Q2 2023 Howmet Aerospace Inc Earnings Call
Speaker 1: Good morning and welcome to the Halmet Aerospace second quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker 1: To ask a question you may press star then one on your touchtone phone to withdraw from the question queue Please press star then two, 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 Thank You Kate good morning and welcome to the helmet aerospace second quarter 2023 results conference
Speaker 2: financial officer. After comments by John and Ken, we will have a question-and-answer
Speaker 2: I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release in our most recent Marshland SEC filings.
Speaker 2: In today's presentation, references to EBITDA and EPS mean adjusted EBITDA, excluding special items, and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation.
Speaker 2: With that, I'd like to turn the call over to John . Thanks BT and good morning everyone.
Speaker 3: Q2 is another strong quarter for HomeOut. Revenues were up 18% year over year and 3% sequentially. Albeit Q2 is traditionally a stronger quarter seasonally than Q1 due to more effective production and sales days.
Commercial aerospace increased by 23% year over year and continues to be the highlight of the quarter and reflects some of the scheduled increases for the anticipated Boeing 737 build rates, which are slated to increase very soon. Defence sales were also strong at plus 17%.
EBITDA was up 16% year over year and up sequentially.
Earnings per share increased to $0.44 per share and exceeded the high end of guidance. This was an increase of 26% year over year.
The cash balance was a healthy 536 million and free cash flow was strong at 188 million, which started at consecutive quarters of cash generation.
100 million of cash flow we use to buy back shares at an average price of $45 per share.
Net debt to EBITDA further improved to 2.5 times leverage and all bond debt is at fixed rates, which provide predictable interest rate expenses into the future. IMF has negative real exposure to floating interest rates.
Regarding our revolver, we amended and extended our $1 billion undrawn credit facility to 2028, while realizing lower fees and a more favorable net debt to EBDOT governance. Lastly, another notable item was the commercial settlement of the Lehman claim, $40 million, which is $25 million less than previously reserved.
with a cash settlement to be paid in July 2023 and a further settlement in July 2024. This litigation was the most significant of all residual claims for Homet, namely Remainco and dates back to 2008.
Before turning it over to Ken, I want to cover three additional items. Firstly, in Q2, Hamet was impacted by approximately five days of production stoppage at our wheels plant in Hungary due to a nine-day strike at Arkonik Corporation, which is now resolved. The interruption of supplies of aluminum billet had an unfavourable effect on the production of the wheel.
resolution shortly. Additionally, Hammet is assessing its significant reliance upon this source of supply.
Secondly, while segment commentaries include in the finance portion of our call, let me address structures. The margin rate fell back for the first time in several quarters.
The profit miss was essentially the result of adding costs for production rate increases, which we did not achieve.
the cost of additional people, furnace preparation and other rolling mill facilities preparation were unrecovered due to the production rate increases not being achieved.
The main issue was bottlenecks in production at one plant.
The backlog did increase since there was not a demand issue.
Naturally, our plan is to achieve production rate increases and burn down the increased backlog as we move into the second half.
This reduced production combined with F35 bulk and inventory burr down was also not helpful but it was in aggregate not material in the context of the helmet overall results which were again up as I commented earlier.
Finally, the Paris Air Show was held in June , with the largest significant orders ever at International for Commercial Aircraft.
which adds to the backlog of orders to be fulfilled once production rates are able to be further increased.
The show was very successful for Hammet with a combination of production meetings with both customers and investors, all reflecting the huge optimism for both the industry generally and for Hammet in particular.
I'll now turn the call over to Ken who will provide further market and segment commentary.
Thank you, John . Let's move to slide five.
All markets continue to be healthy with revenue in the quarter up 18% year-over-year and 3% sequentially.
Commercial aerospace continued to lead the growth with an increase of 23% year-over-year, driven by all three aerospace segments.
Commercial aerospace has grown for nine consecutive quarters and stands at 47% of total revenue.
Commercial aerospace portion of total revenue is expected to increase due to the developing wide-body recovery, strong backlog of commercial aircraft orders, and spares growth.
Spares for commercial aerospace continue to increase sequentially and are now trending to be approximately 95% of 2019 levels at year end.
Defense aerospace was up 17% year over year, driven by the F-35 and Legacy fighter programs.
Sequentially, defense aerospace was at 4% year-over-year driven by engine products.
Commercial transportation, which impacts both the forged wheels and fastening system segments, was up 8% year over year and up 2% sequentially driven by higher volumes.
Finally, the industrial and other markets were up 20% year over year, driven by oil and gas up 36%, IGT up 20%, and general industrial up 11%.
Sequentially, these markets were up 4%, with General Industrial up 9%, Oil and Gas up 4%, and IGT flat. We just started cutting I Nobody's your
In summary, another very strong quarter across all of our end markets.
Now let's move to slide six.
Starting with the P&L and enhanced profitability, revenue, EBITDA, and earnings per share all exceeded the high end of the guidance in the second quarter.
Revenue was $1.65 billion, up 18% year over year.
EBITDA was $368 million, up 16% year-over-year, including net headcount additions in Q2 of approximately 380 employees.
which builds on additions made in Q1.
Year-to-date net headcount additions are approximately 865, which are in line with our targets.
EBITDA margin was 22.3%.
Adjusting for the year-over-year inflationary cost pass through of approximately 25 million EBITDA margin was 22.7% and the flow through of incremental revenue to EBITDA was approximately 22%.
while absorbing near-term recruiting, training, and production costs.
Earnings per share was 44 cents, which was up 26% year over year.
The second quarter represented the eighth consecutive quarter of growth in revenue, EBITDA, and earnings per share.
Moving to the balance sheet, the ending cash balance was healthy at $536 million after generating $188 million of free cash flow, which was our best Q2 of free cash flow generation.
We continue to expect strong, positive free cash flow in the second half of 2023.
$118 million of free cash flow generation was allocated to common stock repurchases and dividends.
Net debt to EBITDA improved to a record low of 2.5 times. All bond debt is unsecured and it ticks rates which will provide stability of interest rate expense into the future.
Our next bond maturity is in October of 2024.
Finally, we amended our $1 billion dollar revolver through 2028 while realizing lower fees and a more favorable financial covenant.
The revolver remains undrawn.
Moving to capital allocation, we continue to be balanced in our approach.
In the quarter, capital expenditures were $41 million with a focus on automation.
Capital installed prior to COVID-19 puts us in a good position to support continued commercial aerospace recovery.
In the second quarter, we repurchased $100 million of common stock at an average price of $44.52 per share, retiring approximately 2.2 million shares.
This was the ninth consecutive quarter of common stock repurchases.
The share buyback authority from the Board of Directors stands at approximately $822 million.
Since separation in 2020, we have repurchased more than $1 billion of common stock.
We continue to be confident in free cash flow. In the second quarter, the quarterly stock dividend was four cents per share after it was doubled in the fourth quarter of last year.
Finally, we issued a notice to redeem $200 million of our 2024 debt tower with cash on hand.
The redemption is expected to be complete at the end of September . It will lower our annualized interest costs by approximately $10 million.
As you will recall, we repurchased approximately $176 million of bonds last quarter, which will lower annualized interest costs by an additional $9 million.
Therefore, year-to-date, bond repurchases are expected to decrease annualized interest costs by approximately $19 million.
Now let's move to slide 7 to cover the segment results for the second quarter.
Engine products continued its strong performance as the second quarter represented the eighth consecutive quarter of year-over-year growth in revenue and EBITDA.
Revenue with $821 million, an increase of 26% year over year.
Commercial aerospace is up 23%, defense aerospace is up 41%, and both markets were driven by higher build rates and SPARES growth.
IGP was up 20% and oil and gas was up 36%. Demand continues to be strong.
EBITA increased 25% year-over-year to a record for the segment of 223 million.
EBITDA margin was 27.2%.
despite the addition of approximately 350 net new employees year-to-date and approximately 90 net additions in Q2.
Across all of the aerospace segments, net headcount additions are needed for the Continued Revenue Ramp, but do carry near-term recruiting, training, and production costs.
Finally, in the second quarter, the Engines team finalized a new five-year collective bargaining agreement at our Whitehall, Michigan facility.
Let's move to slide 8. Fastening systems year over year revenue increased 19%. Medical aerospace was 19% higher as the wide body recovery starts to take effect.
Defense aerospace was up 24%, commercial aerospace was up 17%, and general industrial was up 16%.
Year-over-year segment EBITDA increased 14% as volume increases were partially offset by the addition of 430 net new employees year-to-date and approximately 215 net additions in Q2.
And let's move to slide nine.
Engineered structures year-over-year revenue was up 8% with commercial aerospace up 31%, driven by higher build rates and approximately 25 million of Russian titanium share gain.
Defense Aerospace was down 33% year-over-year, driven by customer inventory corrections.
Now let's move to slide 10. For just wheels revenue year over year increased 7%. The $19 million increase in revenue year over year was driven by a 6% increase in volume. Segment EBITDA increased 8% year over year despite the interruption of raw material for a wheels plank in Hungary due to a nine day stripe at our iconic corporation supplier, which has now been resolved. Margin increased 30 basis points.
due to the impact of lower aluminum prices and inflationary costs passed through. Finally, let's move to slide 11. We continue to be focused on improving our capital structure and liquidity. In July , we issued a notice to redeem $200 million of our 2024 debt tower with cash on hand, which is expected to be completed by the end of September .
and lowered our annualized interest costs by more than $120 million. Gross debt is expected to be less than $3.8 billion after the redemption in September . All long-term debt continues to be unsecured and at fixed rates. Finally, we amended our $1 billion, five-year unsecured revolving credit facility through 2028. The amendment provides lower fees and more favorable covenants. Details can be found in the 10Q, which is expected to be filed later today. The revolver remains undrawn.
Lastly, before turning it back to John , let me highlight one item. In the appendix on slide 18, it covers our operational tax rate, which was approximately 22.6% for the quarter.
The second quarter rate represents approximately a 500 basis point improvement in the operational tax rate since the separation in 2020.
Now let me turn it back to John for the outlook and summary.
Thanks, Karen, and let's move to slide number 12.
The outlook for Hermit continues to be very strong and supported in particular by the extraordinary backlog of commercial aircraft orders of both Boeing and Airbus. Demand increases have moved further to the right, constrained by current aircraft production, but all go well for revenue increases to come in 2024, 2025 and beyond.
This growth in absolute aircraft quantity is further enhanced by the increased sophistication of engine technology upgrades being brought to market by both GE and Pratt & Whitney to the narrow body market.
These turbine improvements address fuel efficiency and time on wing issues, which enhance the value of how much differentiated products.
This combines well with the upcoming improvement in wider body production, which increasingly features composite technology, which again increases the value of how much differentiated products have titanium structures and fasteners.
Wide body aircraft also feature improved aerospace engine content for the company.
Defence markets continue to be robust and we envisage increased revenue growing into 2024 as the lease stocking for bulkheads is completed and engine spares continue to increase significantly as shop visits increase.
The F-35 backlog continues to increase to approximately 420 aircraft with recent orders of 126 aircraft for the US government's Joint Program Office, plus 25 for Israel and a further 25 aircraft for the Czech Republic.
Industrial revenue continues to growth for both IGG and oil and gas in particular.
The outlook for wheels is also healthy for the current quarter and in Q3 underlying demand continues to be strong. Albeit Q3 is notably the weakest quarter for revenue due to European vacations which are also a feature of our aerospace plants in Europe in both France, Germany and Hungary in particular.
we see spares of commercial aircraft closing in on 95% of the 2019 levels by year-end and approximately 130% of the defence and IGT market of 2019 levels. This puts aggregate spares for this year in excess of 2019 levels.
with higher rates to come as we see the rates increasing as we close out the year. A cautious stance has been taken relative to Q4 until the demand is more clear for commercial trucks in the quarter and aircraft parts for the first half of 2024.
While the backlog is there, we find difficulty in planning for rate increases and the inventory impact if that's not achieved.
the backlog is there we find difficulty in planning for rate increases and the inventory impact if that's not achieved specifically
We are raising guidance once again for the year by another significant step. To give an example of guidance assumptions, we have lifted 737 max assumption from 30 per month and nudged it into the 30s, but not anywhere near the rate 38 for the second half. This number is intentionally given all the moving parts for the business.
and also the lack of clarity over very soon. And when we plan for the second half, we are increasing people recruitment further, but at a reduced rate in the first half, as we hope to use the productivity improvements to come.
Becardia and Q3, Revenue is expected to be 1.59 billion plus or minus 10 million. It'd be dar 360 million plus or minus 5. Ernie Spasier 42 cents plus or minus a penny.
Regarding the year revenues increased from $6.25 billion to $6.44 billion, a significant increase. And let's say then plus or minus 30 or 40 million around that range. And then EBITDA has increased to $1.445 billion plus or minus 10 million.
Earnings per share is increased to $1.70 plus a minute as a penny. And free cash flow is held at $6.35 having absorbed the settlement for the Lehman Brothers claim.
In conclusion to my outlook commentary, we are pleased to demonstrate both excellent Q2 achievements, supplemented by further optimistic outlooks with very solid increases to come in the future.
Let's move to the summary on slide 13.
Let's move to the summary on slide 13. Q&A with another strong call to Muhammad.
Revenue is up 18%, EBITDA 16% and earnings per share 26%.
And EBITDA margin adjust for material pass-through was strong at 22.7% And so everything continues to be heading in a healthy direction.
The quiddity is healthy with very positive free cash flow with more to come in the second half and we've continued to deploy that cash both to share repurchase in the second quarter and as you can see we've turned to debt repayment in the third quarter.
Guidance has been increased and we expect year-over-year improvement in annual revenue, EBITDA and earnings per share as stated.
Also, we expect very positive free cash flow generation in the third and fourth quarters.
Regarding debt, I already mentioned the 200 million, and as we complete that with the EBITDA improvements, then we'll be improving our net debt to EBITDA leverage from the 2.5 times record that we talked about in Q2, and we'll see improvements in Q3 and Q4, and heading towards 2 times levered by the end of the year.
And then finally we expect to increase the quarterly common dividend by 5% from 4 cents a share to 5 cents a share in the fourth quarter of 2023.
Thank you all very much. Let's move across to question and answer.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question.
The first question is from Sheila Kayaglu of Jeffries. Please go ahead. The first question is from Sheila Kayaglu of Jeffries.
Good morning, guys, and thank you. John , maybe first one for you here. Just on the incrementals as we go forward, obviously, 22% in the quarter given structures after 25% in Q1. You commented last quarter about how difficult it is to convert at a 30% plus rate.
just given where Earth-based build rates are, and you'll be climbing through at least the middle of the decade here. How do you think about when you put cost into the system when it converts into higher profitability? Do you have to wait till it builds rates peak for that to convert to higher operating profit than revenue?
Okay, thank you Sheila. First of all we don't have to wait.
but the extraordinary levels of recruitment during the last couple of years have certainly weighed upon us and probably of all the things that we've been doing driving labor productivity has been amongst the most difficult and It's certainly been more difficult than
what we believe we've overcome by way of scrap and yield and also driving through on the volume.
If you look at our midpoint of guidance, we believe we're going to raise the incremental to about 28% in Q3, and we're hopeful about 34% in Q4.
And that takes account of what we believe to be hopefully a slowing of recruitment and improved retention ratios. And as the denominators got bigger, the employees were taken on. And so we're optimistic that the incremental drop-through begins to improve.
and then hopefully improve again in 24 with the combined volume, the pull through from the automation programs, the bigger denominator of recently recruited employees, and the mix effective widebody. So, it's a future statement, we're hopeful, we're optimistic, we're planning for it.
But I was very disappointed if we had to wait till we had stability for four improvements in that drop-through.
Thank you for the color. Just to follow up, you know, in terms of the structures and margins in the quarter, how do we think about that bumping up in the second half? How quickly does it improve? How do we think about that bumping up in the second half?
So, I mean, when I think about Hammet is more like a relentless machine. I was trying to bring color to my commentary. So last time I tried a wet paper tissue and that didn't work so well as you know. But this time I think itself, you know, Hammet, a fairly relentless machine rolling forward.
delivering results. We're not that flashbang and you know full of jumpy noises like Chinese firecrackers.
and full of jumpy noises like Chinese firecrackers.
within the Q2, there's one thing...
within Q2, there's one thing we overcame.
which I'm proud in the way we overcame it, which is the consequences of the strike in one of our suppliers, aluminum billet, and that nine day stoppage cost us heavy and yet we marched straight through and delivered really solid margins in our wheels business. So I think that is a really great performance by...
But despite all of that, so let's call it, if you want to, and I never like the excuse me as, but with a combination of a structure-based planting and a supplier strike, we out-delivered the guide on EBITDA, and all said and done, you know, any one of those is multiples. Like when we talk about margin rate of 20 basis points difference, that's worth three million, it's not like it's hardly worth commenting on, and so it's a bit like me saying, yeah, we did really good apart from that. So I generally choose not to, but I'm trying to be responsive to your question.
And I'll say, we also did great on structures with a big faceplant. It's like you read my mind. I'm going to go with relentless march rather than faceplant though. So thank you. Thank you.
The next question is from Robert. Oh.
I'm sorry the next question is from Robert Stallard of Vertical Research. Please go ahead. Thanks so much, good morning. John , is that like a cut you off though, is there something else you wanted to add?
I was probably on a roll and I was getting carried away so no I'm done. You can carry on about Chinese firecrackers if you want to. I don't like asking questions you haven't asked me so please start over and do your damnedest.
Okay, thanks for the update you noted on the 737 MAX rate assumptions, but I was wondering if you made any further changes on either Boeing or Airbus build rates within your guidance. And whether this in relation to that, whether what Airbus said about direct and indirect risk from this latest GT-F issue.
could have any flow through to Hermit. Thank you. Yeah.
have any flow through to Hamlet. Thank you. Yeah. But first of all, no.
rate assumption changes for elsewhere. I mean Airbus have been I'll say plowing ahead but struggling to get to their production numbers. But getting close and certainly their Q2 deliveries was much healthier. And so, you know, I think things are getting better.
generally and I think everybody is believing that we're going to see higher rate increases. And really it's a question of when and trying to get ready for it. You know we think we've prepped for it.
We built capability and capacity in labor terms. We had, I'd say, machine capacity. But if you know
on 737. Originally it was going to be Jan 1st, then May 1st, then July 1st. And we just want to be cautious. That's why I said all we've done is just nudged him to the early 30s and see where it goes and be ready, capable of supplying.
but not willing to be clear, we're not going to put rate 38 in until it's achieved.
And just to follow up, anything to say on the GTF issues?
Well...
Certainly this powder metal issue that we read about seems to be historical. I'm sure that probably we have got a good plan about taking those engines down out of from our craft wing and looking at them in detail because I think boarscobs don't work for that sort of level of crack.
I think the bigger impact for how matters I want to impact, I mean positive, not because the impact, the world impact with these has negative connotation. It's the time on wing issue.
which is present for both current narrow-bodies engines of the ETF and the LEAP-1AB, while each of them I think are doing better for that relative point in their lifecycle compared to the previous which is present for both current narrow-bodies engines of the ETF and the LEAP-1AB, where while each of them I think are doing better for that relative point in their lifecycle compared to the previous
I'll say V2500 and the CFM56 is that they're still well below the exit point of the previous other engines. And so that in itself is leading to what we believe will become increased demand for replacement parts.
and also it's combining with what I referred to maybe not in sufficient detail which was the improvements that we have worked on to help resolve the issues. So where the high-pressure turbine blades have been seeing elevated temperatures from let's say
degradation issues and other issues particularly in far eastern and middle east climates for LEAP is that we are intimate with those improvements. We have worked on them. We are prepping for their introduction and commensurate with our customers needs.
And then we are now assessing how that demand combines with the increased demand for widebodies moving to 24, the increased widebodies moving to 24. So it's all setting up well.
In terms of what I think is good demand is clearly where aircraft production increases less good demand, you know, you could call it bad if you want to is where it's a replacement it's a part for a period of time and then we're rather more cautious on that and Where we need to increase capacity
rapidly to achieve that in the coming months into 24, maybe into 25, is that we certainly don't want to take capacity up and then take it back down. Therefore, we are in deep inter-commercial discussions with our customers to ensure that doesn't happen.
So a long way of saying DTF, power to metal, no issue for us. Nothing to do with us. And time and wing, it's leading to the sort of content improvement growth that we talk about.
as we make improvements to those turbine blades and introduce some pretty sophisticated technologies and certainly in the case of GT-F, looking at things we've done elsewhere on those engines and the more advanced engines and seeking to deploy that, which is great for the...
future robustness of the engine, its fuel efficiency and also good for how mats.
That's great. Thanks, Rachel.
Thank you.
The next question is from David Strauss of Barclays. Please go ahead. Thank you.
Thanks,???,
Thanks. Good morning. Hey, David.
Hey John , so I just wanted to clarify on the max.
So while you've up the guidance from 30 into the 30s, are you actually at 38 a month in terms of what you're shipping the Boeing today?
It depends upon the parts. We supply so many different parts. But, well, I recognize that we receive schedule rates, schedules for parts increasing to rate 38. Is that, um...
I think my scenario which I don't like is where...
should they not achieve that rate, then...
that the parts we've supplied, because they will be bloated inventories, they will then take them out just in the same way as parts were taken out September , October , November , December of 2022, is that I'm blending it all together and saying my average assumption is, I'm in the 30s.
but being deliberately loose about it, but I'm very clear that our guidance is not based upon full rate increase of 38 from the 1st of July . That's not the case.
It doesn't mean to say I don't believe that Boeing can do it. I'd love them to do it, but do it and then, you know, I'll feel more comfortable about our guidance to, I mean our guidance, I've tried to describe in the past, tends to be something that you can rely upon and I want to see aircraft produced.
And then at that point I'll feel confident that we're not going to be on the wrong side of inventory takeout in the remaining few months of the year. Okay, I got it. It sounds like after what you went through in Q4 of last year, you're just airing.
it's just, you know, I'm not putting it all out there. Why would I?
As a follow-up, can you dig in a little on what's going on at Fasteners? We've seen a pretty good revenue pick up here within the business on the Arrow side. I know 787 rates are still low, but the drop through that we've seen.
you know, where it's Chinese about, but you know, the, uh, and then it begins with small steps and, uh, margin rate did increase in Q2, um, despite the large intake, India station of labor to prep for the balance of year. Um,
it's always a bit of a hostage to fortune. But I'm feeling confident that we're going to see both revenue and margin accretion in the second half beyond Q2. So in that sense I'm really pleased with the rate and direction of the business.
I wouldn't have been able to say that six months ago. And so I'm feeling increasingly confident. There's me saying to you publicly, Margin rate's going to increase.
that six months ago. And so I'm feeling increasingly confident. There's me saying to you publicly, margin rate's going to increase. So that's pretty good.
I got it. I'll take the hint. Thanks. The next question is from Peter Arment of Baird. Please go ahead.
Thanks, good morning John , Ken, PT. Hi John , just within End-Year Structures, the 45 million year-to-date gain on the Russian titanium share seems like it's tracking right towards your expectations. Just maybe any of your updated thoughts on that and how should we think about that as we go into next year.
multiply it by four for 2023 and then add on, I think 25%. So that took you to around about the 100 million mark. And therefore implicit if you did 45 in H1, it's 55 in H2. Right now I'm actually feeling a little bit more confident than that.
And so instead of about a 25% lift, I can see us potentially getting to a 40% lift. Certainly, I think the demand is there. So it's going to be above $100 million, well above $100 million. And the thing that I've got to see is structures standing up and making the stuff. And then I think we're going to realize that we're going to have to
win position is healthy. And with that, trying to repeat myself, you know, we had a hiccup in Q2, of which neither the structures team nor myself were proud of what we did.
while they didn't do.
that didn't do. Thank you.
Thank you.
The next question is from Robert Spingarm of Melius Research. Please go ahead.
Hey, good morning.
follow-up things on what you just discussed. First on the question of the improvements to GTF and LEAP, how are these affecting or impacting your ship set content and how do those changes factor into your LTAs? That's the first question and then just on the titanium.
As we move further ahead, you talked about 40% uplift, but as the wide body rates rise.
Let's talk about maybe 2025 when Boeing and Airbus are targeting these higher rates. I would imagine even greater uplift. Can you talk about that?
Yeah I'll do it in reverse order so you're absolutely correct. As widebody moves up then that is highly beneficial for us.
both for our structures business and for our fast-for-business, both in terms of the value delivered. I'm going to say in the case of fast-ners, the value proposition of what's delivered, where I'll say the value set is substantially high just from the additional...
sophistication of the personal sets that go with combining composite skins and titanium structures.
So assuming that we're going from rate three to four to four to five and then I think higher than that in 24, assuming they get
close to the 10 or maybe by then we'll be feeling a lot more optimistic because I think fundamental demand is above rate 10.
And similarly for the A350, that's got to go up to at least a nine a month, I think, to meet market demand. All of that is really healthy for our titanium business. And I'm expecting not just the more, I'll say, straightforward sheet and plate, but also some of the forgings which we...
to wide body mix and our structure's margins. I have commented that I do see moving towards the high teens as we move to the middle or second part of the decade. And everything is there for us to do.
You've just got to make it. Demand is not the issue neither for what we've won from the titanium opportunity because of the BSNPO and tariff and restriction issues, but also the increasing demand from widebody.
In terms of the increased, I'll say, sophistication that I refer to, yeah, that goes to ship set value. So as we move forward, the engine value for Hermet will increase as we move to supply the products for the changes required for the, I'll say, the solution.
for the GTF issues for which we have the part we're playing in it which is on the advantage engine and we'll see ships that value increase there and similarly for the for the improvements we're making on the lead blades as you know normally in engines while very long run items we normally do upgrade about every five to six years
And so we had an upgrade planned with our customer, but the upgrades are, I'll say a little bit more given the issues in terms of durability that have been found on, let's call it the generation one parts of the turbine. Not necessarily issues with our part per se, but because of
basically as you drive the temperatures up because of and then shot blast them with particulates that have got through. And those are problems which require even enhanced solutions to be able to improve time on wing.
the temperature is up because of and then shot blast them with particulates that have got through and those are problems which require even enhanced solutions to be able to improve time on wing. Thanks John .
Thank you. The next question is from Miles Walton of Wolf Research. Please go ahead.
Thanks, good morning. Hey John , I know the guidance raised on sales, you gave some color but I was hoping you put a finer point on it. The 190 million, did you did you imply it was maybe 40 or 50 million ad back on wheels, a little bit on industrial and the bulk from Arrow, is that the way to think about the 190?
I didn't really break it down.
My aggregate feeling is we see commercial and we say move the 737 rates, that's a positive assumption. Defense is proving quite robust and strong. I mean that
17% on top of what we printed in Q1 is really strong. And we are...
beginning to see the early stages of the defense spares increases, in particular, I think as we go through into 24 and 25, we'll begin to see spares increases for F-35 as an example. And so I think.
Defence has been really good for us and I think we continue to see that. Wheels we think, again, stronger than private assumptions in Q3. Order books for Q23 are now closed and so we're getting a much clearer picture for the final outcomes for the Q23 order book close out.
and the truck manufacturers have not even opened the order books yet for 24. So we haven't got a read on that. We're hoping that they're robust. But my guesstimated picture is, there'll be in the coming, let's say 12 months, there'll be some weakness in the trailer market, some distribution.
and relative strength in the European truck market and possibly some weakness in the North American truck market. But in aggregate, slightly better than I previously anticipated.
And just a quick one on the structures bottleneck.
You know it's good to have the assumptions that are conservative and not counting on the OEMs coming through the purchase orders But with the bottleneck in any way a result of some hesitation to go up in rate and having to run more quickly than...
No, we added people. We're adding more people. So we're optimistic that everything we're going to wish for by way of volume requirements for our customer are there.
And as I said, it didn't work out. So I just accept that sometimes in life things don't go exactly as planned. I said, yeah, we face plant it, but at least we know it and don't pretend we didn't do it. Now it's up to us to stand up and do it. It's not a volume issue. It's not a demand issue. It's just we've got to make the stuff. And we're expecting to do so in Q3, but I guess every management says that. We think we're going to do better. I mean it's always better in the future than the past, but Q2 for that business, we cannot be proud. That's for sure.
Can you just provide more specific details and what caused the plant bottleneck? And then how do we think about recovery? And the other part to that would be, depending on what the problem actually is, is there a risk that we could see this spread to the other segments? Like how do we think about all that? Well first of all, absolutely no risk spreading to other segments. It was totally inside one segment, inside one plant. It's not like a disease, it's not contagious. It just is for that singular plant.
I've done my best to dance around every question on this topic. And so I think it's probably getting excessive air time for what is like, uh, irrelevant and the total results of how met and, you know, what we achieved, which we already exceeded everything that we said we're going to achieve. But, you know, it does come down to, you know, there's a huge sequencing process within to make titanium.
And in one of the early stages of that process, our work in progress buffers broke down and we ended up with the labour we recruited off a standing idle.
the equipment wasn't working and then subsequently we starved every subsequent process during the course of the three months. We believe we've got things back on track, detailed, there's an analysis going into it.
recently again, re-reviewing it once again last week, which is my scrutiny of every work in progress buffer of every important production stage for that particular product. And so in terms of daylight being the best disinfectant and the way that my sales look more than paste intensive. This has become a real big Stru RP B you would say, but it's like, you know, he's shown quite a bit upsink the Billing Des HUGE this current Rohitin y Nutr600 and other products that are referred topins and I think this is a car review
a high degree of engagement by the plant management, the head of operations, the business unit leadership. And then for me to be scrutinizing also work in progress buffers for each of the production stages, that's a pretty high level of scrutiny for something which again, wanted.
Thanks, John . That's a really helpful color. It sounds like a very isolated issue for that specific segment. In terms of the recovery pace, how long does this issue like this usually get resolved by 4Q? Is this largely resolved on your back to where you were for margins?
got to do. And we've prepped long and hard to make sure that we succeed and make substantial improvements in Q3 and then to be played again and more in Q4.
I really appreciate the detail you provided, John . Thanks.
I really appreciate the detail you provided, John . Thanks. Thank you.
The next question is from Gotham Connor of Cowan. Please go ahead. G Traveler
Hey, good morning. Thanks, guys.
Hey, good morning. Thanks guys.
I wanted to follow up, I think it was Sheila's question.
given you've already done a lot of hiring, and incrementally, that's not as big of a headline as those people get, more productive and the like. And then the crosscurrents of forged wheels and what have you. Do you have the same confidence in the 30% to 40% incrementals next year that you did kind of heading into this year? It's pretty, I'll say, soon to be imagining 24s. And so we don't normally comment much on 24. I suspect that I'll give you some sort of demand.
outlook when we get to November , you know, time and give Q3 results. We've done that the last couple of years. And I think the most interesting question for, I'll say for when we deliver our Q3 results and decide about giving some color for Q24.
is like do we achieve 2019 levels of revenue? That's the most interesting question. And bear in mind as we all know, there's a significant mixed drag. It's not all things being equal. It's going to be all things being unequal bec Magazine
you know wide body will be a couple hundred planes down and narrow body might be a couple hundred planes up and that's probably going towards a half a billion dollar revenue drag. But can we overcome all of that with all the stuff we've been talking about in terms of I'll say content, price.
They're just driving through and improving our shares and all the rest of it And so that for me is the most interesting question about 24 is that do we get there and therefore it would be like a whole year early That's so fascinating. Of course. I'm asking the question. I'm not giving you the answer because it's too early in terms of margins You know
35% plus or minus five was appropriate for when we were talking that clearly in I think it was in 21 to 22. And I'll say heading that way maybe it's more like a 30 plus or minus for 23. Again too early to say and it's going to depend upon hopefully
seeing positive volume.
combine that with productivity coming through from the more stable workforce, and having really, I'll say, bore down on that problem, which for me is certainly like 25% of the problem belongs in the whole recruitment retention, and the rest is just in fundamental productivity of the workforce. As some of our parts are.
so sophisticated that the trading times are elevated and therefore we should start to see some of the benefits come through on that, add together with the wide-body demand. So a lot of moving parts Gotham, but it's at the moment.
you know, I think it's more like a 30 plus or minus range around it, but I don't know that yet. I mean, that's no more than me thinking directionally. Where are we without any benefit of any detailed financial analysis and therefore it's just talking with you.
I appreciate that. And just as part of that, how do you think pricing?
changes year to year? Just go back to the next. We haven't told you Q2 yet. Nobody's asked a question. But Q2, everything was in line with what we said before. And the year is in line with what we said before. And our Q will be published this afternoon and you'll be able to see it. So everything is in order on that front. And Q23 now is essentially completed for negotiations. So again, all in order. Q24 is coming rapidly into focus.
and commensurate with what I said on the last call is that 24 is going to be similar and good. It's similar and good.
and commensurate with what I said on last call is that 24 is gonna be similar and good. It's similar and good. Thank you, John . Appreciate it.
and last call is that 24 is going to be similar and good. It's similar and good. Thank you, John . Appreciate it. Thank you.
The next question is from Ronald Epstein of Bank of America. Please go ahead. Hey, good morning, guys.
So I think pretty much everything's been asked. So maybe just a quick follow on here. Now I'm not going to estimated the size of my pFar Alun, which is like fWo MO. And then it's j
When rates actually get to 38 or maybe way down the road, they get to 50 or higher on 737s, how should we think about the evolution of incrementals then? Because I think that's on the top of a lot of investors' minds because it can help draw out the trajectory of where earnings and cash flow for the company could ultimately go as the rate goes up.
stop start, stop stock, supply chain, labor, COVID, all post-COVID and all those things that have, let's say, tested us over the last, let's say, two or three years. Then I think when I bring it right down to how do we now see it as we've grappled with each one of them.
that fundamental labor productivity has probably been the most difficult for us in what parts of our business have extremely high learning curves. And to stabilize that, deliver good quality to our customers which is paramount. And we're trying very hard on that front and to meet schedule.
So putting that labour productivity into place and seeing everything smooth out and I'm hopeful that as Boeing moves towards achieving the 737 at rate 50, as Airbus move from their
let's call it early 50s through to something towards rate 75, is that that's going to help smooth out things and we'll be in a much improved condition to deliver at a higher productive level. Similarly with the wide body increases.
I've used a phrase which I'm not sure how apt it really is, but called state of grace. And I do see that maybe as we move into the second half of 24 we get close to that state of grace and all their proctivities.