Q3 2023 Howmet Aerospace Inc Earnings Call
Good day and welcome to the third quarter 'twenty twenty-three Howmet Aerospace earnings conference call.
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I would now like to turn the conference over to Paul Luther Vice President of Investor Relations. Please go ahead.
Thank you Betsy and good morning, and welcome to the Howmet Aerospace third quarter 2023 results conference call.
I'm joined by John Plant Executive Chairman, and Chief Executive Officer, and Ken Jacobi, Executive Vice President and Chief Financial Officer.
After comments by John and Ken We will have a question and answer session.
I'd like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings.
In today's presentation references to EBITDA operating income and EPS mean, adjusted EBITDA, excluding special items adjusted operating income, excluding special items and adjusted EPS, Excluding special items.
These measures are among the non-GAAP financial measures that we have 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 and with that I'd like to turn the call over to John.
Thanks, P J and welcome everybody to the Q3 earnings call.
The results of the third call, Jeff will solve it in all respects.
So you did the guidance given in August with yourself with a further increase on that provided in February.
Sales of 1.658 billion 316.
16% year over year, EBITDA was 382 million an increase of 18%.
EBITDA margin increased to a headline rate at 23%.
Margin improvements reflect the continuing good work.
And all segments.
I would not pass lesbians, although sequential quarterly improvement.
Ladies basis points. Additionally, struck just take one and 320 basis points recovery from the Q2 right.
Hi, Matt.
Year over year revenue increase flowing through to incremental EBITDA margin, that's a range of 28% which was in line with guidance.
<unk> income increased by 22% USDA and operating income margin was 19%.
Continued topline growth and healthy margins generated earnings per share increase of 28%.
Free cash flow was healthy at $132 million and help drive shareholder friendly actions, including gross debt retirement of 200 million share buyback of 25 million.
Lastly, we also announced a 25% increase in the dividend in Q4 on top of last year's 50% take rates.
Having provided this top level summary, I'll pass the call to Ken to provide further details of revenue by end market and the results by business segment.
Thank you John let's move to slide five.
All markets continued to be healthy with revenue in the third quarter up 16% year over year and 1% sequentially.
As expected sequential revenue growth was impacted by normal third quarter seasonality.
Commercial aerospace increased 23% year over year, driven by all three aerospace segments.
Commercial aerospace that's grown for 10 consecutive quarters and stands at 49% of total revenue.
Commercial aerospace growth continues to be robust.
Ported by demand for new more fuel efficient aircraft as well as increased spares demand.
Defense Aerospace was up 13% year over year, driven by the F 35, and legacy fighter programs.
Commercial transportation, which impacts both forged wheels in the fasting systems segment was up 7% year over year driven by higher volumes.
Commercial transportation remains resilient despite normal seasonality.
Finally, the industrial and other markets were up 10% year over year, driven by oil and gas up 29% general industrial up 8% in IGT up 4%.
In summary, another very strong quarter across all of our end markets.
Now, let's move to slide six for more details on the third quarter results.
Starting with the P&L and enhanced profitability revenue EBITDA EBITDA margin and earnings per share all exceeded the high end guidance.
Revenue was 165 8 billion up 16% year over year, EBITDA was $382 million up 18% year over year, while absorbing near term cost associated with net head count additions of approximately 645 employees.
Engine segment drove a majority of the increase by adding approximately 500 employees.
Year to date net head count additions are just over 500 employees.
We continue to increase head count for the expected revenue ramp.
EBIT margin was strong at 23% despite absorbing the head count additions.
Adjusting for year over year inflationary cost pass through of approximately $15 million EBITDA margin was 23, 3% and the flow through of segment incremental revenue to EBITDA was approximately 28% year over year, which was right in line with our guidance.
Earnings per share was strong at 46 per share up 28% year over year.
The third quarter really represents the ninth consecutive quarter with growth in revenue EBITDA and earnings per share.
The balance sheet.
Our balance sheet continues to strengthen while returning cash to key stakeholders. The ending cash balance was 425 million after generating $132 million of free cash flow.
In the quarter $242 million of cash on hand was allocated to debt reduction common stock repurchases and dividends.
Net debt to EBITDA improved to a record low of two three times all bond debt is unsecured and fixed rates, which will provide stability as interest rate expense in the future.
Our next bond maturity of $705 million is due in October of 2024.
How much improved financial leverage and strong cash generation were reflected in fish's August credit upgrade from Triple B minus to triple B to.
Two notches into investment grade.
Moreover, Moody's upgraded how may its outlook from stable to positive in September.
The balance sheet continues to strengthen and is recognized with the rating agency upgrades.
Finally, moving to capital allocation, we continue to be balanced in our approach.
In the quarter capital expenditures were $59 million, which continues to be less than depreciation and amortization.
In the third quarter, we reduced debt by another $200 million year to date, we have reduced debt by approximately $376 million, which will lower annualized interest expense by approximately $19 million.
We also repurchased $25 million of common stock in the third quarter at an average price of $49 32 per share.
This was the 10th consecutive quarter of common stock repurchases share buyback authority from the board stands at $797 million.
Since separation in 2020, we have repurchased more than $1 billion of common stock.
We exited the third quarter with a diluted share count of 414 million shares.
Finally, we continue to be confident in free cash flow in the third quarter. The quarterly stock dividend was <unk> <unk> per share.
The quarterly stock dividend will be increased by 25% in the fourth quarter to $5 per share.
Now, let's move to slide seven to go through the segment results for the third quarter.
The engine products segment continued its strong performance revenue was $798 million, an increase of 17% year over year.
Commercial aerospace was up 15% and defense Aerospace was up 33% with both markets driven by higher build rates and spares growth.
Oil and gas was up 33% in IGT was up 4% as demand continues to be strong.
As expected Q3 sequential revenue was down 3% driven by seasonal vacation.
EBIT increased 18% year over year to $219 million.
EBIT margin increased 20 basis points, both year over year and sequentially to 27, 4%, while absorbing approximately 500 net new employees.
We are pleased with the continued strong performance of the engines team now.
Now, let's move to slide eight.
Fastening systems year over year revenue increased 20% commercial aerospace was up 34%.
Including the impact of the emerging wide body recovery.
Commercial transportation was up 6% General industrial was up 7% and defense Aerospace was down 5% year.
Year over year segment EBITDA increased 19%.
EBIT margin was 21, 8% and its improved 320 basis points over the last two quarters.
Please move to slide nine.
Engineered structures year over year revenue was up 18% with commercial aerospace up 33% driven by build rates and approximately $30 million of Russian titanium share gain.
Defense Aerospace was down 20% year over year sequentially engineered structures improved production rates and revenue was up 14%, which was in line with our expectation of 10% to 15%.
Segment, EBITDA increased 7% year over year.
<unk> EBITDA margin improved 320 basis points to 13, 2%. Despite absorbing approximately 145 net new employees in the third quarter.
Q3 was good recovery by the structures team and we continue to expect further improvement in margins.
Let's move to slide 10.
Forged wheels year over year revenue increased 7% to $19 million increase in revenue year over year was driven by a 13% increase in volume, partially offset by lower aluminum prices.
Segment, EBITDA increased 20% year over year, driving driven by the higher volumes.
EBITDA margin increased 290 basis points, primarily due to the impact of higher volumes and lower aluminum prices.
Finally, let's move to slide 11.
Our balance sheet continues to be a source of strength with healthy cash flow supporting a 200 million dollar debt reduction in Q3.
The $1 25 billion October 2024 that tower was inherited from Alcoa, Inc. And has been reduced to $705 million with cash on hand.
Since the separation in 2020, we have paid down gross debt by approximately $2. One 5 billion with cash on hand, and have lowered annualized interest cost by more than $120 million.
Gross debt now stands at three 8 billion.
All long term debt continues to be unsecured and at fixed rates, we will continue to focus on improving our capital structure and liquidity.
Lastly, before turning it back to John Let me highlight one item.
In the appendix Slide 18 covers our operational tax rate, which was approximately 22, 8% year to date.
The midpoint of our guidance represents a 500 basis point improvement in the operational tax rate since the separation in 2020.
Strong performance by the tax burden and we continue to be focused on further improvements in our operational tax rate.
Now, let me turn it back to John for the outlook in summer.
Thanks, Ken.
Move to slide 12.
Talk about the outlook.
Next quarter.
Here.
So first of all regarding commercial aerospace.
Airline load factors continued to show improvement and resilience.
Back to your improvement for international travel, notably in Asia also continues to increase the.
Domestic airline activity continues to be above 2019 levels in the western countries.
Given these load factors on the continued restriction.
Kraft and builds a fleet of existing aircrafts are having to work much harder.
This is leading to robustness in the engine spares market, which has further increased by the fact that the deployment in recent years.
<unk> technologies, which are currently operating with increased placement costs due to lower time on wing.
If I'm right about this and you can be assured that that is playing its paul.
<unk>, both the technology upgrades and the high pressure turbine and through providing additional service parts.
This will continue over the next two to three years and probably beyond.
Moving on commercial aerospace and defense market.
This market is also showing strength.
Start with the gradual buildup of engine span over the next two to three years to support the F 35 program.
The fleet now stands at 975 aircraft and growing.
These increases more than offset the continued bulkhead inventory correction in our structures business.
The markets of IGT at oil and gas continue to be very healthy.
In commercial truck and trailer builds on order intake continued to be good despite the lower freight rates and increased price of diesel fuel.
We continue to be cautious, though as we look forward until we see several months of data for you 2024 orders, which the order books have only been open for a month.
The initial bump was good but we also know that that.
As can be cancelled depending upon how the broader economy moves in recent months.
In aggregate, we see limited risk of aircrafts demob on both the commercial aircraft market and defense markets.
Two markets great to approximately 65% of our revenue.
And that was up to 8%, excluding the commercial transportation business.
Beyond the fundamental demand from airlines clearly, we rely upon aircraft manufacturers being able to produce a bill that was stated at schedule quantity of aircraft, particularly narrow body aircraft.
Looking forward into 2020 full we envisage growth to be in the 7% range plus or minus a percentage point.
The headline sales number for 2020 full least likely to be approximately $7 billion.
This will be further refined and we see the achieved Q4 build rates from Boeing and Airbus with confirmed bonds going into 2020 for.
All of this will provided in further detail in February with the assumed build rates.
And just the only one of caution.
Moving specifically to the fourth quarter of 2023, we see revenue about 1.635 billion plus or minus 58 million EBITDA of 375 million plus or minus 5 million earnings per share at 45, plus or minus a penny.
Regarding the full year 2023 revenues increased by about 100 million from 6.44 billion to $6, five 4 billion plus or minus $15 million.
EBITDA increased by a further 40 million to 1.48 billion plus or minus five.
Earnings per share has increased by seven to $1 77, plus or minus a penny pre cash flow is at 675 million plus or minus 75 million.
In summary, we see strong performance with health and liquidity.
<unk> guide for the remainder of the year.
We consider the year to date progress to be very good. Despite the continued choppy build conditions in commercial aerospace we are.
Accompanied by the fact that any build misses by aircraft manufacturers, who have moved into backlog given the very strong underlying demand for travel and in particular, the opposite requirements for fuel efficient.
And fuel efficient aircraft with an overarching mandate of reduced carbon emissions.
Our full year guide of $1 77 earnings per share is an increase of 26% year over year.
This builds on the 2022 versus 2021 increase of 39%.
Currently in 2023, with just $376 million of debt bought back.
Yeah.
$150 million.
All of them in stock.
Net leverage was further improved in Q3 and he's heading towards approximately two times net debt to EBITDA by year end.
All of the desktop channels.
Help accomplish our goal of rigid reduced interest rate in both 'twenty three and also going into 2024.
Improved cash flow yield despite the increase generally have interest rates. Thank.
Thanks to everybody and now let's move to your questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question.
At this time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Kristine <unk> with Morgan Stanley. Please go ahead.
Hey, good morning, everyone.
Okay.
Yeah, John Ken P T I guess.
With a 7% revenue increase off where your 2024 initial outlook.
What does that imply for aircraft production rates for the Boeing 780, 777, and the Airbus <unk> Hundred 28 day safety and also you know when you talk to your customers how.
How much visibility are you getting for the rent.
Okay, well I guess, that's the big one Christine.
So let me just talk generally about the 7% first of all.
Within that.
Jen is a.
Our mid teens.
Assumed increase in commercial Aero.
Hmm.
More like single digit increases in industrial things like oil and gas and general another one.
A high single digit decrease in commercial transportation.
So basically you are now.
Your line is solid defence solid general industrial markets.
The increase in commercial aerospace.
<unk> reduced by a high single digit assumption on commercial transportation, that's roughly that offline.
I'm going to say, yeah, we see assume build rates are.
Forecast again James.
Hum.
The most part you know we can see what kind of increase.
Wide body wide bodies fractional increase in mix next year.
At the moment specifically.
A Boeing 787.
Sue.
You asked the question about our assumption is that it's somewhere between the mid Thirty's 40 somewhere in that region, we don't want to pin it specifically at this point you can assume that.
You know within the range plus or minus I gave.
And it's really important that we see.
We achieved the rate, which we thought was going to be.
So that hasn't really happened, but doesn't seem to be happening just yet, but we know it's going to be very soon.
But we're not yet ready to believe.
But even though we could supply.
42 should Boeing.
In a position to build at that rate.
Okay.
Thanks for the color.
Thank you.
The next question comes from Robert Spingarn with Melisa Research. Please go ahead.
Hi, Scott My guess on for Rob Spingarn, John or Ken I wanted to ask you a little bit about pension contributions for next year and also just given the work you've done there considering any sort of risk transfer to get rid of the pension liability and improve free cash conversion.
[noise] been working on it.
Pension liabilities for several years now.
Over the last five years from when we started several billion out of the net liability of gross liability rather and we've always been focused on taking gross on that together.
Otherwise you just leave yourself open to interest rate risk and mortality risk.
We've managed that.
Zero.
Great quarters, and 1 billion of pension and health care suddenly in that region.
And so it's tiny.
Tiny.
Correction of a market cap of medical essentially is not relevant.
At the same time.
What.
I'd note that the.
Well I know the company might be up a couple of TD admittedly tightening.
As I've not yet at that point.
To consider that.
It's not that it's off the table because I think it would be something which will be useful to do well.
Yeah.
Tyler I think.
Todd and those are the best uses of our cash.
Cash at the end.
So I'm not wanting to leverage to enable that to occur.
So.
Essentially we are aware of it we continue to work it out plan I can see us.
Kicking off one or two.
And do a partial.
<unk>, either we didn't apply in a way that total of a plant, but you shouldn't expect to see the light at the extend wished enough to pay the premiums to insurance companies to enable that.
At this point in time.
That may come over the next.
Say three to five years at some point, but not yet.
And the assumption we have for next year is that.
Cash contributions will be a little higher this year.
At this point, it's not material.
Okay. Thanks, I'll stick with one question.
The next question comes from David Strauss with Barclays. Please go ahead.
Good morning.
Hey, David.
John You mentioned.
Your work upgraded blade I wanted to see if you could give a little more color there around the timing of when you.
When do you think there'll be producing upgrading producing and delivering upgraded blade.
To both G E.
And Pratt.
Hmm.
So most of the G.
G T F advantage.
And you're an upgrade.
Cool.
Leap.
Why wasn't the upgrades those are those have been something that we've been working on for several years now.
And and if anything let's say a little bit later.
Into production.
Originally envisaged although that.
These push backs in timing not being as a result of hub, that's not being ready.
So yeah, we're in good shape.
I've commented in the past, but well.
Increased.
Our performance in the high pressure turbine leads to increased complexity and with that.
<unk> is value.
We certainly Uh huh.
The internet when the engine manufacturers to improve the performance of the engine temperatures seem to be higher than originally envisaged and therefore to help improve time on wing.
I figured as those specific timing for Bose.
What was originally called <unk> that has a different code named towards E and I think the advantage for Whitney.
Your best asking them.
Oh hardboard dysplasia.
All of them myself.
Because we you know we have a great plan, but yeah that can indeed has been varied according to the specific needs.
All of those engine manufacturers at this point in time.
Okay fair enough I'll ask them.
Thank you.
Bob <unk>, Bob better David.
[laughter] and then can I guess, a two parter for you I'm just quick comments on working capital through the end of this year it looks like you're kind of a pretty big.
No reversal benefiting in.
Q4, and thoughts on that into 'twenty four and then.
Pension expense.
You brought it down a little bit for 'twenty, three but what are you looking at for 24.
So the comments on the working capital first and then I'll, let Ken amplify.
And then that can totally deal with really the pension side.
And the reason why I want to talk about the working capital because it's also tied up with the specific.
Operations on the status of the different business units all.
So.
First of all in terms of lifting copper loving.
Oh of accounts receivable and accounts payable they just move on the day's assumption so.
Revenue goes up David does the house.
Clearly we have more dollars tied up in receivables than we had but that's a good answer because whatever.
Whatever it is and I don't know that we disclosed it back engineer it but our days are pretty constant and.
So because revenue went up few Mcdonald's went on both of these are in receivables exactly the same.
Tainment payables, the the big wildcard on what Japanese launch inventory.
And.
So fall inventory is still elevated.
Elevated, but I would like but just because I don't like it doesn't mean, it's not where it should be at this point in time.
So we lose with the I'll say status within each business and where we are operationally.
In terms of premiums start from let's.
Lets say volume recovery.
If you take a wheel segments, which was the first division to show.
Volume increase.
Morning, and then moving towards stability enough smoothness of production date.
Days of inventory are in really good shape.
Data I believe close to world class levels.
If I look at the engine business.
She was a second division out of like they did in terms of a big golf revenue.
Increasing mining and that's continuing to increase.
We have gradually been smoothing production.
Albeit we're not in a in the same level yes.
As we all get wheels, and so what we see is gradual improvements in efficiency.
Inventory holding that days on hand.
I think that will continue into improve again in the fourth quarter and into next year.
Pleased with the trajectory, but we're not yet where we need to be on our engine business.
And in terms of fasteners and structures.
The very different coins.
Fasteners.
It's been a later in the cycle in terms of volume pick up.
We've been recruiting this year building it out.
<unk> seen first of all demand you begin to respond to that bill. So it makes that production efficiency.
And also you've seen a little bit of a calming the recruitment in the business in the last few months, but we still did not.
When you say recruitment mode and play.
But by the time points, but trying to put it would be efficiency.
The developments the days on hand, as well as a oh in terms of where it needs to be and is not yet improving ah.
At all but we will begin to improve I believe as we go through 2024.
In the case of structures are that's probably a west the business in terms of days on hand.
And so if you remember last quarter, it wasn't particularly a great quarter in terms of the throughput of the business.
So I hear a lot about but it's just not to focus on inventory, but just to use inventory as a buffer to help stabilize the manufacturing operation.
Cool improves the margin, which is what you saw in the 300 basis points to improve in the structures business.
At this point I don't think it goes anywhere at all in the fourth quarter and that's a combination of all still needs to stabilize its operations, but also at the moment.
I see customers laying an additional demand, particularly laying an additional urgent demands on the titanium side.
Not yet prepared to add heads no working capital in inventory no input material until I'm satisfied with the economics, but you got to pay those premium costs and so if anything I'm going to to hold back.
On that because I've got better places to deploy capital.
I told you last quarter.
Generally in the business about and let's use the very disciplined the way, we allocate capital and so at the moment.
I'm not trying to drive working capital, particularly in that business, but that will come next year.
As that business begins to smooth and improve its production and gained more responsive to the asset in terms of Oh site people paying pool.
Premiums for what they want the demand and the drop in that and they can pay for it all to life. They don't get it is.
It's that simple.
That deals with working capital be comprehensively, David and then I'll pass the cat.
Yeah, Hi, David So as John articulated their days are really the key on working capital and then also dependent on where we are in this cycle by business segment.
So as we are we exit this year I think we've given everybody the work and the assumptions tab of the decks.
But that would indicate a working capital burn.
This year of roughly about $190 million, plus or minus and it's really driven by.
We've increased the revenue guide once again, so you have more <unk> that goes with that plus we're keeping inventory in the business to make sure that we're not the bottleneck for our customers delivering on time in full at the right spec is really important for us. So we got a little bit more inventory next year, we've got another growth.
Projection here, so I anticipate there'll be working capital burn again next year in 2024.
Probably be better than this year as we work down inventory in the business, but it's again going to be dependent on where we are in the cycle. So I believe it's in really good order here driven by the growth of the business on the pension expense side as John mentioned I'll start start at the top of the house we've.
We've taken gross liabilities down by 45% since separation, that's a pretty big decline.
A big significant part of that is the actions that we've taken to reduce gross liabilities just to get a bit of it and help from the increase in discount rates, but theres a lot of action around that gross liability John mentioned, our cash rate. It will be up next year, we re measure at the end of the year. So that's pretty much of a volatile line. So we'll give you more guidance on the net.
The call in terms of what the cash contributions would be.
The expense side, that's a little bit more visible right now again, we strike it at the end of the year. If you look at our our pension and <unk> expense right now its $35 million on an annual basis. So next year based on asset returns for the market's been a little tough here I'd say, probably another 50.
8 million plus or minus $5 million on either side of that is really not a not material, but I think that's all in good order as well.
Great. Thanks, Thanks for all the detail.
Yes.
The next question comes from Scott <unk> with Deutsche Bank. Please go ahead.
Hey, good morning.
Hey, Scott.
Two very quick questions both for John first the price realizations accelerate again in the third quarter I think they had accelerated last quarter and then on fasteners can you say, whether you were shipping at five a month on eight seven at this point or are you still tracking a bit below that thank you.
Hey, I don't think we'd give them really at the core of the detail on the commercial side.
In our 10-Q later when we file it this is Graham wells.
So in good order.
And in line with what.
Previously you said.
But it was a quarter for the year.
Behind my comments regarding our 2024.
I made him the on the left.
That's cool.
Seven eight of them at the moment.
So we are little bit below <unk> five.
I'm, sorry, but what are you expecting that to move up some rate seven next year.
I know you've commented before we see very strong underlying demand for that aircraft I'm I couldn't see the need to go above like separate as well, it's only a question of what.
Okay, great. Thank you.
Thank you.
The next question comes from Myles Walton with Wolfe Research. Please go ahead.
Thanks, John was hoping you could dig a little bit deeper into the fastening margin performance and obviously.
Sort of trough to the beginning of the year and has been showing some signs of resiliency and improvement I think at the beginning of the year. You told me to not expect much for a couple of years are we at a point where.
New management plus the rate increases on the wide bodies, we should start to think about getting back to a 2018 2019 fastener performance.
Well I think it's premature to to go back there.
Conditions than what the widebody market.
Look quite different to what they are now.
Basically.
In the first quarter.
Which is probably our low point.
In Boston the margins reflected essentially.
They totaled metallic build of the aircraft and that's you can call it zero.
But any real body.
Slide <unk>.
So that's one fact, oh gosh, that's begun to change.
The business itself has also.
<unk> begun to improve.
I see it.
Very much improved signs of operating efficiency improvements.
There are ways to go.
I see additional discipline in the business.
Partially.
Hum.
Still a ways to go.
I'm.
Going forward into next year, what I see is a volume increase for commercial aircraft production.
So.
That's you know improvement in mix.
Because of the wide body going into next year in particular in our assumption, but what the problem of wide body production will be adult tobacco what essentially.
Wide body transitioning from metallic pumps, you bad crops during the course of the year.
Hopefully with some dealing yourself triple seven X parts as well, which has got a composite wing and so I'll say general improvement.
<unk> for the business.
But still with a big thrust on improving its.
It's productivity.
Truth with nutrition C, which needs to occur.
Basically some ways to go yet email I have optimism will continue.
Good trend over the last couple of quarters.
But so too soon to call out any specifics on it.
And I don't think we ever guide by segment anyway right.
Got it.
At March into the next year, just giving you exactly.
The increases so that gives you a picture.
A lot of business.
Thanks, Sean.
Thank you.
The next question comes from Ronald Epstein with Bank of America. Please go ahead.
Hey, John how are you.
Yes.
Yes, the topic that doesn't tend to come up much as good forged wheels.
And it appears that it's been running ahead of expectations and then how should we think about that.
What are your expectations around it when.
When we think about modeling out what would be a prudent way to do so.
Yeah.
Well.
Essentially the play.
Well, which wheels for aluminum is the.
You spell at all with what's the Big picture.
The truck and trailer production.
Essentially in North America, and Europe, albeit we do play in.
And some of the Asian markets at a significant shift.
Share position as well.
And then you factor it in.
Basically some.
I have a percentage change that is and then you factor in it was a positive against what I think will be a worst macro position next year there'll be some penetration achieved against steel wheels.
Excuse me frictions requirements and Stubhub.
A fractional contribution but nothing of great note in terms of the adoption of the different Oh.
I'll say powertrain, let's say 10 to get everything moved towards a notification or whatever but the big moves next year about the prospect.
Two as well.
When a fractional share improvement.
On top of that so basically we see.
Second the growth in those segments.
Offsetting some macro decline in these two buckets and that's why guide and does he never commented as I did about you know high single digit reduction to their business is our assumption trying to be fairly cautious at this point in time until we get a better read on what's the general.
Economy Gonna do.
Although I do see freight rates beginning to stabilize and improve recently so yeah. There's a lot of factors yet to be able to bring to bear in terms of what the final outlook for next year is right I wanted to take a fairly cautious assumption. This year I don't want to come and get us to us.
More typical second half of it is we've still been able to burn off backlog.
Let's say even despite.
Today, we know we have isn't it.
Truck genes are subject to the UAW strike.
Our our re is such that that's not going to affect us in the fourth quarter.
Our assumption is that by Q1 next year by another couple of months by UAW.
Future.
Truck brokerage all the medical and they'll be back.
So that's about it really it's you know it's been pretty strong this year and I didn't hear the generally yes.
Yeah, and then and then maybe just one follow on if I may just a little change of subject.
When we think about the Pratt Whitney situation.
With the G T O from all the different needs to be reworked.
Is that good bad neutral for you guys I mean, how should we think about the impact on your company vis vis the G. P F situation.
Yeah.
I'll start off with having two separate two issues I think on the G. T S.
Because I think while it gets sold.
And mesh together I see them as quite separate.
And then the Congress just meet the twining for convenience.
So the disc contamination issue.
Yeah T that requires inspection.
And that might take.
I don't know.
Dave let's call it.
2030 40 days.
The north wing to achieve that inspection and then I guess longer if those risks so that they can be quad to be replaced or not and I guess, it's a it has a small fraction dosing will be quasi replenish that's what I said a separate item.
Over let's say previously incentive field, but I'll call. It Leslie Auld batteries the discussion about the time on wing.
Issues that have been publicized.
Uh Huh bye everybody regarding the GTS, particularly in harsh.
Climate countries, all pollution countries time on knowing it's a fraction of the predecessor engine and also what was originally thought for the G. P F.
So.
And then becomes.
Oh the problems around the can bus the the filling of holes the higher temperatures and that those temperatures and polluted cities the.
Few blades and the high pressure turbine those clearly require replacement and the question is what is the replacement interval for them.
So the so that's step one was a low there was an issue.
I'm proud.
Crowds and Whitney with each other I mean.
You know what frequencies they want to replace those those laid that again more of a question congrats them for myself.
We're able to stand behind them and supply what needs to be supplied Oh, we didn't degrees. The question is what's the requirement.
Then of course, you could entwined them together, so maybe when those.
Engines are off wing for the powder metal contamination issue.
Maybe the opportunity will be taken to replace some of those high pressure turbine blades and all the components of the engine will maybe it wont.
That's a partnership.
And the question I have in my mind is do.
Do they go for full replacement of all the most I really look at it expect to take the engines off the wing for the first time.
Do they stick them back on just because the lines.
Lines would want me engines back on wing on only seek to replace those in harsh climates Oh.
And so it may be that you know the bowl of the what I read for them to use the 300 dye used turnaround time. So I just don't know wrong bodies finally turned out to be.
But it's a choice, but by Raytheon it'll problem Whitney.
So I mean to what extent are they making food when school the time on wing issue in treating the high pressure turbine parts that should I take that also.
Well written about is almost one issue of part a bathroom lunch at them as two distinct issues, which may may come together, but just depending upon the pressure to get those engines back on wing.
We are still in discussions with Pratt and Whitney rigor.
Regarding all of that and they they detail I mean, how many of our parts go to OE production and have made against the Spanish market.
And that's up to them in the aircraft manufacturers.
Manufacturers to decide that.
Got it thank you very much.
Okay.
The next question.
<unk> comes from Noah <unk> with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
No.
John I was hoping to get a little more color from you on your perspective on the broader aerospace newbuild ramp up.
You've had good perspective, and you know as you mentioned you've been cautious and that's been correct. It felt like in the middle of the year and kind of around the air show and into the summer you sounded more optimistic.
Sounded like the supply chain was kind of finally ready to go and then we've had these incremental engine in Aerostructures issues did did Boeing, especially in I guess, Boeing and Airbus keep the underlying broader supply chain going towards the planned higher rates and you know it was everything.
Kind of ready to ramp once after fuselage and alike are fixed and you mentioned them, giving your plans for next year.
Are they incrementally more firm on that now with the master schedule than they've been recovery to date.
Or things firmer or is that wishful thinking.
No I think Boeing two kilo of hard floor plan.
Sure Yeah, it's been the realization of those plan, which has been a.
More of the issue.
And I guess, it's really from a combination of reasons, there's always going to be somewhere in the supply chain amongst all the parts of the difficulties, there's always going to be.
The degree of experience in Boeing's own plans with all of the change people in and out in a post.
Post COVID-19.
And then of course, you know we read in the press about the difficulties of our space was it strike at Siri Jarrod space.
And then some other production issues of some final parts of the holes and all the rest of it.
And yet this seems to have been some management change, there, which are which may.
Proved to be positive because that's a TBD.
Hopefully.
I guess, you listened carefully to the commentary from spirit yesterday.
Optimistic.
Are those fuselage and know the compare.
No problem is to get resolved.
It's not something in our control, but should begin to improve I think that's a major step forward in Boeing realized it gets old plans for production rate increases and also getting behind it the retrofits of those tail titles, which were subject to fasteners.
It was 50 drum whale hunting in the homes build too big in the biggest fastest put in so I think the hoping you hook Julian efforts too.
To achieve all of that.
But you know as you know just herculean efforts by themselves, but instead to produce the outputs and we've still got to see that improve so hopefully.
During the October November December.
We'll begin to see rates pick up.
That's right.
Plus and then.
M L. She Boeing itself to get to the required all stated like 42 next year.
In terms of then the on the engine side I know you you read commentary.
I think well I think any one I've seen was with GE commentary instead of let's say 1700 engine 1600 engines.
But that isn't really impactful for us at this point in time because.
For us it's just us meeting the rate requirements and then there's a choice of as I said to all of them.
Question, what goes to early compared to what goes to the social clubs.
We're dealing with very robust about the both sides and we see that demand increasing again next year plus some blended in changes potentially for the technology change yet to come.
Okay I appreciate it thank you.
The next question comes from Sheila K Yahoo with Jefferies. Please go ahead.
Hi, John Hi, Ken. Thank you yeah, so he and I have two questions. If that's okay. So John.
Well I've been pretty lenient today announcing a two part three passes so yes sure go for you are you are but I want some good nuggets here. So hum you know the elite Oh, he's ever calling out.
Castings and forgings in terms of supply chain, you know kind of consulting.
Following down the supply chain I know you've been clear that isn't a bottleneck and you aren't in the large structural casting business anyway. So maybe could you characterize your output today and what you're capable of in terms of demand and then.
This is more of like a larger opportunity in terms of pricing and volume how do you think about that trade off going forward.
Okay.
Generally yes.
Forging and castings I've been a bit of a whipping boy for a couple of years.
With commentary I think maybe even before there's any basis for it.
Albeit subsequent testing that has been the basis for the commentary.
Need to replace the skill levels to produce sometimes things in particular that they are the cost savings.
As a as really that's a very high order.
So.
E train their recruitment and training time too.
We use expected production work is in some of this so we strained I think all of the companies.
In that regard.
Including Hi, Matt I mean, we did choose to stop recruitment a bit earlier, though at the time.
Cost of the company.
20 basis points of margin by being slightly ahead of the curve.
Hum.
Recruitment, but same time I think it's paid dividends for us in the fact that we've been in pigeon to produce do you hadn't really.
Long time asked right and a generally good quality. So I think it's been a good trade off for us.
I want to correct you the structural casting side, we'd probably the number two in the market behind precision cast parts, but that's still the big dog on the block.
In terms of production of structural castings.
We do produce the where it's a good rightful, let's say, 98% of all of our structural castings.
I mean early on we had a few moments, but things like Furring. So now just like shutting peas and.
Probably no.
Good right. So no problems whatsoever. So you should there be increased demand for structural castings, obviously, when we tools, but they should not be about it.
But you said to us for the next few years should engine manufacturers want to.
Is that are you know we're in a position to supply because we still have some available capacity and indeed, all willing to do it.
Invest commensurate with its being a good return of capital.
And generally you know I've been quite positive about investing in our engine business in pulp trusting that too.
Our structures business must be based upon the returns.
So it's a long way of saying you know we're in a good.
Great.
Wage structure costs things, you know, where all the significant supply to the industry on turbine blades.
That must be me enough nuggets.
How do you think about you know pricing in your contract step downs going forward.
Okay fair enough supply chain and you're hiring ahead of the craft.
Pricing has been positive for us.
It reflects the value that we bring I mean, when I look at.
Some of the requirements for the increased temperature performance in our in the let's say narrow body engines.
Oh.
Bringing to bear some of the local but some of the technologies that we've deployed for the for the absolutely flight engine.
And in terms of the ability to manage both pressure our global performance.
And the high pressure turbine when we're able to produce parts.
She'd be it coke work with the customer it's a N G into specification.
But if so especially in light of 2500 degrees and operate high are you know we can take it offline because as you know for the F. 35, we opened 500 degrees and indeed, the only company in the world that could provide.
Comps with that level of performance.
That environment.
You know we have already commented previously the we all working on the improvements for.
For the currently 2028 upgrade to that engine to improve its a its trust in timing there and so again, we are able to take the temperature performance of those parts and elevate it further and we've talked a little bit.
But tell me a little bit here not technology day about some of the technology is what are we.
Yeah, he wants to deploy for that.
And so you know we're in position to bring a degree of performance and capability at scale, which I think you need to be kept in body because in truth. The turbine blade is a pretty small part of the volume of the engine.
And to feed the requirements for let's say a low carbon footprint.
They continue to be taking up the pressure inside the engine to improve the optimization of the jet fuel and then Felipe good characteristics. The love of pollution in the you know the whole, let's say fuel efficiency and carbon footprint and seen it presents a great value to the industry.
Okay. Thank you.
Thank you.
The last question today comes from Seth Eisman with J P. Morgan. Please go ahead.
Hey, Thanks, very much good morning, everyone.
Okay.
So John I know you are that you wouldn't say this or having said that and so I'm not necessarily expecting a number in terms of the margin outlook for next year, but if we think about that sort of baseline incremental of you know, 30% plus or minus 5% you know how do we think about the puts and.
For where that next year could come in relative to that 30% does the the addition of head count and the need for you know the the learning to develop among your employees.
Does that keep things sort of below that that 30% range as it's been in recent years or are there other opportunities to be above it what's the best way to think about that at this point.
Yeah, I mean, we were able to.
Pablo covenants.
19% of the operating profit up 23% EBITDA rate you know I don't have any commentary regarding margin rates for next year, what I still see.
At the moment is potentially I don't know this but potentially a few more months.
Choppy.
Sean, particularly on the manufacturing side, just like just an assumption.
Maybe we get lucky towards the second half of next year or the back end of next year, and we see things move out.
Yeah.
Seen some things begin to move we announced favorites like commentary has been on the inventory side, but I was thinking about.
Alright, and your business.
But in terms of.
At what point do we reach what I call. It what I previously said, we thought it to a state of Grace with things like that.
Yeah margins are.
Hum State Bulletin bedroom in cash just to use that as the industry and hopefully out of apartment.
You know I've always said, that's a that's a year away and I still think it's in a.
Yeah like would be the back end of 'twenty, four but more likely getting to 25 and that hopefully combined with the.
25, external I'll say abuse of what the and the aircraft production will be including its wide body mix did not become big enough to get us into a good state. So you know I have generally medium to long term optimism.
We are in a really great place with a great backlog of good things to come.
Albeit.
Still you know having to face up to shorter term challenges.
Of all the things we've talked about it in terms of you know.
They build rate change inside the assumptions change.
Yeah in many parts of the.
Our markets in particular that you get the commercial aerospace part of the.
Market.
Okay.
I can give us so.
Excellent thanks very much helpful.
Thank you very much.
This concludes our question and answer session and conclude the conference call. Thank you for attending today's presentation. You may now disconnect.
Okay.
Okay.
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