Q2 2024 Howmet Aerospace Inc Earnings Call
Good day and welcome to the Howmet Aerospace second quarter of 2024 earnings call.
Speaker Change: Please note that today's event is being recorded and all participants will be in a listen only mode.
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Also please be aware that today's call is being recorded I would like to now turn the call over to Paul Luther Vice President of Investor Relations. Please go ahead.
Thank you Joe Good morning, and welcome to the him at Aerospace second quarter 2024 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. 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 Companys 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 adjusted EBITDA, excluding special items adjusted operating income.
Special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation with that I'd like to turn the call over to John.
Okay.
Thank you P J.
Welcome everyone to the <unk> second quarter earnings call.
Q2 was a strong quarter for the company.
John: Metrics exceeding both guidance and prior year results.
Year over year revenue growth was 14% building on the 14% growth in the first quarter.
And then this number commercial aerospace growth well, it's an outstanding 27% continuing a strong trend.
The revenue markets will be covered later in the call.
EBITDA was $493 million with a margin rate of 25, 7%, while operating income was 414 million, although with a margin of 22% operating income was up 38% year over year and increased 370 basis points.
With engines and fasteners performing at the high level supported by an increasingly strong set of results in our structures business.
John: We also as essentially flat despite the market decline.
Earnings per share was <unk> 67 cents, an increase of 52% year on year.
Free cash flow was also strong at $342 million, resulting in a quasi and cash balance of $752 million after share buybacks of 60 million.
Furthermore, a $23 million bump repurchases, obviously 2025.
So dividends of 21 million.
Strong cash problem Ah trial, not only retirement.
John: Paul.
205 million of the 2020 full bonds Oh July for one day after the quarter Ed.
These actions will reduce annual interest cost by some $12 million and continues to March to reduce interest rate drag, which is now well below 200 met again with the increase in free cash flow yield.
I will provide commentary on the future dividend that shouldn't Indiana section.
John: You'll also note later in the in the the increase in capital expenditures in 2024 30 million dollar level.
Takes the level towards $320 million for the year.
John: And these are these expenditures on mainly the deposits on future machine tools, which are required to support even further new capacity growth for our engines business and she is necessary as we have now secured additional market share second engine manufacturer.
These revenues, but also commenced during 2026, albeit at a quarter or so later than the previous discussions on this topic.
Ken: I'll now pass the cold coffee, Ken to provide additional details by end market I'm bought business like that.
Yeah.
Thank you John Good morning, everyone, let's move to slide five.
So the markets continued to be healthy in the second quarter on a year over year basis performance was as follows total revenue was up 14% driven by strong growth in commercial aerospace, which was up 27%.
Ken: For the first half.
Ken: Commercial aerospace was up a healthy 25%.
Growth continues to be robust this year on top of the 28% growth rate in 2022, and the 24% growth rate in 2023.
Moving to our other markets first defense Aerospace was also strong up 11% driven by fighter programs and engines spares demand.
Next the commercial transportation.
As expected the market has weakened with revenue down 4%, although helmet continues to gain share from steel wheels, with how much lighter and more fuel efficient aluminum wheel.
Finally, the industrial and other markets were up 4% driven by oil and gas up 14%.
T up 6% in general industrial down 6%.
In summary continued strong performance in commercial aerospace defense and industrial partially offset by commercial transportation.
Now, let's move to slide six.
Ken: So first the P&L.
For the second consecutive quarter Q2 revenue EBITDA EBIT margin and earnings per share were all records and exceeded the high end of guidance.
On a year over year basis revenue was up 14% and EBITDA outpaced the revenue growth by being up 31% while absorbing. The addition of approximately 190 net new employees in the quarter.
Incremental flow through of revenue to EBITDA was excellent at 50%.
Moreover, the team delivered records for both EBITDA margin of 25, 7% and earnings per share of <unk>, 67, which was up a healthy 52% year over year.
Now, let's cover the balance sheet and cash flow.
The balance sheet and liquidity have never been stronger.
Cash at the end of the quarter was 752 million and free cash flow was a record for Q2 at $342 million.
The healthy cash balance at quarter end was used to repay the remaining balance on the 2024 bonds of $205 million.
Payment was at par and we've made three months early on July 1st.
Moreover, in Q2, we opportunistically repurchased $23 million of the 2025 bonds.
The combination of these actions will reduce annual interest expense by $12 million annually further improving free cash flow yield.
Finally, net debt to EBITDA improved to a record low of one seven times.
All long term debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future.
Liquidity is strong with a healthy cash balance.
And the $1 billion Undrawn revolver complemented by the flexibility of a $1 billion commercial paper program.
Yeah.
Ken: Finally capital deployment.
We deployed approximately $104 million of cash in the quarter to shareholders of which $60 million was used to repurchase common stock.
This was the 13th consecutive quarter of common stock repurchases.
The average diluted share count improved to a record low Q2 exit rate.
410 million shares.
Finally, we continue to be confident in free cash flow in.
In the first quarter, we deployed 21 million for the quarterly common stock dividend of <unk> <unk> per share.
John will discuss the increase in the Q3 dividend as well as our 2025 dividend policy.
Now, let's move to slide seven to cover the segment results for the second quarter.
John: Engine products delivered another record performance.
Revenue increased 14% in the quarter to $933 million.
Commercial aerospace was up 18% and defense aerospace was up 10%.
Both markets realized higher OE build rates and spares.
Ken: Yeah.
Oil and gas was up 14% in IGT was up 6%.
Ken: Demand continues to be strong across all of our engine markets driven by our differentiated products.
EBITDA increased 31% year over year to a record $292 million.
EBIT margin increased 410 basis points year over year to a record 31, 3%.
While absorbing approximately 315 net new employees in the quarter to support future growth.
The engines team delivered a record quarter for revenue EBITDA and EBITDA margin.
Now, let's go to slide eight.
Yeah.
Fastening systems also had another strong quarter revenue increased 20% year over year to 394 million <unk>.
Commercial aerospace was up 36%, including the impact of the wide body recovery.
Ken: Commercial transportation was up 10% general industrial was up 3% and defense aerospace, which represents about 9% to fasteners revenue was down 20%.
Ken: Year over year, EBITDA outpaced revenue growth with an increase of 58% to just over $100 million.
EBIT margin increased 610 basis points year over year to a healthy 25, 6%.
The team has progressively improved results for four consecutive quarters through commercial and operational improvements complemented by the wide body recovery.
Now, let's move to slide nine.
Ken: Although engineered structures had a favorable comp year over year performance continued to improve sequentially.
Revenue increased 38% year over year to $275 million.
Ken: <unk> aerospace was up 42% driven by build rates in the wide body recover.
Defense Aerospace was up 45% year over year, driven primarily by the F 35 program.
EBITDA doubled year over year, while EBITDA margin improved to 14, 5%.
Ken: Sequentially revenue EBITDA and EBIT margin increased for the fourth consecutive quarter.
Incrementals continue to improve sequentially at 23%.
We continue to optimize the structures manufacturing footprint and we expect to exit two small plants in the U K this year.
The team continues to make progress and we expect continued improvement throughout 2024.
Finally, let's move to slide 10.
Forged wheels revenue was down 7% year over year as expected in a challenging market.
EBITDA also decreased by 7% driven by volume and regional mix EBITDA margin continues to be healthy at 27%, which is essentially flat year over year.
With that let me turn it back over to John for the outlook.
Yeah.
Yeah.
Thanks, Ken and let's now move to slide 11, and I'll talk to the end markets and provide some overview.
Lastly, regarding commercial aerospace Ah trial comments regarding strong demand for air travel throughout the world continues to apply.
Traffic growth in Asia Pacific I spent time in particular for international travel.
In fact international travel globally has been increasing at that 20% range plus or minus.
Quite volumes have also been robust with increases of 10% plus recorded.
Domestic travel continues to go gradually in all markets.
Ken: There's travel demand combined with an aging aircraft fleet is leading to significant doritos and extremely high backlogs Tesla aircraft orders, leading to a position where aircraft orders placed now cannot be fulfilled until the end of the decade and beyond in certain cases.
Speaker Change: However, the issue being faced by hand, math is not that demand, but rather about sales are currently constrained to some degree by the ability of aircraft manufacturers to build and deliver aircraft on a consistent basis.
He's slacks off the subject of many press articles and that's disappointing with teaching those facts here.
Speaker Change: While Airbus is steadily increasing mccloskey building below desired levels slowing its volume rough logic inside his body.
I'll pass holders.
Asking somebody showed some training they continued to be at levels above the actual step 37787 build rates.
And in order to have also been trim, albeit by a large percentage.
Given the situation question surrounding Boeing and its affiliates inventory positions on liquidation of inventory at your mines.
We've tried to de risk this to a large extent to that guidance and notably data assume 737 build rate to 22 aircraft per month in 2024.
Speaker Change: She's the previous fields F 'twenty for months.
Speaker Change: Naturally we hope for a higher build on this and all sorts of future rate increases.
Speaker Change: In the case of defense the outlook continues to be a double digit increase for the year.
Strength is seen in engines, but also the F 35 onshore space on new bills for legacy fighters.
Speaker Change: New orders are also being received both structural parts how it says.
IGT Mountain this fall.
Speaker Change: Significant single digit growths.
Worth, noting that it was a potential for increasing demand in the future for new IGT turbines as a result of increased requirements emanating from electricity demand for data centers.
H.
These potential demand increase is being studied and it's worthy of further commentary in the future.
Speaker Change: How much is well placed in the IGT market being the largest supplier to bind blades in the world to our customers of Siemens GE Mitsubishi.
Mitsubishi heavy sour.
Speaker Change: Well done.
Indeed further production capacity will be added by high into the IGT market.
25 to support this increased demand.
Oil and gas continues to be strong with double digit increases.
So commercial aerospace defense and IGT to continue to grow with that group.
Speaker Change: The pace of approximately 17% year to date with the rate increases expected in the balance of the year.
Commercial truck builds are beginning to abate and the long predicted slowdown, particularly in Europe has started and will lay on the second half of it maybe a 10% reduction in addition to the more normal European summer vacation seasonality.
There's normal seasonality is also noted in our European Aerospace operations, obviously baked into our third quarter guidance.
Before I talk to specific financial numbers I'd like to cover three topics.
Speaker Change: The capital expenditure required for 'twenty to 'twenty four has been increased for the 13 billion.
The midpoint of 320 billion.
Speaker Change: Is this reflective of additional customer contracts achieved share gains of our engines business.
The exposure will be provided on this topic in our next call.
Speaker Change: Despite the additional capital expenditure free cash flow guide has been increased by $17 million I think taken a counter this expenditure and also the increase for working capital and the revenue guide.
A conversion of net income is maintained at the prior guide of approximately 85%.
Ultimately this expenditure needs for the future revenue growth.
Speaker Change: It's a great outcome with revenue starting to a breach in late 2025.
Our guide for capital expenditures for 2020 for 2025 is approximately 4% of revenue.
The next topic is the dividend.
To increase the common stock dividend, starting with the August payments to eight cents per share.
This is an increase of 60%.
The increase from our expectations discussed during our call in May.
Moreover for 2025 common stock dividends are expected to be in the 15% of net income.
Special items, plus or minus 5%.
Finally share buyback authorization has also been addressed by the board and increase by 2 billion to approximately $2 5 billion.
Now moving to specific numbers in Q3, we expect revenues of 1.55 billion plus or minus 10 billion EBITDA of 465 million plus or minus five and earnings per share up 64 cents plus or minus a penny.
It should also be noted that we have increased revenue guidance for the year. Both in cooperating the Q2 beat and the additional uplift the previous second half revenues.
For the year, we now expect revenues to be at seven point full $4 billion, plus a modest torchy, which is an increase of $140 million from the prior guide.
Speaker Change: EBITDAR is guided to 1.865 billion plus or minus 10 million, which is an increase of 115 million from the prior guide.
Earnings per share increased to $2.55 plus.
Plus or minus two cents, an increase of 39% year over year.
On free cash flow, you've guided to 817 million plus or minus 30 million an increase of 17 money until the product guide and that's after increasing our capex for the club and sponsor to money yet.
Betsy about their policy.
You can see from the numbers show that.
The new problems that free cash flow have lifted again for 2024.
Total annual revenue increased to 12% growth rate.
Yeah.
Now I'll move to provide a summary.
Most of it is placed without a second quarter results.
Diet for D. S been raised again on all fronts.
We've taken a catch up of commercial aircraft build rates.
What's your position just centered on Boeing.
And thank you very much and now I'll move to the questions.
Speaker Change: Yeah.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad and if youre using a speakerphone. Please.
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To withdraw your question. Please press Star then two.
And again, we ask that you please limit yourself to one question only on todays call.
At this time, we will take our first question, which will come from Doug Harned with Bernstein. Please go ahead.
Yeah.
Good morning, Thank you.
Good job.
So I wanted to see if you could help.
A little bit of an understanding what's been happening in the air.
Airbus on the <unk> on the leap one a.
They they talked about a slowing of engine deliveries, it's our understanding that relates to airfoils and the hot section G and its the supplier issue Hum, It's obviously a.
Speaker Change: No.
The lead supplier for airfoils in the Hot section.
Has this have you had any issues on delivery the G E and if not does this shortfall by others provide any kind of an opportunity.
That's for sure.
Well, Doug I, especially at that to be the hot topic of the day given the comments on the I'll say opening.
Evening of the Farnborough Air show last week, and then followed up by a knowledgeable and Blue book This weekend.
I guess my first reaction.
Two it's also been bolstered the company. So that's really good news.
Because he really oh.
Pumping in a 27% increase in commercial aerospace revenue.
Yes.
He said that exactly is true then.
Need to make a we need to make more on that.
Speaker Change: Therefore, it's like this is a.
Speaker Change: Really good condition for us.
So just getting.
A little bit more specific than that.
Hum.
Oh, Michael but.
Michael: Over the last three years, we've put in a 28% increase in commercial aerospace revenues, followed by a 24% on a year to date this year, 25% of them issue its track those increases compared to.
Speaker Change: Any former Oh, Kraft build schedules and you can see that we are increasing significantly above any aircraft production rate.
Speaker Change: And therefore.
It's unlikely that we are providing such constraints.
And then just opinion, it's a little bit further.
I mean, we have significantly.
Increased production of a turbine blades in the hot section.
Hum.
And if you look at it six months ago.
The loss.
A few months, it's probably put a 40% increase through in terms of protection.
Hum.
And therefore, what.
Speaker Change: That's really good in terms of a rate increase for anybody in the aerospace industry.
Oh, probably effectively operating out so I could possibly or possibly even above it.
Speaker Change: On the accounts of the deals that we have.
So the way I look at it as a way of producing well above engine build rates.
And and then.
We don't know festival the outcome of what the subsequent processing is for Oh gosh things.
Speaker Change: No do we get to are there any and any view about where do they go in to them. So they rebuild the she is MRO, so you'd be sort of sales.
Speaker Change: And so.
I guess the way I look at it is.
Hi, Matt.
The opportunity appears to be that too.
Speaker Change: Sound, even more if we're able to make a few more.
At the same time, the adverse consequences of Pompe mouse, because its engine build eastside and you heard in our guidance that we've taken the engine build assumptions down to be in line with what we've heard from the engine manufacturers in recent times and you've seen that those would be significant rate reductions.
Whereas previously we'd be prepared to meet those.
And so when you when you get that even though we have the demand opportunity to supply into the MRO market through a customer.
We also suffer because if a lack of an engine build then obviously we are not able to supply any structural cost savings that we are we do manufacture.
Nor are we able to supply parts are in the low pressure part about our buying and so given the recent I'll say bill of a strike goodness, we actually have some some excess label shorts are working in some of our French plants because of the a L. P. T demos. So we're not at all.
And clearly we would like to make even more.
Because obviously you have got into the survey savvy smelting should be Oh, he built so.
So it's a long way of saying to you.
We are increasing.
They had a massive increase in the AR in the last few months and doing our best to satisfy everybody.
And and that's about all I can take it.
Hum.
Don't know what else to say to you to provide any further color.
Okay. That's very helpful. Thank you.
And our next question will come from Christine <unk> with Morgan Stanley. Please go ahead.
Hey, Thank you for the question John very helpful color regarding to leap engine blades as you spelled out I mean, I guess you know if we take a step back with the new engine technology, both for the G. T S and for the leap <unk>, it's clear that the hot section is getting a lot more you know it's getting used more it's hotter.
Speaker Change: Higher performance and you know from my visit at Whitehall, you've clearly invested in the space can you quantify how much more market share you could potentially get it seems like you know you're not the bottleneck for production and you've got content and then also as a follow up in terms of the new Bill.
You said, you're not seeing the reduction there does that mean that one for one you're seeing a spares pick up two or the oes, maintaining the rate at a higher level.
It's.
Again at the moment nothing is easy to explain them and so while I don't want to present to you complex pictures.
You know he calls it becomes necessary to do so so.
Hum.
Clearly the investment that I've talked about those in the last two calls that today, a third time, but today introducing the fact that we are further increasing our corporate expenditure to meet demand for our second engine manufacturer.
And that.
As I previously mentioned and then merchandise it yourself some additional contracts and share that we are able to fulfill in the future.
Fulfilled with the introduction of that new capacity.
When we bring that new capacity online then we're going to take the next plant and so what we said we're building out footprint in two particular pumps a 11th.
Speaker Change: And that so when we finished that footprints the level of I'll say sophistication automation and quality and use of for example, I already know that's that's that's going to be taken to another level because to achieve the levels of production that.
We see the only way to do it with the consistency of Nielsen do me squeeze auto pace, you can conquer easily do it using a lot of labor.
Speaker Change: And so yes, we are taking the technology too.
Of the 11 in terms of manufacturing and we're also able to help all of us.
The most.
Speaker Change: What they would like to see.
Yeah.
Good temperature performance Ah and increased pressures.
Speaker Change: So.
When the original development. Some uplift school we are the two most recent engines. So we know they move from being more focused on.
Speaker Change: That's purely efficiency to more robustness and that's something that we're able to let you work with them to try to to achieve so all of that is in play and and you read articles that some of those upgrades.
Speaker Change: The available subject to certification requirements later in 2025, and then aggressively yeah, I'll say it was launched with Egypt.
Got some manufacturers over the next couple of years and it doesn't matter, whether it's a elite, but based engine or G. T. F N Gen and we working on the upgrades for all of those.
And again, we'll be providing those new products into the service market as well. So that's an example included.
You know, maybe it's over and above the increases in volumes and I've talked about.
Bill's already some tens of thousands of parts ready for the new improvements all engine manufacturers.
There's a currently sitting in inventory awaiting certification sign off and then there'll be assembled into engines.
Speaker Change: Yeah.
Great. Thanks, John.
Okay.
And our next question will come from Seth <unk> with J P. Morgan. Please go ahead.
Hey, thanks, very much and good morning.
Seth: I Wonder John if you could talk a little bit about seven eight and seven are we've seen some some mixed messages here are it seems like some of the Japanese structure suppliers, maybe preparing to incur.
Increase their rates.
Boeing deliveries are low are one of the European suppliers shutting down for a little while when you think about the trajectory in the fasteners and structures business. How are you thinking about seven to eight seven.
On the structure side, so far we've been seeing.
Deliveries from how about in line with the previous guidance.
At the same time, we do notes they want us a European manufacturer she's not saying they are going to cut back a little Saba.
We've taken a couch about an hour.
And the guide that we provided to you in the same way as I said, we covered out the reduction in L. P. Pizza by blade that also has some structural castings.
And in the case of fast enough.
Again, we note that.
No not building.
787 to the stated rates, but they wanted to hop in the skyline.
So in the same way as we've done with the 737 and they're using our fastest we show on our mid boxes abroad.
I'll say directly schedule path is that we've taken those those inventory.
Inventory levels that are there many of them such that we are.
In accordance with our contract with Boeing but not seeking to put our inventory is above that level such that we get cool with it but you take out it later in the year or next year sure Bob.
Great. Thank you very much.
Thank you.
Speaker Change: And our next question will come from David Strauss with Barclays. Please go ahead.
Thank you and good morning.
David.
Hey, Hey, John So in the past John I think you've talked about.
We're targeting a 30% or so incremental margin, you know plus or minus 5% and it looks like.
This year, you're a young your your revised guidance imply something in the 40% 45% range. So just wanted to just wanted to get some updated comments about the how to think about incremental margins for our for the business. Thanks.
Yeah we've.
Speaker Change: Have increased the bottom to be yeah, I think it's.
Yes.
Fractionally over 40 in Q3.
That takes account of the seasonality plus the reduction in our wheels business that we envisage, but yeah at the moment.
Speaker Change: They're coming from Europe, but also affecting our class eight trucks in the U S as well.
So that's why we've put a ring convention into Q3.
Century in Q4 feels like it.
Should be a rather strong with them not to end up the year with the higher level.
Continuing the theme from our last.
Cool diabetes.
Speaker Change: If you look at the rate of increase in employee head count, which I think last quarter, we said to our net.
Speaker Change: You said about 400 GB yourself with a slightly reduced rate, while we've still been hiring it's now down to just fractionally below 200, and yet if you look at the increase in revenue.
And.
It's a significantly above that in terms of percentage so.
You can assume that productivity is being achieved.
In the case of our fastener business on top of that I think it was a 28% increase in revenues in Q1 about 20% in Q2.
I should take and see around incremental head count. So here, we are pumping a 20% plus revenues with with no incremental people, which obviously.
A lot towards the Oh C. Both of mine up the efficiency within the business.
And so at the half year on a net basis.
We're up probably 600 people in the company and all of that is it out of engine business and that's because they.
The demand level that we have plus also we do need to begin to prepare all of the increase could possibly because our head count is going to be required. Okay. So the recruitment and training that we've talked about it but past that he takes them out of a lot of effort to gain the skills that are requisite.
I want to be an employee now engines business. So we.
We're pleased with what we've got to buy weight efficiency.
We are seeing on the people side, we're seeing also a slight calming and the inflation and so in fact in Q2, we had a tiny deflation in a mental team plus which which was good for the aerospace business.
Not worth talking about in terms of probably wasn't even oh, sorry, we didn't even get 10 basis points. So it was good that we didn't have a headwind.
And then the only area we have a current headwind is the increasing price of aluminum, which is obviously affects our wheels business.
So we will see a small drag you know getting a dollar recover for a dollar of of course that always provides them Brett.
Margin drag up that margin right to the we do sell to put in that will.
Speaker Change: He's signaling.
Wheels revenues would be down in the margin will be down a little bit more than that.
So of course, because of seasonality and the demand, especially aluminum.
But if you put together the company, we see I'll say good stability.
Across the piece in terms of input metals and increase in labor productivity.
And good demand.
But are you still giving it's a I'll say a fairly good mix, which would be reflected in the guidance. We're guiding it about 25% EBITDA margins in the second half as well.
Speaker Change: Yeah.
Okay.
And our next question will come from Myles Walton with Wolfe Research. Please go ahead.
Thanks, Good morning, Hey, John 90 miles.
Stopped specifying our pricing, but I have to imagine given the sort of breakaway moment here in the quarter pricing must be accelerating can you give any comment on that front and also just to take it at a higher level you talked about the Airbus and Boeing not being able to achieve their production objectives, but it did seem.
G E had more of a material shortfall on their own and I'm curious do you see this as a blip and in their ability to get production up and maybe the risks are shifting to the engine as opposed to the to the airframe.
Okay.
Speaker Change:
Sandy.
Right change is a minor issue as a matter of factors all well publicized so.
Pace of that but as I said, they've taken the annual expectations had delivery standby 30 aircraft of which I assume the majority are not.
Our bodies.
Hum.
Speaker Change: They talk about some engine.
Our latest policy issues.
And.
Under discussions at Farnborough last week.
And the pace of Boeing again, well publicized.
And we took a little bit of encouragement from what the head of Boeing commercial Aerospace said, Budd wage increase stability within our manufacturing plants.
Speaker Change: Seattle them so.
Activation of them achieving rates Dorothy eight by the end of it which is great.
Clearly, we have we haven't assumed that they get that far but what we did.
Bold enough to go from our previous assumption of 22 production 'twenty production through 'twenty two rate.
We'll be probably still significantly below oh, well the majority of expecting that to be in.
And in the case of an engine manufacturer that has like Oh, that's a really discussed for what I saw in Red is the so.
The expectation is.
Leap engine output will increase significantly in the second half of the year, which is really good and so that will mop up some of our.
Speaker Change: Oh see inventory and structural castings.
Pressure turbine.
I mean, obviously you know there's still a very high rates of production in the whole question about it.
I think that covers not part of the question Oh they play.
I'm surprised.
No we haven't given any further guidance due to the price topic.
But what we got you, but they ended last year, which was thought instead.
'twenty 'twenty four will be.
On a similar level plus or minus <unk> 2023.
<unk> got lots of great stuff.
It's about $100 million of costly the whole of the company.
Then they said it would be a death or a little bit more no no change from that guidance at all.
We've given them.
Who are you can assume it's exactly as we'd previously indicated but.
But really not commenting so that's about it.
Topic.
Okay alright, thank you.
Thank you.
Okay.
And our next question will come from Sheila <unk> with Jefferies. Please go ahead.
Thank you congrats guys on a great quarter and securing the second Gen. One.
So John maybe you could help elaborate on the terms there and what kind of agree with that on that so if you could just talk about how.
How do we think about that second engine OEM I think you said the volume start up a quarter later than the first OEM in 2020 six so how do we think about that incremental volume that kind of got it yeah.
Our return profile, let's say additional capex and I'm guessing, it's better than the 31%.
And margins you have today and any thoughts on the first versus the second deal.
Yeah.
No absolutely.
So why wouldn't we wouldn't take it at the same time whenever you put new engine capacity.
Speaker Change: As you know engine manufacturing is very capital intensive.
And so we would be facing elevated depreciation charges because the average you'll get a oh, so you're right in that asset base compared to putting in your capital it is very different.
Speaker Change: In the early part of this call I talked about but the extraordinary levels of automation to which we are we having to go to Macy's who's cheapest consistency quality and.
Yield, but also vital to to being able to produce effectively.
So for the I'll say, new special requirements for these are they took on types of products.
So I didn't really want to get into specifically pinpointing any particular margin, but you can assume that it's satisfactory otherwise we know we're going to achieve.
Return on capital a submission, but so I think we will make our investors are very satisfied.
Same time indeed.
The margin rates will be a it will be adequate.
I'll say it will be a pumping them through with adding as little fixed cost as possible. While at the same time, we recognize it will be I think depreciation costs, but it's a long way of saying, it's okay Sheila.
Thank you so much can you comment on the volume.
Ah kidney volumes are up because we said we'd be taking additional share.
That's part of this I don't really want to comment on a specific market share is that we have on any particular customer.
I don't think that's an appropriate thing to be talking about it.
Publicly.
But the important thing is the share gain is it.
It is pretty healthy.
Speaker Change: It is a similarly in line with the previous increase.
So it shows that we've talked about for the early investment. So basically this one is the investments are about six months getting off them six months later than the previous your best friend.
Speaker Change: Clearly our job is to try to place all of those new machine tools get them as quickly as possible and place them and commission them as soon as possible because the demand is clearly therefore them a.
And you saw our customers would like to see them come on as soon as possible I think it's all going to be tied up with not just what they want when they want to see small cubes today, but also.
The certification of the changes going on in the engine will which they S. A a yes. It would have to sign off those for for Airbus and Boeing but these new engine upgrades Oh. So you have to be certified as well. So we await the outcome could be different for each of the manufacturers we feel.
Thank you.
Speaker Change: Thank you.
And our next question will come from Robert Spingarn with Melius Research. Please go ahead.
Speaker Change: Hi, This is Scott and I guess on for Rob Spingarn.
John I hate to put you on the spot and ask for a long term margin target here, but your operating margins were quite strong in the quarter Theyre in the low twenties now and precision Castparts, there's always noise in the numbers due to metal pricing in LIFO reserves, but its operating margins before it was acquired were in the high.
Speaker Change: Twenties do you think howmet has the potential to eventually get there long term.
Well first of all I wasn't quite sure whether it is some cast parts, where operating margins or EBITDA margins, but.
Just thinking about it because I don't really comment on margin at all.
Speaker Change: Hmm aerospace is a cyclical industry and anybody who has the absolute knowledge and prescient to know exactly what volumes will be next year and the year after and the year after that and what the rate of increase will be it's.
It's something that with the I don't have them. Therefore, I've never been comfortable talking about what do I think margin, but it would be in the future.
Well I think all we can do we used to say this is what we're doing these are the changes we're trying to make to improve our company.
I don't follow some.
Speaker Change: I'll say full skull whatever happened.
A decade ago, one company one of those were real or not real.
Margins at the time and what type of margin rate was covered so I choose not to do it the Scott So I don't I don't.
I think I am a hub and not doing out of the will comment on margin.
Yeah, it's a it's something which like how do you know so I recognize that some companies do say what that market is it going to be two or three years from now whether they're achieved enough seems to get lost but you won't want me doing it.
Okay got it I'll stick with one thanks John.
Okay. Thank you.
Okay.
And our next question will come from Noah <unk> with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
No.
John You had explained that the the Incrementals were strong in the first half because you didn't have to hire as fast while the revenue growth is still pretty good I guess that begs the question of when do you suspect you'll be back to hiring and then I guess, you know where to look for how the segments have evolved.
You know engine is up.
Like a 1000 basis points versus pre pandemic fastening still lower than pre pandemic. Obviously, that's we know why that has a a lag revenue recovery I guess does fastening have as much potential as engine as it continues to get its a revenue recovery.
No no in commercial Aero nothing is ever exactly the same.
Pre pandemic.
We were a time I think producing something like nine eight since it is amongst the 13 or 14 satellite seventh of the month.
And as you know we produce a completely different set of stuff as well.
Composite based on aircraft that are metallic based aircraft.
Speaker Change: To some degree you saw that when the 787 was holter and what he said.
One point, we were down to zero because of the clearing as they've been in the truth and we've been climbing back from that both in terms of a favorable mix, but also the effects of trying to drive productivity in that business and also it would be probably a little bit better commercially.
Speaker Change:
At this point I don't know what eventually right wide body will get closed and therefore, the future makes is gonna be different I note, the increasing age 50, and I suspect that they.
I used to be 50 would be the Ohio racing wasn't for some.
Supply constraints, particularly in the infrastructure area.
And that's slated to go to I think is at 12, a month by 'twenty, 'twenty, which would be great because that will be above previous rate.
On 787, the only ambitious number I've heard you right pad, which was slightly plus 'twenty five 'twenty six but there are things to be modified and added 26.
I think we've got to wait and see what happens in 2020 five first.
And getting out from what I think I would tell him productions maybe three.
Three months four months levels, what ive read them.
To get back to five and then seven next year and I think I'll start with maybe if you could take them. Apart. So good about probably also the same thing as we had previously I mean supply chain, there's often quoted but often there's also issues within the assembly processes for some of these aircraft.
So the old needs picking a policy in much greater detail than let's say the rates progressed string I'll say balance of 24 to 25 before we get to know what's the real rate going to be in 'twenty, six 'twenty seven but should it get back to a two.
Speaker Change: It's a 14 a month of 780 sevens.
What's the is.
Just to get to 12, a month you cited for the 850.
I guess it depends on what the volume of the metallic based narrow bodies will be but that would be a very positive effect for us, but I don't feel like.
Saying that moving back to any particular previous margin level I think the most important thing you should be just look at the track.
Margins in the fastener business during the recent quarters I think it's been a truly impressive in terms of sequential.
Speaker Change: The improvement enough as far as I'll go.
Yeah, Okay. Thank you thank.
Thank you.
Yes.
And our next question will come from Gautam Khanna with D. D. Cohen. Please go ahead.
Hey, John Kevin P T.
Gautam J. Khanna: Congrats on the results.
Hum.
Hey, just John maybe to put a finer point on it where if anywhere do you see excess inventory in the channel of your products.
Has there been any.
Deferral requests or anything incrementally that this weakening in some of the outlook beyond maybe 2024, obviously, you've raised 24, but anything that gives you pause in 'twenty five.
And then lastly, Relatedly I just wanted to ask that Ashville RPX facility has that had any negative impact on the longer term outlook.
Four.
After 135 or any other programs who serve us.
Yeah.
Okay. So maybe I'll do would be a.
Real question for Us, though I haven't heard any commentary coming up so T X and the last a year or so.
Let's see.
Gautam J. Khanna: I believe it's coming up to rate on machining work and that's probably necessary.
To get through the the disc.
Sure.
And really cool on the investment casting process Uh huh.
Gautam J. Khanna: Anything.
Gautam J. Khanna: That's material in that area.
Gautam J. Khanna: So I'm still.
My previous comments about.
Gautam J. Khanna: The facility you just stand on the record that is.
The moment you know.
Speaker Change: We're not seeing that reflection of any change of our requirements over the next few years and are at this point don't expect it to I mean, what happens, let's say after I don't know 2030.
And you know compared to the 650 million that was seeing that investment, which doesn't go far across coaching and machining and buildings outlined on investment castings I think you've got a few more billion several billions to go yet to for that to become.
Sufficiently are equipped at scale.
To to be cost effective.
And it's it's not clear to me that the.
And Whitney are emphasizing that investment compared to getting through the I'll say current G. T S issues.
Do you still have you're saying the cash cost of that the provision that was made last year.
6 billion, obviously shed between them and some partners, but that's a big nugget to absorb so I.
I don't know more about.
And just it's a big.
Speaker Change: Spending so much time Fingerstall question, what was the first part of it.
It was excess inventory in the channel inventory right now not really I mean, there's bits of pets. So as I said, we would.
It'll get surprised when we got cut back recently, the low pressure turbine part because that is a leap engines willing to assemble.
And so we've probably got more than we would like and that's what we're trying to manage that through the next quarter or so.
And according to what we can do by way of changing their employment.
I'll say hours at our facilities into two buckets.
One plant in France.
But nothing of Great medicine, because as I said earlier, if you think about it with so many moving parts going on at the moment in the industry like once a.
We see what aircraft manufacturers delivery rates all how much comes out of production to better happens comes out of inventory, what's the state of how many aircraft are starting to Kevin you rolled up a club that's pretty opaque and we don't really have an you don't have good production level of inflammation and then you get from.
All of the engines, you've got all the images.
So there's so many different aspects to it and it must be really difficult for you to model because it's difficult for us.
So what I would advise you to do is just take a diet and the way we've tried to set it out we've been cautious way we need to.
Called out reductions for example in the wheels business, what we see now that the reduction in market activity you know very clearly.
Starting in Q2, and it's going to be a significant in Q3 exacerbated by the seasonality because as you know the European plans tend to go off for several weeks in July and August.
So we've got all of the best I think we can do is to say look at the guide takes accounts the best level of knowledge. It keeps pace with all of the previous production quantities, we talked about on the first quarter earnings call unadjusted cause of Boeing right totally.
And you know we've taken engine right down to match.
What are what we'd been advised in in the case of the engine manufacturers.
Thank you.
Thank you.
Okay.
And our next question will come from Ron Epstein with Bank of America. Please go ahead.
Okay.
Ron Your line is on mute.
Hey, guys, sorry about that.
Yeah.
Speaker Change: Yeah, I think that was the.
First question all day, because somewhat so I'm going to answer it.
But anyway right so yeah.
But the ones that don't show up.
So Kristen just a broad one a lot of stuff's been asked but one of the feedback we picked up over at Farnborough.
And probably you have.
Every meeting we went into where it's just a shortage of castings kind of across the industry.
So maybe more broadly you meant you do casting right and where what kind of opportunity is that for a helmet to pick up share or more business because of what's going on in the casting world as it is an opportunity or is it not do you see that resolving itself Oh.
If you could talk on that.
Yeah, you didn't go to pick it apart between that which is the testing so structural cost by the high pressured shuttling testings of low pressure turbines. So.
In the case of where we've seen.
Engine OEM engine cut backs and that also negatively affected to a small degree a structural casting in the L. P. T castings, we do.
Hum.
And so I guess that just goes to the territory. The capacities in some jabil to you can't just say I'll now make a high pressure turbine castings with that because there's different diets.
So I'll say different.
Casting techniques et cetera.
So it's it's not immediately transferable at all.
So the key to let's say is can we produce and the high pressure turbine castings because.
Speaker Change: Service demand seems to be high.
And possibly higher than certainly that we had been advised six months or a year ago.
Speaker Change: And so we know we've put all our shoulder the wheel and try and get everything we can to do increase that well also stating that we know really well above engine right I'm not giving you a specific quantities, but you can assume that that saves absolutely correct well above engine right.
And then it's you know we know what pace to service the MRO shops, and what goes to the Oh I'll say early production not so that's not hard.
Decision.
So we kind of tried to improve once again and it'll go to yield in the short term that will go to fresh.
Capital expenditure in the in that medium term.
So you know we've been clear.
Clear that.
For us to put the fresh college, because if it's a high capital intensity and you've got to have sure. Let's see yeah returns is that's why are you know we've.
We've struck agreements which are market market share.
Ah commensurate with those investment across Asia, So we're positioned well for the future.
But if you said to us can be produced in the 30 percents a high pressure turbine casting due in the next two months, we ought to be.
No. We can't you know, we will be well above engine right.
And then.
And that's about all we can say and it's going to go come really improve our internal yields and also be talking to our customers about how they can help with often and we've got some really good collaboration without constantly trying to achieve improvement over and above the improvements in volumes have been.
Already achieved so I'm feeling pretty positive about it.
Like the dynamic I like the fact that we've got significant the mountains.
But I've also got it would be a realistic I just don't have them all back inside and so they all go producing all surgical 17, they've just like that we've got new tools to put we've got.
Casting machines, we got new presses, you everything to to fundamentally change that I think that's what I said, you know, we'll bring that capacity on and you'll see the fruits of that in 2026.
Got it got it got it.
I may just on that same question, how much better could you getting yields because my understanding already as you guys are pretty good.
It's going to be at the margin and where we are from where we are today the only way it is.
Who are used to where sometimes those may be X.
So I see no requirements on a drawing whether those.
Those can be relaxed anyway, which don't go to four months, but it seems like it's sort of tiny things, which masa adult market, let's just call. It performance there's possibly.
Something in that I'll call, a teeny wheel study about the but while always protecting the quality of the product that we produce.
Thank you.
Thanks, Rob.
That is all the time, we have today for questions. Thank.
Thank you all for attending and participating in today's conference call.
May now disconnect your lines and have a great day.
Okay.