4: In summary, Q1 performance was healthy.
Speaker 4: and a great start to 2023. And the outlook as seen by Hamad is improving. The balance sheet was improved with debt reductions of 176 million and net leverage will now continue towards the two times net debt to IBITDA in the balance of 2023, given both the reduction in debt and the improved IBITDA.
Speaker 4: The balance sheet is strong. Continuing share repurchase can be expected as cash is generated and the current authority is sufficient to continue this program. Annual cash to service legacy pension and OPEB liabilities is modest at approximately $56 million. We look forward to updating you again in August . Thank you very much. Let's move to your question.
Speaker 2: your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker 2: Please keep yourself to one question only. At this time we will pause momentarily to assemble our roster.
Speaker 2: The first question comes from Noah Baponick with Goldman Sachs. Please go ahead.
Speaker 2: Hey, good morning everyone.
Speaker 6: John , if I take the 1Q actual on the revenue and then the 2Q guide, the full year guide in order to get into that range, the 3Q and 4Q it looks like would need to be closer to.
Speaker 6: a billion five. Recognizing everything you've been saying and the posture you've been taking with conservatism around the end markets, just in general, how do we get there?
Speaker 4: last quarter was helpful to describe what you were assuming on the major aircraft production rates in the guide, if you could just update us there. Yeah, before I comment specifically on any aircraft build guide, let me just back up and...
Speaker 4: And we talk how we thought about the balance of year. And I think this is really important in setting the tone because managing through an uptone has many more dimensions, especially when you have one major segment, which is commercial aerospace having significant potential volume increases.
Speaker 4: And as you know, volumes for aircraft build have been taken up, down, delayed with some regularity over the last year, two years.
Speaker 4: And so how we thought about this, that we see essentially Q2 playing out very similar to Q1 and preparing for improvement in build. And in doing so, we need to add to our costs. And so...
Speaker 4: In Q1, as you saw Ken from Ken's commentary, we recruited some 500 people. And we're heading probably to a similar sort of run rate of employee edition in Q2.
Speaker 4: and all expecting that we are receiving and will be receiving the schedules to meet these potential lifted second half volumes. And of course you will know, as everybody else knows, is that Boeing has announced that for their 737...
Speaker 4: that they will take their production rate up to 38 at some time later in the year without specifying exactly when that is.
Speaker 4: And the cost of these headcounts are clearly not matched by revenues in the second quarter. So we're prepared to support our customers where they may go in volume.
Speaker 4: And the cost of these head counts are clearly not matched by revenues in the second quarter. So we're prepared to support our customers where they may go in volume. And so we're confident.
Speaker 4: is that we're also cognizant of what happened in the last four months of last year when cutbacks occurred because people did not achieve or our customers were unable to achieve some of their more ambitious increases that they had thought about. And I did say about all marching to the place of the weakest link, and whether that's in the supply base or in the final assembly of aircraft, it doesn't really matter. So...
Speaker 4: cognizant of what happened in the last four months of last year when cutbacks occurred because people did not achieve or our customers were unable to achieve some of their more ambitious increases that they had thought about. And I did say about all marching to the place of the weakest link, whether that's in the supply base or in the final assembly of aircraft, it doesn't really matter. So we set ourselves up.
Speaker 4: We want to be cautious about the second half and we'll maintain that stance until we see actual increases in production. And when we see those increases, I think we're going to have a lot more confidence that we're not going to get cut back. And hopefully that might produce a...
Speaker 4: increased guidance.
Speaker 4: increased guidance. So in summary, what I'm saying to you is whether it's...
Speaker 4: commercial arrow, whether it's strength in the oil and gas, increased strength in our commercial truck and pushing back some of the potential for any cutbacks there, and also the strength in defence. It's a guide up across many of those sectors which also have to be taken into account.
Speaker 4: while still maintaining that for the year we need to be suitably cautious because we're only one quarter in. And we've got to see how this plays out even though we are optimistic that everybody achieves their plans. At the same time, I don't want to put ourselves in and give you a sense of robustness which may not occur in the end.
Speaker 4: So hopefully that gives you the way we thought about it, Noah. And I've also referenced the only public change in production rate, which is for the 737 later in the year. And essentially we are not calling out any changes, any other specific numbers, because we don't know of any.
Speaker 2: on your framework. Okay, thank you. Thanks. The next question comes from Miles Walton with Wolf Research. Please go ahead. Thanks, good morning.
Speaker 2: John or Ken or PT, the profile of margins at Fastening Systems, I was hoping you could touch on those. Obviously, the EBITDA margins are a couple hundred basis points below the last year or so. It doesn't really look like mix. I know you're hiring and there's a recruiting training production cost associated with that.
Speaker 2: Can you just give us some color on the margin trajectory from here? Thanks.
Speaker 2: the margin trajectory from here. Thanks.
Speaker 4: The casting systems margin is not where I'd like it to be. And at the same time, we also need to recognize exactly where we are in terms of the production mix, which is still very much metallic focused of narrow bodies.
Speaker 4: for the main and we've seen really no demand change for, or essentially no demand change for our wide body business currently except for something on the Airbus A350.
Speaker 4: We do expect that that mix will change and improve in the balance of year.
Speaker 4: and in preparing ourselves, if you look at the net recruitment, I think we call that like 250, 260 net people in engine.
Speaker 4: which of course is two and a half times larger than our FASNA base, but say we were at 215, 220 people in FASNA, we recruited disproportionately in FASNA preparing for that improvement.
Speaker 4: So essentially, when I think about the year and margin rate, is that I don't see much change, a little bit of change, positively maybe in Q2, but essentially having absorbed the costs of raising production and stabilizing the workforce.
Speaker 4: plus the increase in volume, plus the improvement in mix, I do think that we will see some margin rate improvements in the second half of the year. So basically don't expect much in Q2, and we're positioning ourselves optimistically for improvements in the back end of the year miles. Should the incremental margins of that segment in 2425 more approximate the whole company?
Speaker 4: saying does it match this segment as of on average. All I know is that I'll be somewhat disappointed if we're not earning a margin rate in 2024 above our current Q1 level. And indeed don't expect it to be like that.
Speaker 4: segment as an average. What I know is that I'll be somewhat disappointed if we're not earning a margin rate in 2024 above our current Q1 level and indeed don't expect it to be like that. Thank you.
Speaker 4: Thank you. The next question comes from Robert Springham with Melius Research. Please go ahead. Hi, good morning. Hi, Rob. John , you had this very strong sequential growth in industrial, but some peers have suggested that that's just a matter of a lot of inventory that was available to ship in this first quarter. So how does that trend as we go through the year? If I pick apart our wider industrial business.
Speaker 4: We saw really strong demand in terms of the oil and gas sector, which is really for derivative turbines. And that was quite extraordinary at 50% plus.
Speaker 4: And we don't see anything but that being positive for the next few quarters. We haven't really thought about 24 at this point. But the oil and gas has been quite strong.
Speaker 4: And then that's backed up by the industrial gas turbine business at 14%. So those are the two. But beyond that, the wider industrial business was really low single digit. So nothing exceptional there at all.
Speaker 4: But for the two specific sectors which make a difference to us, which is oil and gas and IGT, we don't think we pulled anything forward or there's any concerns whatsoever.
Speaker 4: Well, I did say Q2 we see is very similar to Q1, so I don't think you should be expecting anything given what has been a really, really great first quarter. Maybe I shouldn't say it myself, but it was good. So I think you should think about Q2 being pretty similar and us taking on cost repair for the second half. And then we're going to wait and see how our customers volumes pan out.
Speaker 4: And we think we've tried to give you a balanced view of the way forward. And, you know, I think that, so I don't think you should expect any sequential growth being open above what's been quite exceptional growth already. Okay, thank you so much, John .
Speaker 4: we think we've tried to give you a balanced view of the way forward. And, you know, I think that, so I don't think you should expect any sequential growth, you know, over and above what's been quite exceptional growth already. Okay, thank you so much, John . Thank you.
Speaker 7: The next question comes from Christine Leeweg with Morgan Stanley . Please go ahead. Hey John , following up on your salient point on marching to the weakest link, I mean having to invest ahead of time with volumes being uncertain, you know, seems counterproductive for the supply chain. Well that's interesting because I guess maybe I should a Yes absolutely absolutely.
Speaker 7: Where do you see the weakest link industry? What do you think is keeping Boeing from actually getting to 38 sooner and then also What do you think for the 737 MAX and what do you think the OEMs could do better to make it easier for the supply chain? to meet these volume increases I don't have any comments
Speaker 4: supplied by the engine manufacturer. So, and I don't have any specific information.
Speaker 4: if there are supply challenges in any specific suppliers.
Speaker 4: Obviously we've all read about the tail plane, tail section issues and its fastening to the fuselage.
Speaker 4: And obviously, my guess, and it's a guess, is that there's a finite amount of parts that they can get and how many of those parts are directed to the original equipment build for the 737 and how much are for retrofit of the aircrafts which are out with airlines or in the inventory they've got.
Speaker 4: We don't know and we don't control any of that. So we're just hopeful that our customers keep to their statements and their plans. And as I said, I think they will absolutely, will schedule the parts on us. And then,
Speaker 4: Should they build at that rate? They'll have a pass, but if they fail to build at those rates, then of course there is the potential to be cut back as they rebalance their inventories for parts they've had which they didn't use. It's a very difficult question for us to answer. And so I think the takeaway really is we're ready, we're committed to support our customers.
Speaker 4: At the same time, we're not willing to get ahead of ourselves. We are willing to do the recruitment necessary, but I hope that we don't end up with what we did last year in like in the fourth course where we shed some employees, because we were a little bit too far ahead of where our customers were.
Speaker 4: And so that's how we think about it. But I can't call out anything specific of there is this issue, if that was fixed, that would solve the problem. And I guess it's all wrapped up in the statement later in the year.
Speaker 7: And I guess you can ask Boeing specifically which bank that is. Great, thanks John . And if I could follow up on Miles' question earlier, if you exclude inflationary pass-through costs, incremental margins were 25% for the whole business. So at some point, as the supply chain issue alleviates for Boeing and Airbus, we could get these higher volumes materialized.
Speaker 7: And at that point, you know, you might have CAPEX and labor already in place. So when we kind of look out to 2024, 2025,
Speaker 7: Where could incremental margins be for the arrow businesses? Is this something that could be in the 30s percent or 40s percent?
Speaker 4: When we talked about this a year or so ago, we did say we'd probably see a couple of years at 35% incrementals plus or minus 5% and you've seen all of that play out in terms of being in the low 30s to the high 30s. It's very much been dependent upon the change of volume.
Speaker 4: by quarter. And when we're prepared, and I'll say there's a reasonable growth, we convert really well. When it's been excessive growth, we struggled because we had to ingest more labor. And it's untrained, and going towards that gross cost and real cost and scrap, etc.
Speaker 4: That's how it's played over the last couple of years. In the first quarter of this year, here we are again. We're preparing for volume and taking people on. And all that's good because we know at some point it's going to happen because the demand is so strong. And adjusting for them is a metal and non-metal inflation flow through.
Speaker 4: by the math is that the second half, we anticipate to be over 30%. And again, you can reverse engineer that from the numbers already given without me calling it specific percentage ads. So should that continue, and then obviously it depends on the growth rate going into 2024, as to what the incrementals will be, but it should be in a good zone.
Speaker 4: And at the moment I'm voting for the higher volume and because ultimately having those higher volumes with our leverage of applying our margin rate to the higher volumes clearly overcomes the working capital drag and the capital expensive drag and so it all ends up in free cash flow Christine.
Speaker 8: Great, thank you, John . Thank you. The next question comes from Sheila Cagliaglu with Jefferies. Please go ahead. Thank you. Good morning, John and Ken and Pee-Pee. Thank you. Hi, Sheila. Hi. I'm just a 23 EBITDA margin. I'm just a 23 EBITDA margin.
Speaker 4: commodity prices have come in a little bit. Thank you. Yeah, I mean we've seen some commodities come in, but also quite a few have moved out against, for example, if you take hafnium and menium, those have become very expensive in the last few months. In fact, we've been.
Speaker 4: laying in some security stocks of certain of those metals to make sure that we have adequate coverage to be able to support our customers in the quest for the increased volumes. At the same time, well, I think generally, we see it as a big positive that inflation is beginning to come down. We are learning less and less about prices andARPA still.
Speaker 4: pretty high, you know, let's call it 6%, 7% in that zone and those non-metal inflation is where the the big action is today in trying to look at that, control it at the same time, you know, recover it. So for me the major story of margin rate is
Speaker 4: you know, volume and then, you know, do we see those flow throughs that we anticipate? And obviously, it'd be great if, you know, the if everybody built what they say they're going to build, then and with this increased spares demand both for domestic and international and to cure some of these time on wing issues.
Speaker 4: hoping the revenue turns out to be that or better. But I mean, calling out a point one or point two and the margin rate is difficult. You're talking fraction like a million or two here or there. So you know, I'd say it doesn't really matter to you. Okay, thank you very much.
Speaker 4: out to be that or better. But I mean calling out a 0.1 or 0.2 on the margin rate is difficult. You're talking fraction like a million or two here or there. So, you know, I'd say it doesn't really matter to you. Okay, thank you very much. Thank you.
Speaker 4: The next question comes from Seth Seifman with JP Morgan.
Speaker 3: Please go ahead. Hey, thanks. Thanks very much. Good morning everyone. I think during the prepared remarks, I think Ken mentioned the the 20 million of share gain from Russia on titanium in engineered structures. I think that's the wrap around on the share gain that you...
Speaker 3: whether the OEMs have moved forward there with the alternative sources or not yet.
Speaker 4: Okay, so you're absolutely correct, the 20 million was the increase.
Speaker 4: in our fourth quarter of 2022 volume. And the way to think about 2023 is you take that 20 million, multiply it by four, and then add on to that about a 25% plus or minus growth for 2023. And currently,
Speaker 4: I think you just take a 23 number and you probably add another 25 to 30 percent on for 2024. That's the way I'm thinking about it. We've taken a lot of very positive steps with the order intake notably from Airbus.
Speaker 4: but also from Embraer and also more recently our first orders with Boeing and that's both for mill product and some forgings. And we continue to work actively on quotations, particularly with Boeing who are, you know,
Speaker 4: getting more engaged given the fact that they've known they've had a very large inventory of titanium given the restricted build of the 787 and other widebodies. But we see them preparing for ordering and release and gradually increasing those requirements.
Speaker 4: doing the back end of this year and into 2024. So it's all playing out as expected and see the titanium opportunity is very positive. It's only blemished at the moment by reverts. It'll be very tough to get hold of and it's expensive.
Speaker 4: So we've laid in additional sponge requirements and are seeking really to ramp up our production in our titanium furnaces during the balance of 2023. And that's important to us. Great, thank you very much. Thank you. The next question comes from Robert Stallard with Vertical Research. Please go ahead..
Speaker 4: So we've laid in additional sponge requirements and are seeking really to ramp up our production in our titanium furnaces during the balance of 2023. And that's important to us. Great. Thank you very much. Thank you. The next question comes from Robert Stallard with Vertical Research. Please go ahead. Thanks so much. Thanks for your time.
Speaker 4: additional sponge requirements and seeking really to ramp up our production in our titanium furnaces during the balance of 2023 and that's important to us. Great, thank you very much. Thank you. The next question comes from Robert Stallard with Vertical Research. Please go ahead. Thanks so much, good morning.
Speaker 9: John , I'd like to ask you about lead times. If Boeing does move ahead with this move to 38 per month on the 737, wouldn't you have to start producing these parts considerably in advance? And more importantly for you, I suppose, wouldn't you have to start ordering the metal sooner as well, almost like now, if you're going to hit that by the end of the year?
Speaker 4: Yes. Yeah. You're right. And so we are recognizing that we are increasing the rate and some of that is occurring now. And it's only balanced by the amount of inventory that we have. And as you know, we carried...
Speaker 4: the volume that we saw, we chose not to reduce inventories in the first quarter. We wanted to keep everything healthy. We've tried to input materials such that we can respond to both the production requirements of schedule.
Speaker 4: And also what we think is going to be some spot by purchases which will be required in the balance of the year. So we're ready and poised to be able to respond, I think, hopefully in a good and efficient manner. But as I said before, we don't know exactly what's going to happen.
Speaker 9: what all of the issues are in terms of the fine, that govern the final production rates, but we're prepared. Okay, just sorry just to follow up on that. So how much lead time would you need from an OEM customer to say theoretically move your production or deliveries from where you are at the moment, low 30s to 38?
Speaker 9: It very much depends upon the path. So where we're accessing base metal, it'll be, let's say more in that, let's say six to nine months. But if it's where alloyed metal, you're now talking out really 15 to 20 months of laying in order requirements to anticipate. So we're already having to anticipate.
Speaker 9: what 2024 might look like for our material ordering and laying those requirements on our supply base. And it's all, again, predicated on how many have built this year, you know, do we build an excess or are things pushed and what the growth rate will be next year.
Speaker 9: As I said in my prepared remarks, managing an upturn has far more and many dimensions than managing a downturn, whether it's labor, materials, production facilities, capital, etc. And so it's quite fascinating. And I'll say in one sense, a really high class problem to have. So here we are debating what's the angle of the growth rate.
Speaker 9: and we worry excessively about some of the minutiae, but at the same time, we've got to keep our mind focused on the main goal, which is these are really good conditions to be in where we're looking at the growth rates that we're talking about and we know that we're going to grow again in 2024 and we know we're going to grow again in 2025.
Speaker 4: And so in my book, all of that's pretty good. Thanks, Marshall. Thank you.
Speaker 4: in my book all of that's pretty good. Well, yeah, thanks for jumping. Thank you. The next question comes from David Strauss with Sparklies. Please go ahead.
Speaker 4: Thanks for taking the question.
Speaker 4: Hey John , so two things. If you can update us on the status of the UAW in Whitehall, what's going on there, and then any color you want to give around the recent change in leadership at Fasteners. Thanks.
Speaker 9: Okay, so in Whitehall we continue to be in negotiations with the UAW and have extended the agreement with, you know, with no work interruption. So that's just going on as normal. And in fact, you know, we're going to continue to be in negotiations with the UAW and have extended the agreement with the UAW and have extended the agreement with the UAW and have
Speaker 9: we've been discussing that again in the last few days. So, I say normal sort of negotiations around that topic.
Speaker 9: that again in the last few days. So, I say normal sort of negotiations around that topic.
Speaker 9: Just remind me, Dave, your second one. I got focused on the... The, uh, yeah, thanks. The change in leadership that you announced. Oh, change in leadership. Yeah. We made a change. We actually changed out the leadership of the faster group. The fourth quarter of 2022.
Speaker 9: and have been managing through a temporary solution there with an acting, let's say, president of Strasnus. And it's also given me the opportunity of even being, you know, to do more.
Speaker 9: intimate with that business and you know and now appointed what we think is going to be a great leader for that business and you know started practice the person have started they were engaged with us the week before starting that quarter the
Speaker 9: business operating reviews and so that I think that was a good learning and Information exchange and so You know I'm optimistic that with the changes that we've made and the increased focus performance orientation of the business that the things that I see possible become
Speaker 9: on recruiting in second quarter, taking those costs on and getting ready. And the improvement in volume and then the improvements in mix with wide body coming more to the fore. And in particular, we are beginning to see stirrings of life in the, I call the sub-tiers of the 787 suppliers around the world, which will require the fasteners from us to be able to produce their parts.
Speaker 4: it's quite dramatic the change which you get from those wide body aircraft and the degree of composites they contain. Do you anticipate having to make additional hires in the second half, John , to hit the stated production rates that are out there? Or will that all be in place with the additional hires that you talked about in the second quarter?
Speaker 9: If it is as we think, we should be at rate in the first half, but inevitably there's always some attrition, and so there's a bit of a replacement. And the case for hiring in the second half will be, I'll say, basically predicated on two factors. One, what is the actual...
Speaker 9: rate of production required in the second half. And secondly, particularly when we get to the fourth quarter, we will have to be anticipating to some degree the rate of growth into 2024, which as I said, we expect 24 to be another very positive year for the commercial aerospace side. And so, you know, it's difficult to be precise until I know more about.
Speaker 9: the final requirements for the second half and then what's the angle of increase for 24.
Speaker 4: Thank you. Okay, thank you. The next question comes from Gautam Khanna with Cowen. Please go ahead.
Speaker 4: Thank you. Okay, thank you. The next question comes from Gautam Khanna with Cowan. Please go ahead. Hey guys, good morning.
Speaker 9: I promise I'll keep it to one this time. I know, you gave me a bit of grief over your one three part question last time.
Speaker 2: But both good. That's right. I deserved it. Hey, I just wanted to get your pricing expectations over the next couple of years and if you could specify price opportunities, I should say, and then if you could specify where and which segments the pricing opportunity is greatest.
Speaker 9: Thank you. Okay. Um, I think when I talked in February , um, I indicated to you that we were about, um, we were about to have a conversation about, um, the, the, the, the, the, the, the, the
Speaker 9: 80-85% done in terms of moving through the long-term agreements for 2023. And now we're up at the 95-98%. So essentially...
Speaker 9: 2023 is complete and everything is in line with what I've previously said in terms of a similar order of magnitude in terms of further pricing that we talked about for 2022. And that as you know is over and above any recoveries for either
Speaker 9: metals or non-metals inflation that's quite separate. This is just pricing. We don't normally talk about 2024 at this point. We've been studying that recently. It's a little bit early.
Speaker 9: is that my guess is it's a similar order of magnitude, heading in that direction for 2024 Gotham.
Speaker 4: Okay, any segment that stands out with the greatest pricing opportunity over the next couple years.
Speaker 9: Now, price is positive for us in all four segments. Inevitably for engine it has to be greater because it's the largest segment. And this also carries with it some of the more exceptional technologies where...
Speaker 9: we're now pushing the boundaries once again of what's possible to enable really the mission of let's say further, let's say lower fuel usage and improve carbon footprint. And I see that those...
Speaker 9: impacts not only for the fact that you've got the fuel efficient aircraft but the engine developments which are being made by our customers. Those are really going to assist that whole achievement of lower greenhouse gas emissions for the aerospace and airlines in particular.
Speaker 9: So I think it's all good news and Hammet on our internet to helping to achieve that in the stage that I'm taking after the combustor.
Speaker 4: Thank you guys. Thank you. The next question comes from Matt Acres with Wells Fargo. Please go ahead.
Speaker 5: Yeah, hey guys, good morning. Thanks for the question. John , I was wondering if you could talk about your latest thoughts on the Asheville facility that Brad is ramping up and I think that's supposed to ramp up production a little bit this year. Have they given you any indication of what the volumes are there and maybe what kind of time frame you think that could.
Speaker 9: Is there any risk to your airfoil volume? Well, I don't think anything in terms of the narrative have changed from all the words that I've expended on this topic over the last two or three years. We're starting with…
Speaker 9: with Pratt and Whitney deciding to sell their airfoil castings business, which was in Poland in 2016. And then deciding in 2017 that they would re-enter, but with using new core technologies from a company they'd bought. They've been obviously continuing to develop that.
Speaker 9: And I think it's a certain luck because most of our, I mean, you take both GE and I think Pratt, we've coexisted with them for many, many years with them having their own development and production capabilities. But in terms of when you get to, I'll say, real production at high volume of very complex parts.
Speaker 9: I'd say Hammet is a really good zone. I'm not going to use the word league of its own, but in terms of
Speaker 9: the achievement of the complexity with the yield rates, that's really important to the whole economics of the casting business. The information I have is that of the 650 million that's still being applied to machining, coating.
Speaker 9: investments are very expensive for machining turbine parts.
Speaker 9: and they're expecting first pass off some qualification for those machine parts in May of this year. And so I guess it's proceeding to plan. At the same time, I've also noted with you the extension of our long-term agreements with PRAS.
Speaker 9: And I've also shared with you conceptually without giving you detail of the further technology improvements we're making both for the Block 4 joint strike fighters with 28 improvements in the requirements for efficiency and thrust in that program. And also on the advantage engine. So...
Speaker 9: There's a lot going on and we're intimate with those developments with our customer. Great, thank you. Thank you. The next question comes from Phil Gibbs with KeyBank Capital Markets.
Speaker 4: be intimate with those developments with our customer. Great, thank you. The next question comes from Phil Gibbs with KeyBank Capital Markets. Please go ahead.
Speaker 4: Hey, good morning. Hey, Phil. Hey, you pointed to strength and spares, demand and engine products in both commercial, aero and defense. Can you give us an idea about where that business is relative to pre-pandemic levels and whether or not you'd expect that to continue? We're seeing a nice improvement in our spares business. So.
Speaker 9: If you go back to the reference point that we gave you of 2019, we were about 800 million. And at the time it was roughly half of it was defense and industrial. And now it's probably closer.
Speaker 9: 475, maybe 500 missiles that's continued to grow. And commercial aerospace dropped quite dramatically to well below 100 million. And this year we see that commercial arrow segment which used to be 400 million, probably back to it.
Speaker 9: and 40% compounding and I expect that 75% depending, we won't say, we have a way to turn out, 75% could be 80% of the 19 level by the end of the year, that was 400 million men.
Speaker 4: 2023 earnings conference call. Thank you for attending today's presentation. You may now disconnect. Thank you.
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