Q4 2023 Howmet Aerospace Inc Earnings Call
Hello, and welcome to the Howmet Aerospace fourth quarter 2023, and full year 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 todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad and to withdraw from the question queue. Please press Star then two.
I would now like to hand, the call over to Paul Luther Vice President of Investor Relations. Please go ahead.
Jay Good morning, and welcome to the Howmet Aerospace fourth quarter and full year 2023 results conference call.
I'm joined by John Plant Executive Chairman, and Chief Executive Officer, and Ken Giacobbe, Executive Vice President and Chief Financial Officer.
Speaker Change: After comments by John and Ken We will have a question and answer session.
I would like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections.
Speaker Change: 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 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.
Yeah.
Thanks, Peter and welcome everyone to the 2023 year end results call.
If you move to slide four please.
I'll start off by saying how.
Fourth quarter results were indeed very strong revenue.
EBITDA EBITDA margin and earnings per share all met or exceeded the high end of guidance.
More importantly continue to outgrow each of our respective pockets.
Specifically revenue was $1.73 billion, an increase of 14% year over year.
Aerospace up 22%.
Speaker Change: EBITDA was 398 million, which was an increase of 18% year on year, while its EBITDA margin.
Even with Q3 at a solid 23%.
Second half EBITDA margin was 30 basis points greater than the full year average.
Q4 earnings per share increased by significant growth of 9%.
For the full year revenue was up 17% driven by commercial aerospace up 24% and EBITDA was up 18%.
Earnings per share continue to improve annually almost a record $1.94 per share, which is an increase of 31% year over year.
Moving to the balance sheet and free cash flow free cash flow was a record that's above the high end of guidance at 682 million.
Speaker Change: And in the fourth quarter.
Tangible east balanced capital allocation strategy by buying back another $100 million of common stock.
Paying another $100 million of debt parts of itch reduction of 'twenty 'twenty four bonds.
Moreover, we refinanced $400 million about 'twenty 'twenty, four buttons that reduced interest rates.
The combination of these actions further reduces our annualized interest expense by $10 million going into 2024.
<unk> towards continued improvement to free cash flow yield.
We've got earnings per share.
Lastly, net leverage improved to a record $2, one times, which was in line with expectations.
Each segment contributed with engine products and forged wheels that are making record profits.
Pleased with the pickup in the margin to just in excess of 22% EBITDA margin Ken's going to detail all of this in his commentary.
Having completed a strong 2023 the majority of my comments today will focus on the outlook for 2024 and will be covered in the guidance section.
Covering the historical results, we look forward to a healthy 'twenty 'twenty four and now over to Kent.
Thank you John let's move to slide five for an overview of the markets.
All markets continued to be healthy and we are well positioned for future growth.
Revenue was up 14% in the fourth quarter.
And up 17% for the full year.
The commercial aerospace recovery continued throughout 2023 with revenue up 22% in the fourth quarter and up 24% for the full year driven by all three aerospace segments.
Commercial aerospace has grown for 11 consecutive quarters and stands at just over 50% of total revenue.
Growth continues to be robust supported by the demand for new more fuel efficient aircraft with reduced carbon emissions and increased spares demand.
Defense Aerospace was flat for the fourth quarter.
However, defense aerospace was up 10% for the full year driven by legacy fighter programs in spares demand.
Commercial transportation was up 5% year over year in the fourth quarter and up 9% for the full year driven by higher volumes.
Finally, the industrial and other markets were up 21% in the fourth quarter, driven by oil and gas up 34%.
T up 24% and industrial up 9%.
For the full year, the industrial and other markets were up 17% year over year, driven by oil and gas up 38%.
J T up 16%.
In general industrial up 7% in summary, another strong year across all of our end markets.
Now, let's move to slide six.
Consistent with prior calls we will start with the P&L and focus on enhanced profitability.
For the full year revenue EBITDA EBIT margin and earnings per share all met or exceeded the high end of guidance.
For the full year revenue was $6 six 4 billion up 17% year over year.
EBITDA was $1 5 billion and outpaced revenue growth by being up 18% year over year, while absorbing. The addition of approximately 1850 net new hires.
EBITDA margin for the year was strong at 22, 7% with.
For the fourth quarter exit rate of 23%.
Adjusting for the year over year inflationary cost pass through the flow through of incremental revenue to EBITDA was approximately 31% in the fourth quarter and approximately 26% for the full year.
Earnings per share was a record $1 84 up 31% year over year.
Additionally, Q4 earnings per share was a record 53 per share versus the prior quarterly record of 46 per share.
Speaker Change: In the quarter, we had two minor benefits impacting earnings per share one cents associated with the Q4 favorable tax rate in <unk> related to favorable foreign currency.
The fourth quarter represented the 10th consecutive quarter of growth in revenue EBITDA and earnings per share.
Now, let's cover the balance sheet.
Our balance sheet has never been stronger.
Free cash flow for the year was a record $682 million, which exceeded the high end of guidance as we have done every year since separation, we continue to drive free cash flow conversion of net income to our long term target of 90%.
The year end cash balance was a healthy $610 million with strong liquidity.
For the full year, we reduced the 2024 debt tower by approximately $875 million.
475 million came from the balance sheet and $400 million was refinanced at a fixed rate.
With an approximate coupon of three 9%.
Net debt to EBITDA improved to a record low of two one times.
All long term debt is unsecured and fixed rates, which will provide stability of interest rate expense into the future.
Our much improved financial leverage and strong cash generation were reflected in S&P's December rating upgrade to triple B minus.
With this upgrade we are now rated as investment grade like two of the three rating agencies.
Finally, moving to capital allocation.
We continue to be balanced in our approach.
For the year approximately $800 million of cash on hand was deployed to debt paydown.
Speaker Change: Common stock repurchases and quarterly dividends.
The previously mentioned debt reduction actions during the year lowers annualized interest expense by approximately $29 million.
We also repurchased $250 million of common stock at an average price of $47 76 per share.
This was the 11th consecutive quarter common stock repurchases.
Share buyback authority from the board of directors stands at approximately $700 million.
The average diluted share count improved to a record low Q4 exit rate of 413 million shares.
Finally, we continue to be confident in free cash flow in.
In the fourth quarter, our quarterly common stock dividend was increased by 25% to five per share.
Now, let's move to slide seven to cover the segment results for the fourth quarter.
Yeah.
Engine products continued its strong performance revenue increased 16% year over year to $852 million.
Commercial aerospace was up 14% and defense aerospace was up 18%.
Both markets realized higher build rates and spares growth oil.
Oil and gas was up 25% and IGT was up 24% as demand continues to be strong.
EBIT increased 22% increase.
Increased 22% year over year to a record $233 million.
EBITDA margin increased 120 basis points year over year to 27, 3%, while absorbing approximately 180 net new employees in the fourth quarter and approximately 1030 net new employees for the full year.
For the full year EBITDA.
EBITDA was $887 million and EBITDA margin was 27, 2%.
Both were records for the engines products teams a significant accomplishment.
2023, EBIT margin was up approximately 450 basis points from 200 from 2019 when revenue was at a similar level.
Speaker Change: Now, let's move to slide eight.
Fastening systems revenue increased 26% year over year to 360 million.
Commercial aerospace was 45% higher including the impact of the wide body recover.
Transportation was up 13%.
General industrial was up 8%.
And defense Aerospace was down 9%.
Year over year, EBIT increased 38% to $80 million.
Speaker Change: EBIT margin increased 180 basis points year over year to 22, 2%.
We are pleased with the continued performance of the SaaS thing systems team with three consecutive quarters of revenue EBITDA and EBITDA margin growth.
Now, let's move to slide nine.
Engineered structures revenue increased 6% year over year to $244 million.
Commercial aerospace was up 19% driven by build rates and the wide body recover.
Russia titanium share gain was flat year over year at approximately $20 million due to timing of shipments.
Defense Aerospace was down 35% year over year, driven by the F 35, and legacy fighter programs.
EBIT was 33 million down slightly from prior year.
EBITDA margin decreased 130 basis points year over year to 13, 5%.
Really due to absorbing net new employees. However.
However, sequentially revenue EBITDA and EBITDA margin increased for the second consecutive quarter.
In Q4 sequential revenue increased 7% and EBIT increased 10%.
Speaker Change: Although production efficiencies are not yet back to targeted levels, we are making progress and expect continued recovery in 2024.
Speaker Change: Now, let's move to slide 10.
<unk> you.
Speaker Change: Year over year revenue increased 3% to 275 million to $9 million increase in revenue year over year was driven by an 8% increase in volume, partially offset by lower aluminum prices.
Sequentially volumes were down 3% as we're starting to see signs of the commercial transportation market softening.
EBIT was flat year over year EBIT margin decreased 90 basis points, primarily due to the timing of inflationary cost pass through.
Finally, let's move to slide 11 for more detail on that actions.
In the fourth quarter.
We redeemed $500 million of our 2024 bonds.
The $500 million redemption at par was funded with approximately $100 million of cash from the balance sheet and approximately $400 million draw from to term loan facilities.
Both term loans are pre payable without penalty or premiums and mature in November of 2026.
200 million was drawn from the U S. Dollar denominated term loan facility and approximately 200 million was drawn from a Japanese yen denominated term loan facility.
We entered into interest rate swaps to exchange the floating interest rates of the term loans into fixed interest rates.
The weighted average fixed interest rate is approximately three 9%, which is lower than the 2024 bonds coupon of five eight.
The combined impact of these Q4 actions is expected to reduce annualized interest expense by approximately $10 million.
Moreover, debt reductions in Q1 through Q3 reduced annualized interest expense by an additional $19 million.
We continue to leverage the strength of our balance sheet.
Speaker Change: Since 2020, we've paid down gross debt by approximately $2 2 billion with cash on hand, and lowered our annualized interest cost by more than $130 million.
Gross debt now stands at approximately $3 7 billion.
All long term debt continues to be unsecured and fixed rates and our $1 billion revolver remains undrawn.
Lastly, before turning it back to John Let me highlight a couple of additional items.
As we continue to focus on improving <unk> performance and capital allocation I wanted to highlight our pre tax rona or return on net assets metric Rona, which excludes goodwill and special items has improved by approximately 400 basis points on a year over basis year over year basis.
From 29% in 2022% to 33% in 2023, you will find reconciliations in the <unk> of the presentation.
Lastly in the appendix on Slide 16, we have included 2024 assumptions.
Interest expense is expected to improve to approximately $200 million.
The guidance includes all that actions completed to date.
The operational tax rate is expected to continue to improve to a range of 21% to 22%.
The midpoint of our guidance represents approximately a 600 basis point improvement in the operational tax rate since separation in 2020.
We continue to be focused on further improvements in our operational tax rate.
Pension and <unk> expense as well as contributions are expected to increase modestly by approximately $15 million year over year.
Finally, we expect miscellaneous other expenses, which are below the line to be in the range of $5 million of income to $15 million of expense for the year, we are very volatile within quarters.
So with that let me turn it back to John.
Thanks, Ken and let's move to slide 12. Please.
The commercial aerospace market continues to be strong.
Airline load factors are good.
International travel continues to strengthen.
I know this has led to significant orders for new aircraft and higher levels of aircraft backlog.
Speaker Change: Boston boating.
Demand for new aircraft is expected to be sustained due to the need for aircraft with substantially improved fuel efficiency.
Also to the commitments made by the airlines of improvement towards carbon neutrality with two stages of 2030, and then 2015.
Commercial aerospace spares are also growing not only due to the number of aircraft in service, but also in the case of narrow body due to the increased so the shop visit requirements of the new fuel efficient engines.
This is a long term trend over the next decade, which we look forward to.
Defense budgets that hence the defense market continues to be strong and fly the aircraft.
Most drugs in helicopters.
Brian's and how it's a systems are also strong.
Specifically, we expect increased F 35 engines bad requirements due to the shop visit requirements as the fleet continues to expand globally.
Other markets of oil and gas and gas turbines continue to be healthy.
We do see natural gas turbines to be the natural accompanying technology to the renewals segments wind and solar.
The market, where we are cautious is that us commercial transportation, where we see potential for up to a 10% reduction in revenue as we move through 2024.
Speaker Change: We do envision commercial transportation to resume growth in 2025 and enter 2026. This is supported by the view that any potential reduction in miles.
To the continued secular growth improve penetration.
<unk> compared to stay wheels.
For the needs of purely efficiency or increased payloads.
Also this truck engines moved to alternate means of propulsion other than fossil fuels the adoption of aluminum wheel should gradually move towards 100%.
Moving now from general market commentary to specific numbers, we expect Q1 revenue to be up 9% year over year and EBITDA up approximately 11% for.
For Q1 of 2024, we expect revenues of one point to seven 4 billion plus or minus $10 million.
Speaker Change: EBITDA of 400 million, plus or minus 5 million and earnings per share of 51, plus or minus 2%.
This is similar to Q4 after excluding the one off benefits of the tax rates are below the line items, which contributed about two cents.
Regarding the full year of 2024, you see revenue at $7 1 billion, plus or minus 100 million EBITDAR at 1.635 billion plus or minus $35 million.
Earnings per share of $2, 15%, plus or minus five cents pre.
Free cash flow, we see a 735 million plus or minus $35 million and capex at $290 million plus or minus $50 million.
I'd like to comment further on our capital expenditures as soon as these are expected to be above depreciation for the first time in many years.
Essentially this is due to investment opportunities materializing.
The products business.
We see this as a very good sign to be able to deploy capital with high returns rapid future growth.
He felt that makes that info.
Got it.
'twenty, three which was another year of above market growth in each of our segments. In fact above 5% above market served this engine investment is viewed as excellent and speaks to the continued market growth in the business with 27% plus EBITDA margins and a 33% plus return of capital.
Yeah.
This continued growth is seen as the investments come on stream in approximately 18 months time.
Underpinning all of this is an agreement with one of our engine manufacturer customers for increased business and increased market shares.
This does not change our long term commitment to deliver average free cash flow conversion of 90% of net income.
And as you can see from our guide free cash flow. After all cost is approximately 45% of EBITDA, which is best in class.
We based our guidance on Boeing 737, Max production of 34 aircraft per month, and 6787 aircraft a month.
Airbus assumptions are in line with that plan.
As an example.
<unk> hundred Twenty's 56 aircraft per month.
We are prepared and can be prepared should volumes increase above current customer assumptions.
In the case of the <unk> hundred 20.
Anticipating that bill rate, increasing in 2025 to approximately 60 to 65 aircraft a month and that will require us to do some pre builds of parts in 2024 and that explains the outreach we've given.
Please now move to slide 13.
2023 was another good year for how much sales increased by 17% and were above each of our segments and markets.
EBITDA was up 18% and EBITDA margin increased to 23% in the second half of the year.
Earnings per share was up 31% cash.
Cash flow exceeded guidance.
In line with our long term view.
39% of net income into cash flow.
Speaker Change: Our balance sheet was strengthened with the significant debt.
Debt pay down repurchases with cash on hand, and record low net leverage of two one times.
Do you have to look for next year well for lots of 2020 full has already been outlined in the numbers given but let me give you some qualitative terms to look at 2024.
It demonstrates the following features.
We have further revenue growth, which we expect will be proven to be again in excess of that end market served.
Free cash flow continues to improve with the higher EBITDA margins and we expect to further reduce debt and interest expense but.
When we take into 2020 full a reduced share count and you can expect further shareholder friendly actions or increased share buybacks I'm sure there's a dividend Brooks.
And now I'll close my prepared remarks, and I'll hand over and get ready for questions. Thank you.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question only.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
Hey, Doug.
When youre looking at a situation with very high demand on the on the interim product side.
And one thing I'm I'm really interested in is how you're seeing pricing given your very strong position there youre.
Speaker Change: Youre looking at.
Speaker Change: Catalogs spirit's prices from the engine Oems up in the teens recently, what do you see.
For helmet in terms of pricing over the next couple of years.
And can you explain the differences there between what you're getting and what you're seeing is increases on the engine OEM side.
Yeah, we've noted that our engine customers have been raising prices into the are they to the MRO shops significantly.
We don't have that opportunity Doug in the short term.
So our long term agreements provide full price stability during the duration of those agreements.
When we get to a long term agreement renewal.
With the sophistication of the analysis, we introduced a few years ago.
Now splits all of the parts into volume and variety and looking at the different trends within that.
Also when parts go to let's call it past model and become.
So besides like.
But also noting the increased service monitoring current parts.
And so at that time, we do differentiate.
Speaker Change: Between the increased pricing that we expect to receive the LTA renewal.
And.
Certainly look at the the service requirements and the pricing and you can expect that as we renew those agreements.
I don't generally comment about when those agreements are all renewed.
But you can expect to see increased pricing associated with that service parts.
But from your standpoint, when you look at.
So even the short term 'twenty 'twenty four so how do you think of your pricing relative to inflation and is this a positive contributor to margins.
No I don't think you can say that we're going to price per se on individual service part.
You kind of expect that we will be moving on price once again in 2024, and you'll see when we issue our 10-K, which I believe you cause evening, you'll see has that trend continued in Q4. So I expect to see continued positive contributions from pricing as we go through.
But.
And you'll see that 23 was a healthy year and 'twenty four should be an equally healthy year.
Very good thank you.
Thank you.
The next question is from Robert Stallard with vertical research. Please go ahead.
Thanks, so much good morning.
Hey, Rob.
Hey, John.
On your Boeing 737 rate assumption are you currently shipping at 34 months to the 737 line and if Paul you should actually get to say do you have the head count in place to sustain that thank you.
Okay. So.
We see demand signals from two principal sources, one is from the aircraft manufacturers for our structural products and <unk> and then on a different sequencing the demand signals from the engine manufacturers.
I'm not sure.
If you look at our 2023.
So Boeing schedules increase too late so G H.
So we are in position and Oh, we're able to support them in that light 38.
We were cautious when they were talking about going up to 42 with TC saw was delayed and now that's not going to be the case.
Oh, so it's around <unk> 24 is that this is going to continue to be choppy.
Most of that loss, it's not necessarily the stop start stop start than we've experienced in quite the same degree as last couple of years, but we're also prepared but may be Boeing will not be building that likes to say it because indeed, we don't believe that they have built that later.
Seen various assumptions of what was actually built in Q4 and now we see their restricted too, but yes, I E in terms of that bill.
In 2024.
But of course, we don't know is to what degree if any under build in one month it will be not overbuilt. Another month or indeed is it just going to be kept up the production for that month in terms of issuance.
If it gets we have no idea.
And therefore, we still thinking that demand could be choppy and in.
Given given the balance sheet a Boeing is.
So are they willing to continue to sustain building out at a higher rate to match your building and therefore, we've made some allowance with it I wasn't capital such that if they don't take the parts are scheduled.
So that provided for in our free cash flow guidance that we've given you and.
And similarly, I mean, I'll get it all out there.
Ah you saw margin flow through for 2024, 28% plus or minus compared to Q4 of 31% and there's also a lot, but some allowance for the shop or choppiness that we may see depending upon how things go at least bothering.
Yeah.
That's great. Thanks, Joe Thank.
Thank you.
Okay.
The next question comes from Peter Arment with Baird. Please go ahead.
Thanks, Good morning, John Ken.
Peter Arment: Morning, Jonathan.
You you added I think roughly about 1700, our employees in 2023, if I have that correct. I was just wondering what your guidance kind of assumes around.
Head count head count.
The expectations in 'twenty, four and yeah, maybe I'll just leave it there. Thanks.
Peter Arment: We were expecting between a saw some 1500 people depending upon what the exit rate should finally be for the year.
So we are continuing to recruit, albeit most of them as you can see that we are ingesting the labor that's a reduced net rate to a to the last year or the other.
Last 18 months and some of that to do with the bringing now the experience of some of those operators, we've been able to retain during that recruitment process.
And also the improvements in productivity that again, we are planning to make and so it's a blend of all of those things plus some of the automation that we've talked about in the past coming onstream. So let's call. It 500 people plus or minus less then we took on last year and while at the same time to trying to improve our recruitment and retention.
Statistics, which is really very important to us getting that sort of the stability of labor.
Thanks for that thanks, John Thank.
Thank you.
The next question is from Myles Walton with Wolfe Research. Please go ahead.
Thanks, Good morning.
Okay.
Fastening system the speaker, John the growth there obviously was.
Pretty much on top of the engine products growth is there a leader in 'twenty four and fastening systems and then maybe just could you provide any color as it relates to where distributions sits with fastening and where your wide body recovery is versus pre COVID-19.
Yeah.
One of the things that I've been particularly pleased with the improvements in our distribution business inside fastening systems.
A couple of years ago, maybe three years ago now we are we created a separate.
Business within its Rodney is amalgamated with our OE business, we provided dedicated management to that distribution business and we've seen it indeed have outsized growth relative to the market and.
That continued again in a significant way in 2023.
So that's proven to be very good for us.
In terms of like where does the final Oh say school called Latin for are for 2020 full in terms of the massive growth of engines versus fasteners, it's difficult to say at the moment I expect very positive contributions from both.
Yeah, we have to.
It recognizes that we still have to see widebody demand come back and really be built.
Penn State actually to grow high I pushed that wide body demand make should actually show improvements because of the relative gross compared to narrow body, especially skin that Boeing is not cups.
That should be that should be good same.
Same time.
We note for for example, if you take the leap range of engines is that the.
I'll say grace of that's a segment that's been reduced a little bit boasting the actual for 2023.
The slightly lower bills.
The initial demands a drop from I'll say a year ago. We saw a 24 was going to be looking at 'twenty 200 engines that he went to about 2000 and now it's in the range of I think something like 18, 75 to 1950, something like that so we got to see how all that settles out and and indeed it is.
So what goes to rebuild those who sluggish demand for those engines.
I mean, the most important thing is.
Both engines and fasteners are good so I don't want to handicap. It at this point, but it will be I expect that we'll be having a good year for books.
Okay. Thank you thank.
Thank you.
The next question comes from Sheila <unk> with Jefferies. Please go ahead.
Good morning, guys and thank you for the time.
And I wanted to ask about margins, John maybe you could talk about <unk> 2021 margins just looking at Q1 and the full year, you're kind of pointing to a 23% and I guess I'm a little surprised that there's no really an improvement in your Q4 exit rate and you're stuffed up 30% on the Incrementals. So maybe if you could just to shape that out for us.
And how you think about that with Arab items, getting better and maybe yes, trapping and also you mentioned something in the.
In regards to the N Gen pricing and how you're locked into long term contracts and as long as the F. 35, obviously, that's a long term contract. So how do you think about what percentage of your margins are locked in because of that.
P a.
I mean L L shaped Sydney.
The most of our business.
For the company.
Just momentarily.
How much is kind of escapes me, but it's a I'm going to say somewhere up at that so I'm going to say.
75% to 85% I believe but can.
We find that should it need to as I say I'm talking here.
Having said that of course, there are certain agreements, which have come up.
Peter Arment: For renewal for 2020 full pricing.
And indeed, we are probably now.
90% agreed to with the price structure for 2024.
So our our expectation for the price commentary all but what are you, giving you is that you'll see that Q4 was healthy with me she was 10-K.
A very solid year, and we expect 2024 to be similar and within that you'll see some of our engine products should indeed be repriced the chewing gum during 2024 and have already been agreed. So that's that's all to the good.
In terms of margins are I mean, you'd have to get like quarter on quarter straight line you tend to plateau for a little wall and then you move again.
And so it really has been that.
Peter Arment: We stepped up to a 23% level in the second half.
Peter Arment: Of 20.
Peter Arment: 23, and so what should we expect and I think just saying well, let's play it again for Q1 and see how we do it isn't about assumption I've already told you that we have assumed a 28% incremental but it's just what we can push it.
31% in Q4.
This also provides some allowance for the Choppiness that comes with all of them. So.
Good.
For example, Boeing not play called a part to play a scheduled out and that is you have to go into inventory. That's what we will be taking a profit on them and so we've assumed that a let's say a 3% below our absolute number of conversion and therefore to me just playing it out it seems like a reasonable assumption are for for linear.
So how it flows through our balance of year, it's difficult to say at this point in time in terms of up to date market commentary.
We actually see wheels demand to be probably.
Probably a little bit stronger than we had imagined a in the short term and that's within the numbers we've already given you.
Same time.
What does the back end of the year Behold I don't really know at this point orders have been and it takes with truck manufacturers have been a little bit stronger and therefore, it bodes well but of course, there was a comp level, depending upon how the general economy goes west to wait and see for me. The most important thing it's not like what happens.
This quarter or next but indeed that market its commercial transportation, we expect to resume growth in 'twenty five 'twenty six and then that continued with the I think strong continued demand from from commercial aerospace.
And then continuing to defense and for the I.
Our gas turbine business.
Peter Arment: Promise is good gross you know beyond 24, once we go into 'twenty five 'twenty six.
Great. Thank you.
Sheila this weekend that just to build on your question around long term agreements to junk John's right somewhere in that 75%.
The revenue is tied to long term agreements that could be plus or minus.
Say, 5%, depending on where we are at renewal process as you can imagine on the aerospace side much heavier on long term agreements. So on the engines side of the house you could be up to 90% of that revenue.
It could be under long term agreements.
Thank you.
The next question comes from Noah <unk> with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
No.
John just one clarification on the original equipment side of aerospace I Couldnt quite the sorry for where you're saying you are now on the Max rate, if it's possible to quantify that and then on the aftermarket side can you base.
Baseline us on what percentage of aerospace aftermarket at this point.
And you know just how much growth can we expect there in the medium term given.
The work Youre doing are related to time on wing on the Amgen and elsewhere that's incremental.
Yeah.
So our assumption in terms of our guide and of course, our guide is collecting independent of a of.
Of what Boeing.
Or indeed, Airbus may build on what they may schedule, it's a it's a financial assumption and one that I feel appropriate for them.
And I'm for the large part I feel as though we've tended to call the market.
Fairly recently.
In the last few years.
So our assumption is very clear it was 34.
Bridge.
For Boeing 737 for the year.
Now what they ought to be built.
I don't know.
They actually schedule out I'm going to say at the moment, they say, they're going to continue with the Reits are th assumption as best as we can detect from what we see from a demand schedules. So that's that's that's that's that's the specific numbers.
A spell is.
Our exit rate for spares in the in the commercial.
The Asian market.
Stepped up again and so compared to.
Our 2019, which the reference point, we've used previously and if you remember.
2019, our revenue from the Spanish market for on the commercial side, it's about 400 million and.
Peter Arment: And it was about 400 million on defense in gas turbine side.
On the gas turbine and defense side that continues to be steady and an increasing and now that increased to a level. We believe we will see something like $600 million of demand.
Peter Arment: In the end.
Peter Arment: That sector.
T sector with both growing but indeed, the spares for the F 35 growing in particular.
And in 2025, so as an example.
We expect the spares business full F 35 should be as big as the OE business has been in recent years. So that's been good you see demand increase in 'twenty three.
We are expecting at 24, and then 25, we should expect it to be say, but continue to grow as that fleet.
Just to expand on the fleet I think it was about 975 aircraft.
And while we originally thought it was gonna expand at like 150, Yeah as you know.
No. Currently Lockheed is now building costs are not building no delivering that right and so to some degree you have to be a little bit cautious, but you can expect a 50% increase compared to 2019 levels in the case of the commercial segment that did drop at.
So something just sub 200 million.
No that's fully grown back to to 400 million, but with a run rate are you seeing in the in the third and fourth quarters and then strengthening each quarter. You said that is now at a run rate above our $400 million.
And and then obviously to that you also have to pay your kid a the potential for additional schedules.
As these reported time on wing issues.
You know get so I'll say address and serviced and we do expect demand to be picking up in the second half of 'twenty 'twenty four and then for the strong demands in a very strong demand going in 'twenty five 'twenty six so that.
So he is very good and so today you can assume that our spares business for 'twenty three is getting about let's say the billion dollar Mark and we expect it to be.
Therefore, an increased percentage of our revenues and you can expect the percentage therefore going into the aftermarket to continue to increase as we go into 'twenty five 'twenty six after after a healthier in 'twenty four.
So overall a good picture.
And indeed as I said in my commentary that the thing which is it's not demand just to solve the immediacy of a time on wing issue.
I mean, there is a structural shift in in Spanish demand, which I don't think it's appreciated yet totally.
The.
The newer engines themselves are essentially have incur.
Increased service intervals, because as you increase the temperature pressure and engine the way having parts I'm, saying the high pressure turbine parts of the engine. So there is initial blade ones blade to Layne long et cetera, those become a theres a wearable wearing potbelly like great pipe on a call.
And so you can expect to see a structural shift has increased.
Fitment of those engines.
Peter Arment: Fleet.
Replaces the predecessor, CFM 56 engines, so you're seeing temporary strong demand for CFM 56 used to running the fleet existing fleets harder on our fundamental structural increase in replacement costs, which is going to be there and I think you're going to see additional say service shops built around the world to services.
These new engines, but that's you know that's why unfold over the next say few.
A few years.
Yeah.
Okay. Okay. It's really interesting I appreciate all the detail just to make sure I have the Max assumption correct.
Are you delivering to about 34, right now and you're assuming you stay there through the year or are you in the low thirties right now and you said you actually click into that treated.
38, without any rate breaks above and beyond that.
Sorry, if I gave you, let's say the fourth quarter, we believe we do we delivered.
38, while Boeing builds.
Right. So let's see so H Q4 lets assume that each aircraft sets per month went into inventory. So that's 24 sets of parts, which are sitting in building inventory for the structural parts that type of estimation.
I don't think it's just quite the same on the engine side because what wasn't built at engines. That's let's say a reduced engine build but you've already had commentary from the engine manufacturers about that then the balance of the the majority of the parts clearly on the turbine side, but not necessarily a structural side essentially went to just service.
Ups delivery to the MRO shops to account for what I'm, what you just talked about.
Okay.
Okay.
Speaker Change: I'm, sorry, if you think about it.
Assuming that Boeing taking Q1 at 38, depending on the final thing is.
And yeah. There is a did you say build if my assumption is 34, maybe they'll below 38.
That's why I have allowed for some choppiness as I already commented on and allowing for some inventory that we may end up carrying does that get ironed out and with it how many people who recruit to what I have already commented on that.
Peter Arment: And so it's allowed us to fill that in its allowance for some of that choppiness within the margin rate incrementals that I give them.
Peter Arment: Moving out 28 day study work in Q4.
Okay Super helpful. Thanks, So much thank you.
Our next question comes from Robert Spingarn with Melius Research. Please go ahead.
Hi, Scott My guess on for Rob Spingarn, John I wanted to ask you. The last time you had mentioned that it was I believe you had one and a half times the relative market share of your closest competitor in the airfoils market.
So just with the upgrade to the G. T F Leap and then also thinking about the new engine agreement with an engine OEM customer that you reference where does your relative market share stand now in the airfoils market.
Okay.
We have grown about 1% share a year.
In the post market over the last let's say.
Four or five years, so it's been a consistent March and we believe there are.
Just around that 50% Mark currently.
And we see that.
Continuing a 222 to grow.
Commensurate with some of the I'll say extraordinary levels of technology that we bring in that segment.
And also a commentary that we would not be considering Ah, let's say investing further in the in the scale itself referred to.
Without knowledge of the shipping there and indeed, I did say very clearly and unequivocally that we've also contracted an additional share.
Within that so we can change should drive not improve it.
So you did hear hopefully is that's not changing our free cash flow guide metric a conversion of net income.
Okay, and then as a follow up I wanted to ask did you see any pickup in spot sales in 2023, and do you have any assumption for spot sales baked into the 'twenty 'twenty four guide.
Yeah, we did see the spot market pick up further.
Further in 'twenty three.
And what you can never be sure. So we've just assumed it's played again.
And in 2024.
And we did put in some security stock of material such that we could be smaller.
The spot market.
And our balance sheet could take it but we've not assumed that it's like a further significant step up because he's always had not yet unknown area of indeed.
Hum.
<unk> previously scheduled additional demands are there and sometimes you know the opportunity for an increased shift so suits somebody else not be able to deliver.
So it's.
Thanks for taking the questions.
Thank you.
Yeah.
The next question comes from Seth <unk> with J P. Morgan. Please go ahead.
Okay, Thanks, very much and good morning.
I saw I wonder.
I, if I could ask a maybe a two part question just about all this 73, seven and just understanding that dynamic.
Look I guess extensively about Boeing and the production rate. There can you talk about at the on the.
The engine side.
Kind of you know.
Where that level of production is.
Expect it to be in in 2024.
And then on the on the airframe side, how much I assume most of the 737 contents on the airframe side of them is in fasteners and I guess, so how much of that goes directly to Boeing versus how much would be going to other suppliers like like maybe spirit, especially and so.
Yeah.
That would imply that your expectation in terms of the demand pull for how that would be more not even necessarily a demand pull from Boeing directly but the demand pull from you know the.
The let's say tier one in the Boeing supply chain.
Yeah.
So.
We do supply.
I'm going to say in terms of commercial Aero.
Boeing's requirements, we supply the majority directly to Boeing but we also do supply a spirit as an example.
That's also providing sub assemblies to a.
To Boeing and so again, it's never an option.
Yeah picture, but are we just assume like a we've taken our assumption of a number of aircrafts that are.
It could be that Boeing build up one level and maybe another supplier might build a different level and he's also compared to what they want to hold and also.
Deed, what Boeing have by way of the minimum and maximum inventory holdings as well. So we operate on a min Max system, just roughly correlated to bill's placed hubs times when it breaks breaks that correlation.
So.
It's never quite straightforward stuff.
I want to build new is the I'll say unnecessary detail, but.
But the best assumption is just the beginning.
We saw some 34 and all of the other suppliers that right 34.
And knowing that at some point.
Is that if if boeing have been scheduling into high rate and build the inventory has to come out.
And so there'll be health, because there's going to be and it may be the rate assumption will go up maybe to be 40 to make it be 47 in 2025 and therefore.
You know because it's really important to all the parts of that so you avoid traveled work which has been such a lot of commentary recently, so having supply security and all the parts are available is really important and therefore, it could well be that all of that will be held which which we don't know that.
And at the same time, there's also the possibility is that given the cash strain that are either Boeing or other suppliers may be on the is that they will adjust our inventory and so we've just taken that cautious view.
Pad that's.
Against a sample that against the conversion of strike, 90% of net income, which are which is a longtime guide you can see from what we've given you. This morning, it's like 85% plus or minus and that provides the allowance for just in case, we have not only the growth rate that we expect but also.
If we are if we get cool, it's holding that having to hold the bag in a in terms of a little bit lower take their natural scheduled.
Some of those Max inventory. So we're just we don't know that it's just.
It's just an assumption I mean, clearly what we hope for is that they build.
Really and great quality levels of like 38, that's what we want and that's what we hope for.
We look for great success from our customers, we'd love to see that and should they build on schedule and then increase schedules for an increasing rate in 2025 and that will be really good for us and you can expect us to even further increasing our sales should those scenarios play out but at the moment we're not.
Prepare to go to that because we don't know.
Alright, thanks very much.
Okay.
The next question comes from David Strauss with Barclays. Please go ahead.
Thanks, Good morning.
Peter Arment: David.
I'd say, John I guess following up on that so if.
But take part two 5% on on the free cash flow conversion and it looks like.
Yeah, that's about 50 million that you have assumed.
In working capital or inventory build related to conservatism around what Boeing takes but even with that it looks like you know or I guess on top of that it looks like you've got maybe 100 150 million of working capital usage in that in that free cash flow guidance is that correct and if so what what is that and.
The other part of the question on capital deployment I know you don't have anything baked in but you know how are you thinking about that given I know you have $200 million, you've gotta love to retire this year, but that you know given the cash guide are you know gives you a fair amount of room to do something on the share repurchase side. Thanks.
Yeah. So.
Most likely it's always one of these multi part questions would show, which got you. So first of all of course, given that revenues are increasing let's call it half a billion.
And the guide there is a natural 15% to 20% working capital drag on that so it's best to use the 20% because the math becomes so much easier there's 100 million of working capital for you.
To which we added the the sort of number that you talked about in terms of the pension which might happen.
So that's why we are oh, not assumption and in terms of how we deploy.
We haven't actually fixed anything at this point, but.
It is hardly likely that we're going to enter a refinancing for a couple of hundred million. So it's quite possible that we may decide to retire that take those interest rate savings into.
And to say end of the fourth quarter and into 2025, and therefore, you can assume if that's all we're going to do probably I mean, we could do a bit of a refi around the 20 fives, but that's on a TBD basis, but that's not going to be a big drag either which way apart from let's call it any fee structure and breakage cost but.
Peter Arment: Then the majority of that and you can assume it's gonna be share buybacks are positioned.
Positional wise you can assume that 'twenty 'twenty four will be a big year for share buybacks compared to 2023, where you can see the majority of the action was for the on the debt side to put up on our seating to the great shape that is currently in and so.
Peter Arment: Roughly speaking you can exploit assume further leverage improvements despite the share buyback.
Peter Arment: Thoughts that we have at the moment, which are gonna be elevated compared to 2023.
Great you got both parts appreciate it. Thank you thanks David.
This concludes our question and answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Okay.
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Peter Arment: Yeah.
Peter Arment: [music].
Yeah.
Okay.
Peter Arment: [music].