Q3 2024 Howmet Aerospace Inc Earnings Call
Good day and welcome to the helmet aerospace third quarter of 2024 earnings conference call.
Paul, because the Vince will be in a listen only mode for the duration of the call. Inchanger need any assistance, please send me a conference specialist by pressing the star key, followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two.
and today's call, we ask that you please limit yourself to only one question.
Speaker Change: I'll simply be aware that today's call is being recorded. I would now like to turn the call over to Paul Luther by President of the Investor Relations and FPNA. Please, John.
Paul Luther: Thank you, Joe. Good morning and welcome to the Hamlet Aerospace 3rd Quarter 2024 Results Conference Call. I'm joined by John Plant Executive Chairman and Chief Executive Officer in 10G Acobie, Executive Vice President and Chief Financial Officer.
Speaker Change: After comments by John and Ken, we will have a question and answer session.
Speaker Change: I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations.
You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings.
In today's presentation, references to EBITDA, operating income, and EPS mean adjusted EBITDA excluding special items, adjusted operating income excluding special items, and adjusted EPS excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion.
Speaker Change: Reconciliations to the most directly comparable gap 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.
John Plant: Thank you.
Speaker Change: and others. Thank you. Thank you.
John Plant: Thank you, P.T., and welcome, everyone, to the Hammett Third Quarter Earnings Call.
John Plant: Q3 was another strong quarter for the company. Year-over-year revenue growth was 11%, building on the 14% growth in the first half.
John Plant: Within this number, commercial aerospace growth was 17%, continuing a strong trend, including engine spares growth.
John Plant: Other markets will be covered later in the call.
EBITDA was a record $487 million, along with a margin of 26.5%.
Speaker Change: while operating income was $419 million with a margin of 22.8%.
John Plant: Operating income was up 33% year-over-year and increased 390 basis points with engines and fasteners performing at high levels supported by an increasingly strong result in structures.
Speaker Change: Wheels revenue was down, driven by market declines, especially in Europe, which reduced double digits with extended summer vacations.
John Plant: However, wheels continue to deliver a healthy EBITDA margin of 26%.
Speaker Change: Earnings per share was 71 cents, an increase of 54% year-over-year.
Speaker Change: Free cash flow was also strong at $162 million, improving year-to-date free cash flow to approximately $600 million.
Speaker Change: The quarter-end cash balance of $475 million is after deploying $282 million to debt paydown, $100 million to share buybacks, and $34 million to dividends.
Speaker Change: Overall, Hammett had a healthy set of results with EBITDA, EBITDA margin, earnings per share, and free cash flow above expectations.
John Plant: Let me comment on revenue, which was fractionally light of our guide. In September, we restricted our aerospace parts supply to Boeing, pending further understanding about the duration of the strike.
John Plant: Naturally, we are pleased that the Boeing strike is now over and the business can gradually return to normal.
John Plant: The other notable shortfall was in our wheels business. Wheels revenue was approximately $30 million below Q2, principally due to notably weaker European market conditions, resulting in an 18% decrease in revenue.
John Plant: North America revenues were down by 10%.
Speaker Change: I'll now pass the call to Ken to provide additional details by end market and business segment before I return to cover the outlook for the company.
Ken: Thank you. Thank you.
Ken: Thank you, John. Good morning, everyone. Let's move to slide five.
Speaker Change: despite our decision to restrict supply to Boeing due to the strike.
Ken: Commercial aerospace revenue was up 17%, which builds on the 25% commercial aerospace growth in the first half.
Ken: Fence aerospace was also strong, up 15% driven by fighter programs in fighter engine spares demand.
Speaker Change: As expected, the commercial transportation market weakened, with revenue down 12%.
Speaker Change: led by the slowdown in Europe into a lesser extent North America.
Speaker Change: Finally, the industrial and other markets were up a healthy 17%, driven by oil and gas up 26%, IGT up 20%, and general industrial up 5%.
Speaker Change: In summary, continued strong performance in commercial aerospace, defense aerospace, and industrial, partially offset by commercial transportation.
Speaker Change: Now let's move to slide 6, starting with the P&L.
Speaker Change: For the third consecutive quarter, EBITDA, EBITDA margin, and earnings per share were all records and exceeded the high end of guidance.
Speaker Change: On a year-over-year basis, revenue was up 11%, and EBITDA outpaced revenue growth by being up 27% as total headcount remained flat in the quarter, despite adding approximately 235 headcount in the engine segment.
Speaker Change: Incremental flow-through of revenue to EBITDA was a healthy 59%.
Speaker Change: Now let's cover the balance sheet and cash flow.
Speaker Change: The balance sheet continues to strengthen. Cash at the end of the quarter was $475 million and free cash flow was a record for Q3 at $162 million.
Speaker Change: Year-to-date free cash flow is approximately 600 million dollars.
Speaker Change: Net debt to EBITDA continues to improve and was at a record low of 1.6 times. All long-term debt is unsecured and at fixed rates.
Speaker Change: Almet's improved financial leverage and strong cash generation were reflected in Moody's two-notch rating upgrade to BEAA1.
Speaker Change: Additionally, Fitch upgraded Helmet's outlook to positive.
Speaker Change: Liquidity remains strong with a healthy cash balance in a 1 billion dollar undrawn revolver complemented by the flexibility of a 1 billion dollar commercial paper program.
Speaker Change: Regarding capital deployment, we deployed approximately 416 million of cash in the quarter to debt pay down, common stock repurchases, and quarterly dividends.
Speaker Change: For the quarter, we reduced debt by approximately $282 million through the following three actions.
Speaker Change: first
Speaker Change: We redeem the remaining $205 million balance of the 2024 bonds with cash on hand.
Speaker Change: Payment was at par.
Speaker Change: Thank you.
Speaker Change: Second, we issued 500 million dollars of new bonds due in October 2031. The fixed interest rate is 3.72 percent.
Speaker Change: Third, we redeem the remaining $577 million balance on the May 2020-25 bonds.
Speaker Change: We used $77 million of cash on hand, plus the proceeds from the October 2031 bond issuance, which has a substantially lower fixed interest rate.
Speaker Change: All combined debt actions year-to-date through the third quarter 2024 will reduce annualized interest expense by approximately 33 million dollars.
Speaker Change: The company's next debt maturity is in November of 2026.
Speaker Change: Moving to share repurchases. In the third quarter we repurchased 100 million dollars of common stock at an average price of approximately $94 per share.
Speaker Change: Year-to-date through September we repurchased 310 million dollars of common stock at an average price of approximately $77 per share.
Speaker Change: Thank you.
Speaker Change: Q3 was the 14th consecutive quarter of common stock repurchases.
Speaker Change: The average diluted share count improved to a record low Q3 exit rate of 409 million shares.
Speaker Change: Moreover, in October of 2024, the company repurchased an additional $90 million of common stock at an average price of approximately $103 per share.
Speaker Change: Year-to-date through October 31st, the company has repurchased $400 million of common stock at an average price of approximately $81 per share, retiring approximately 4.9 million shares.
Speaker Change: Remaining authorization from the Board of Directors for share repurchases is approximately 2.3 billion dollars as of the end of October.
Speaker Change: Thank you.
Speaker Change: Finally, we continue to be confident in free cash flow.
Speaker Change: In the third quarter, we paid $34 million in dividends as we increased the common stock dividend 60%.
Speaker Change: from $0.05 per share to $0.08 per share.
Speaker Change: Now let's move to slide 7 to cover the segment results for the third quarter.
Speaker Change: Engine products delivered another record performance.
Speaker Change: Revenue increased 18% year-over-year to $945 million.
Speaker Change: commercial aerospace was up 20% and defense aerospace was up 15% driven by engine spares growth.
Speaker Change: oil and gas was up 26% and IGT was up 20%.
Speaker Change: Demand continues to be strong across all of our engines markets with strong engine spares volumes.
Speaker Change: which are expected to reach a record with 1.25 billion dollars of revenue in 2024.
Speaker Change: EBITDA outpaced revenue growth with an increase of 40% year-over-year to a record 307 million.
Speaker Change: EBITDA margin increased 510 basis points year-over-year to a record 32.5% while absorbing approximately 235 net new employees in the quarter to support growth.
Speaker Change: The engines team once again delivered a record quarter for revenue, EBITDA, and EBITDA margin.
Speaker Change: Now let's move to slide 8.
Speaker Change: Fastening systems also had another strong quarter.
Speaker Change: Revenue increased 13% year-over-year to $392 million.
Speaker Change: Commercial aerospace was 17% higher, including the impact of the wide-body recovery and the Boeing strike.
Speaker Change: General Industrial was up 26%, Defense Aerospace was up 5%, and Commercial Transportation, which represents 16% of Fassner's revenue, was down 3%.
Speaker Change: year-over-year revenue outpaced revenue growth, excuse me, year-over-year EBITDA outpaced revenue growth with an increase of 34% to 102 million.
Speaker Change: EBITDA margin increased 420 basis points year-over-year to a healthy 26 percent.
Speaker Change: The team continues to expand margins through commercial and operational performance.
Speaker Change: Now let's move to slide 9.
Speaker Change: Engineered structures performance continues to improve.
Speaker Change: Revenue increased 11% year-over-year to $253 million.
Speaker Change: Commercial Aerospace was up 11% and Defense Aerospace was up 27%.
Speaker Change: year-over-year driven primarily by the F-35 program.
Speaker Change: year-over-year segment EBITDA outpaced revenue growth and was up 27% to 38 million dollars.
Speaker Change: EBITDA margin increased 180 basis points to 15%.
Speaker Change: Sequentially, revenue decreased 8% as we continue to optimize the structure's manufacturing footprint and rationalize the product mix to maximize profitability.
Speaker Change: The team continues to make progress and we expect to continue improvements heading into 2025.
Speaker Change: Finally, let's move to slide 10.
Speaker Change: Forged wheels revenue was down 14 percent year-over-year as the long expected slowdown takes hold of the commercial transportation market.
Speaker Change: EBITDA decreased 17% as the team flexed costs to minimize the margin decline. EBITDA margin continues to be healthy at 26.1%.
Speaker Change: Lastly, before turning it back over to John, I wanted to highlight a special item on page 18 in the appendix.
Speaker Change: In the third quarter, we completed a study that resulted in a favorable R&D tax credit of approximately $44 million, which was approved by the IRS.
Speaker Change: The credit was for prior period expenses associated with R&D investments.
Speaker Change: The favorable credit was excluded from our results and was noted as a special item.
Speaker Change: The favorable R&D tax credit reflects Helmut's continued investment in innovation and technology.
Speaker Change: Now let me turn it back over to John.
John Plant: Thanks Ken and let's move to page 11.
John Plant: First, let me start with an overview of the markets for 2025 before moving to the specific guidance for the balance of 2024.
John Plant: Starting with commercial aerospace, demand for air travel continues to be robust.
John Plant: Air traffic growth rates have eased compared to the recent past as we've moved into the second half of 2024, as we expect with normal seasonality, albeit the growth of Asia-Pacific continues to be strong at I think about 7%.
John Plant: However, given the recent years of underproduction of aircraft, demand for additional spares and the record backlogs of new orders, the order book outlook for aircraft production and our products continues to look very healthy and should lead to higher growth for several years compared to historic norms.
John Plant: and this is supported by future passenger growth of approximately 4-5% a year.
John Plant: In 2025, we envision commercial aerospace growth to be about 12% plus or minus, and leading to the total revenue growth for the company of about 7.5% plus or minus.
John Plant: It should be noted that at the start of 2024, we envisioned a similar growth, but we managed to exceed this.
John Plant: However, we need to see sustained and consistent narrow-body aircraft production to be confident.
John Plant: IGT is envisaged to grow at mid-single visits with oil and gas a little bit higher.
John Plant: The outlook for commercial truck wheels continues to be muted in the fourth quarter this year and the first two quarters of 2025 with the prospect of some pickup in the second half of the year.
John Plant: The second half of 2025 potential is principally due to North America, where it is envisioned that the early stages of truck pre-buying will occur in response to the new environmental regulations which become effective in 2027.
John Plant: Let me now turn to the topic of future IGT demand, which I referred to in our August call when I used the words of AI for the first time.
John Plant: Firstly, let me address AI.
John Plant: Of course, we are keeping current with AI developments and using our offices and manufacturing plants.
John Plant: However, what I would like to address is the effect on future revenues for Hermat as we address the increased demand for electricity over the next few years.
John Plant: AI, data center bills, and cryptocurrency mining all impact positively the future energy demand.
John Plant: Examples are AI computer capacity, which has grown over 50% per quarter since the start of 2023.
John Plant: Data center power consumption, which was 19 gigawatts in 2023, is expected to increase to 50 gigawatts in 2030.
John Plant: Much of the demand is from cloud hyperscalers, that is, Meta, Microsoft, Amazon, Google, and Oracle.
John Plant: An AI query results in 10 times the electricity usage of a Google search.
John Plant: Data center build-outs are expected to be approximately 600 billion dollars by 2028 and they require uninterruptible electricity supply.
John Plant: This is likely to be fulfilled by a combination of possibly nuclear and certainly IGT power generation in some percentage combination.
Speaker Change: Well, we're unsure about the exact demand. What we see are new plans for gas generation.
Speaker Change: For example, Duke, AEP and Dominion have announced plans for an additional 18 gigawatts of new gas generation over the next 10 years.
Speaker Change: We see this as not just a U.S. phenomenon, but a worldwide one, and consider Hammett well-positioned in the supply chain given our IGT turbine blades, since we support GE, Vanova, Siemens, Mitsubishi Heavy, and Anzaldo given our global network.
Speaker Change: where we are the number one supplier of turbine blades for each customer.
John Plant: While this will have limited effects in 2025, growth will begin in earnest in 2026.
John Plant: Beyond that, we have optimism for the addressable market over the next several years.
John Plant: In summary, 2025 is expected to be strong for Hermat.
John Plant: Let me turn to commercial aerospace since this impact is significant.
John Plant: We have considered the gradual restart of the Boeing 737 assembly lines now that the strike is settled, plus the supply chain impacts on Airbus mentioned by themselves.
John Plant: We have tempered the bills accordingly.
John Plant: and further adjusted for the 2024 underbills by Boeing compared to their planned bill rates due to inventory considerations.
John Plant: In doing so, we envision commercial aerospace growth to be about 12%, with total growth to be in the 7.5%, plus or minus 1%, with stronger growth in the second half of the year versus the first half.
John Plant: Naturally, we will adjust the revenue outlook as we move to 2025, especially as we come to understand more about specific Boeing production.
John Plant: Now let's move to the near term and the Q4 and four-year guidance. The one additional comment I would like to make for Q4 is that any weakness from Boeing and commercial truck wheels is offset by sales of additional engine spares.
John Plant: The specific numbers are as follows. Revenue of $1.87 billion plus or minus $20 million. EBITDA of $488 million plus or minus $10 million. Earnings per share of 71 cents plus or minus a penny a cent.
John Plant: and for the year.
John Plant: Revenue of $7.41 billion plus or minus $20 million EBITDA of $1.895 billion plus or minus $10 million
John Plant: Earnings per share of $2.66 plus or minus a penny and free cash flow of $920 million plus $20 million minus $30 million.
John Plant: One final comment is regards future dividends.
John Plant: The plan is to increase the common stock dividend in 2025 by 25% from 8 cents.
John Plant: to Tencent with the first payment in 2025 subject to final board approval.
John Plant: The only other comment I'd make is that the aggregate net headcount for the third quarter was a zero increase.
John Plant: Thank you very much, and we'll now move to Q&A.
John Plant: Thank you very much.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star and 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two.
John Plant: Again, we ask that you please limit yourself to one question only on today's call. At this time, we will take our first question.
John Plant: which will come from?
John Plant: Sheila Kyle-Longview with Jeffries. Please go ahead.
Sheila Kyle-Longview: That's close enough. It's not as easy as plants. Thanks, John. Thanks, Ken and PT. Maybe if we could start off, obviously, you've given your 2025 guide.
Sheila Kyle-Longview: and you've talked about Q4, any weakness from Boeing being offset by spares, but in 2025 you've given a guide that's pretty in line with the street. How are you thinking about commercial build rates, if you could talk about that?
Speaker Change: It's tough to get to specific build rates at the moment.
Speaker Change: If you start with this time Boeing rather than Airbus, I don't think it's clear to anyone yet the rate at which Boeing will build in the balance of
John Plant: November nor December or indeed exactly what the rate will be in 2025.
John Plant: What I've done is to look at the external forecasting agencies for total aircraft production next year by platform and by customer and considered the increase from
John Plant: what I expect the 2024 actual is that that increase is rather unrealistic given it stands at approximately 30% at this point.
John Plant: And so I think we need to re-evaluate that and consider what is the art of the possible way of builds of aircraft.
John Plant: starting with Boeing and the 737 all the way through their aircraft platforms and then of course Airbus themselves as well given their commentary regarding several types of parts and supply chain constraint.
John Plant: So we've just taken our best guess and we'll give more color on that in our February call, Sheila.
John Plant: But we've just said let's think of a more realistic number
John Plant: and feel as though a 12% increase year-on-year is quite doable.
John Plant: and certainly it has to be better than 2024 which has really been a pretty miserable year for aircraft build and indeed engine build and so we are looking forward to better things but taking a fairly cautious view at this stage until we know more.
Speaker Change: Okay, thank you.
Speaker Change: Thank you
Speaker Change: And our next question will come from Robert Stellard with Vertical Research Partners. Please go ahead.
Robert Stellard: Thanks so much, good morning.
Speaker Change: and Rob.
Robert Stellard: Hey John, just a follow-up really on Sheila's question in relation to the 2025 revenue forecast. I was wondering if you could give us some idea of what your thoughts might be on aerospace aftermarket revenues in whatever form for next year and also whether you've included any risk of de-stocking on the back of this OEM production rate uncertainty. Thank you.
Speaker Change: So when will we start?
John Plant: talking about spares and future rates of revenue and increases.
Speaker Change: I'd probably like to deal with the topic in a fairly broad fashion because I think it comes to the heart of several questions which may be asked during the course of this call.
John Plant: and I'm going to start off with, first of all...
John Plant: in a
John Plant: Press release this morning. I think we indicated that we expect our spares revenue this year
John Plant: to be about 1.25 billion now, which is a further increase on the last quoted number which is about 1.1 billion that we gave, I think, on our oldest call.
John Plant: and I think the first point
John Plant: I'd like to make which I think is the fundamental and most important one for investors is is the strategic positioning of the company and What I mean by that is that in 2019
Speaker Change: When our revenues were about $7 billion, our spares or our aftermarket exposure was about 11% of those revenues.
John Plant: and obviously a higher percentage of the engine products business.
Speaker Change: in 2024.
Speaker Change: given the outlook for the year and our revenues are close to seven and a half billion, is that our spares or aftermarket exposure has risen to 17%.
Speaker Change: And that is a very significant increase, especially given the growth in the OE bills as well in aggregate.
Speaker Change: And going forward, my thought is over the next 2, 3 or 4 years, that that level of aftermarket content of our revenues will go to in excess of 20%.
Speaker Change: And so I think that what that means for the company
John Plant: and therefore the owners of the company is that it implies less volatility.
John Plant: with less volatility given the exposure to the OE production, that's really good for shareholders. So I think that's the most important point which I think should resonate.
John Plant: and then I'd like to deal with...
John Plant: spares in the more topical framework of supply chain constraint that we've heard and seen and reported in the press.
John Plant: quite a lot of commentary around the availability of engine spares and servline blades in particular and its impact on engine production.
John Plant: So again I'm going to repeat one data point that we provided in the last call to say that specifically on LEAP engines and the
John Plant: type of blade which is currently used is that our output is up from 2023 by 40%.
John Plant: and for the top 10 turbine blades for the company across all engine manufacturers our output is up by over 50%.
John Plant: And, of course, when the casting leaves Hamet, we don't designate which part of the end market goes to, whether it goes to a spares build or a specific OE engine gold.
Speaker Change: Give them the commentary.
John Plant: Bye.
Speaker Change: Airbus about having
Speaker Change: gliders and lack of engines.
Speaker Change: is that we had a and asked for a joint meeting of every interested party.
John Plant: at Hamas.
John Plant: to go through the production data so we could demonstrate and show specific production.
John Plant: and what they could see is that the last 40% or 50% overall...
John Plant: and also the production.
John Plant: of the new engine blade which is awaiting the final approvals by the FAA and EASA.
John Plant: And what is remarkable, I think, is that we've increased production by the specific blades that I've talked about, while also producing
John Plant: many tens of thousands and in fact 500 engine sets of blades for the new type pending approval.
John Plant: And those castings have left Hamet and been delivered to the customer.
John Plant: So, I've covered specifically...
John Plant: production in 2024 which is let's say just moves into transitory situation and of course given the
John Plant: output of both the current and the future engine sets.
John Plant: is that that puts, I think, everybody in a really good position going forward. And, of course, we're working really well with our customers.
John Plant: to try to drive further increases in output.
John Plant: which ideally would be required, and so we expect...
John Plant: both the increase in engine production next year to be robust.
John Plant: and also the increase in spares requirements which are also going to be robust and even more importantly leading to that longer term trend of increasing engine spares and total spares for the company as a percentage of our revenues.
John Plant: and so
John Plant: The other thing which I think is really good for us is that
John Plant: What we want, of course, is...
John Plant: more aircraft production and more engine production, both of.
John Plant: the more robust LEAP engines, the more robust GTF Advantage engine.
John Plant: and of course then we'll be able to sell all of the other parts that we make for those engines which are structural castings, low-pressure turbine parts for that part of the turbine and indeed fan blades as well.
John Plant: So that's given you a pretty comprehensive answer to your specific question, but broadened it out. And I think in all of that, the most important thing is that strategic positioning with fundamental less volatility for our revenues, giving us a very significant increase in the aftermarket as a percentage content of the company.
Speaker Change: That's great. Thanks, John. Thank you.
Speaker Change: And our next question will come from Doug Harned with Bernstein. Please go ahead.
Doug Harned: Good morning. Thank you.
Doug Harned: John, I wanted to continue on what you were just describing because, you know, you've got rising airfoil production for the current blades on the Leap 1A, the Leap 1B over time, and then you're also now, you know, new lines doing the new blades and we're going to see the Leap 1B, presumably the new blades for that next year. How do you think about...
Doug Harned: you're planning for production capacity for both sets of blades over time and I'm trying to understand kind of where you are today in terms of that.
Doug Harned: that capacity automation and so forth to understand what the investment profile is likely to be.
Doug Harned: Okay.
Doug Harned: So...
Speaker Change: I think that everybody's heard that we are increasing our investment in the engine business.
Doug Harned: given the robust demand overall for engine production increases.
Doug Harned: aircraft production increases, but also in particular the increased requirement for spares given not only the temporary effect of the Taiwan Wing issue, Doug, which you've certainly commented and written about.
Doug Harned: But even more significant, I think, is the increase in requirement for spares over time.
Doug Harned: given the fact that the more modern engines with their higher operating temperatures and increased pressures means that their shop visits frequency is increased.
Doug Harned: and therefore we see and indeed we've been having very detailed conversations with our customers what that demand looks like over the next not just one year and two years but over the next five years.
Doug Harned: and looking to increase our capacities along with the right agreements.
Doug Harned: to invest for that capacity.
Doug Harned: and so I believe we're in the best position that we've been in for many years in terms of understanding what that future demand pattern is.
Doug Harned: and have really...
Doug Harned: I'll say signed up to increase our production.
Doug Harned: to meet that demand, which we see is going to increase for both the OE production over the next few years, commensurate with both narrow-body aircraft production and wide-body aircraft production.
Doug Harned: but also through the increase in spares as well.
Doug Harned: while I think the rate of change of the spares will change as over the next it's a probably will even accelerate further with the time monitoring issues to be addressed the next two or three years
Doug Harned: I just think we'll see increased demand overall for those spares with uninterrupted increases, albeit at different percentages between the years, certainly for the next 5-7 years.
Doug Harned: and you know not willing to comment much further beyond that. And I think you see that our engine customers also building out additional MRO shops to to take care of those that increase frequency of engine visits.
Speaker Change: Very good, thank you.
Speaker Change: And our next question will come from Scott Deutschel with Deutsche Bank. Please go ahead.
Scott Deutschel: Hey, good morning.
Scott Deutschel: Good morning, Scott. John, can you talk a bit about what's driving this re-acceleration and incremental margins in the fourth quarter? And I was curious if there's anything you'd be willing to offer at this point, just to level set us on how to think about what this recent strength and incremental margins means for the trend going into next year. Thank you.
Speaker Change: I think as you appreciate nothing's ever linear. You can't just extrapolate a line certainly not for margins because things occur at different times and different rates and I think that when
Speaker Change: One of the determinants of your margin rate is also the rate of change for your top line and then that rate of change is not just down to the top line but your ability to convert at a higher level of efficiency and so
Speaker Change: given
Doug Harned: I think the significant uncertainty.
Doug Harned: and Kevin Lee.
Doug Harned: expectation that as we build out this capacity, we're going to have to take on increased labor next year.
Speaker Change: It's one of those things where while I think we're going to see the benefits of the leveraged volume, we're also going to have the impact of the getting a lot of people trained in the company to meet those future production requirements going forward.
Speaker Change: So we've probably hit a pretty good patch over the last two or three quarters in terms of productivity increases within the company. So you've seen maybe a net
Speaker Change: 600 people recruited in the first quarter, maybe 400 in the second quarter.
Speaker Change: and while we've increased in our engine business in Q3 a net zero for the company.
Speaker Change: and really trying to hold that for the balance of year.
Speaker Change: while expecting that we're going to need to re-accelerate our...
Speaker Change: Hiring as we go into 2025
Speaker Change: such that when we commence productions, much of the new equipment we've been talking about is that the workforce will be trained.
Speaker Change: so that we can keep our levels of quality.
Speaker Change: and our levels of delivery performance in the really good zone that they've been unable to respond to the customer's demand.
Speaker Change: So I think we've seen the benefits of that, but at this point, I don't really have any margin comments regarding next year.
Speaker Change: An MD, I don't think you can extrapolate anything from this at this point in time, a plough of acknowledging that we've got the volume increase of the 7.5% I've talked about plus or minus.
Speaker Change: and then the net effect of the additional hiring as we go into next year which puts us in a position hopefully of continued really excellent supply that I've also talked about picking up on that spares question.
Speaker Change: and then going into 2026 where we see the requirements again increase for both OE production on the commercial aerospace side and indeed spares again.
Speaker Change: All right, thank you, John.
Speaker Change: Thank you.
Speaker Change: And our next question will come from David Strauss of Barclays. Please go ahead.
David Strauss: Thanks. Good morning, everyone.
David Strauss: Hi David. Hey John.
David Strauss: There are a lot of things kind of like they go into this potentially, but just at a high level you know given the market share gain on the inside that you've hinted at that will start to come in a bit I guess in 25 But more so in 26
Speaker Change: If aero revenue growth does turn out to be 12% in 2025, would you expect that your aero revenue growth would accelerate off that level in 2026 based on the market share pickups?
Speaker Change: yes I you know I keep thinking about
Speaker Change: What's the trajectory of aircraft production?
Speaker Change: and we've heard a lot of commentary about supply chain and supply chain constraints.
Speaker Change: over the last 2, 3, 4 years now and to the point where almost the first response is always supply chain, I think those constraints have to begin to ease and time is a great healer.
Speaker Change: and I think as each one is mentioned you know I see the potential for further improvements in the wider supply chain performance.
Speaker Change: And so while I still think that 2025 is a year of flux given the targets to increase.
Speaker Change: the Airbus A320, A321 and the introduction of a new XLR and obviously the really a thirst for increasing A350 if those supply chain constraints can be resolved.
Speaker Change: but certainly Boeing, I mean the additional overlay there is that you have to...
Speaker Change: gain confidence in the restart of production while under FAA oversight.
Speaker Change: to be able to increase the air production, but certainly the demand for new aircraft is there, going back to the fundamentals for airlines, which is not just for fuel efficiency.
Speaker Change: but even more importantly for emissions, which I think are here and will continue and particularly in in other parts of the world as well where the carbon footprint is is really important and so those requirements for
Speaker Change: aircraft are there and and you've seen you know aircraft held in service probably longer than ideally would have been wanted given the lack of production so
Speaker Change: you know.
Speaker Change: Maybe while 2025 is still another year of flux and sorting out
Speaker Change: which I don't think is going to be totally smooth is that surely by 2026 we're going to be in a better position and the aircraft and the backlogs are there and so I get really optimistic that aircraft production is going to improve.
Speaker Change: and that combined with the vectors of demand that I talked about on the call for electricity and therefore what I expect to be an increasing demand certainly for our IGT business.
Speaker Change: and see no diminution of demand by
Speaker Change: countries around the world for example the F-35 or even legacy fighters like the F-15 and the F-16s. I just think all of that is positive as we go forward and so
Speaker Change: that plus usual spares demand and the capacity we're putting in, you know, I think we can get pretty optimistic that 2026 should be a further step up on 2025.
Speaker Change: Perfect. Thanks very much. Thank you.
Speaker Change: And our next question will come from Myles Walton with Wolf Research. Please go ahead.
Myles Walton: Thanks, good morning. I think, John, one of the biggest areas of growth from your guidance initially over the last couple years has been on the defense side, and so I'm just curious, the mid-single-digit placeholder you have, do you think that's as conservative as the last couple of years?
Speaker Change: given the F-35 is kicking back in in terms of deliveries within structures and obviously I'm sure the airfoils business is going gangbusters. Why is it only mid-single-digit growth? Thanks.
Speaker Change: let's say 150 aircraft if it was 152 but as we all know they've struggled to produce that each year.
Speaker Change: and deliveries have been somewhat less than that given the software issues that are being or have been resolved.
Speaker Change: And so, I think we're going to see higher deliveries than production over the next two or three years. And production still may be incrementing up a little bit, maybe from the 152 to 156 level. And so...
Speaker Change: I mean that's only a four aircraft as I'd like.
Speaker Change: two or three percent. I'm more optimistic that we see spares demand increase because the engine and aircraft fleet is now over a thousand worldwide.
Speaker Change: and indeed in Europe over the next few years it's going to increase to 600 by the end of the decade.
Speaker Change: and so that additional OE demand bodes well for engine spares demand over the next few years so I'm optimistic about that and also on the
Speaker Change: bulkhead side, particularly on the titanium bulkhead side, that should also begin to to improve
Speaker Change: given that I think this quarter, and I'm hopeful it's this quarter and doesn't continue into 2025.
Speaker Change: and the excess inventory which was at our customer.
Speaker Change: from, let's say, bills which had been anticipated but did not occur, is that that inventory is cleared out, and the last part of it is cleared out in 2024, but with some possibility, there's still a little bit left over, but hopefully not into 2025. So, at this point, I think that...
Speaker Change: of a mid-single digits is the right call and of course should
Speaker Change: I'll say Boeing find themselves able to increase their legacy fighter production which they struggle with because of labor.
Speaker Change: and I don't know that's going to change this quarter, next quarter or the first half of next year but should it improve then I think we could become a little bit more optimistic but not yet.
Speaker Change: Okay, thanks. And just a clarification, the $1.25 billion of spares, is that about split even between commercial and defense slash IGT at this point?
Speaker Change: Yes, I mean the rate of growth on the commercial side has been higher.
Speaker Change: in the last, let's see, 12 months.
Speaker Change: But the absolute level of the
Speaker Change: I'll say Defence and IGT and oil and gas has been higher in absolute terms because that didn't see the you know the very significant interruption that we had with COVID and post COVID and then because of the bills and and all of that and
Speaker Change: and so at this point the way I'm thinking about it is the of the roughly should be 50-50 and I'm going to guess at him Ken can.
Speaker Change: correct me because I struggle to keep every single number in the front of my mind, but I'm thinking that we're 55 to 60% currently on the, let's say non-commercial error side, but with the commercial error growing faster.
Speaker Change: 550 million plus or minus this year and then on the defense and IGT right around 700 million plus or minus right but the key is
Speaker Change: You know the numbers are up year over year, great performance compared to 2019 but accelerating as we exit the year. So all good.
Speaker Change: Thanks for the call.
Speaker Change: And our next question will come from Seth Safeman with JP Morgan. Please go ahead.
Seth Safeman: Thanks very much and good morning.
Speaker Change: Good evening, sir.
Speaker Change: Good morning.
Seth Safeman: I wanted to ask, you know, just in terms of the spares demand you're seeing and, you know, it sounds like the answer is no, but, you know, a lot of, we think about, you know, older planes staying in service longer as a driver of aftermarket demand. It sounds like the aftermarket demand here is, you know, very much driven by the newer engines.
Speaker Change: And so, to the extent that we were to see increased retirements at some point, that doesn't really interfere at all with your expectations for spares growth over that, you know, kind of two to four year period that you outlined.
Speaker Change: Okay.
Speaker Change: There's several parts to pick apart in that question there, so the fact that the legacy
Speaker Change: aircraft and engines. Let's think about the B2500 and the CFM56.
Speaker Change: I don't think their shop visits have peaked yet.
Speaker Change: and that's probably being pushed out further.
Speaker Change: by the fact of lack of retirement so
Speaker Change: If you go back 3 or 4 years, I think everybody expected 2025 to be the peak demand for CSM56 and B2500. I think that was the expectation.
Speaker Change: But I think that that peak is now going to
Speaker Change: be pushed out to 26, 27. It's probably more likely possibly even beyond 27. But I don't think you then expect a significant dip after that peak. It's pretty sustained and a very gradual decline.
Speaker Change: Meanwhile, your assumption or statement that there are more spares requirements for the new engines, well that's...
Speaker Change: classic true given
Speaker Change: the well-documented time on ring issues driven by I'll say the earlier than expected shock visits for those engines
Speaker Change: and that applies to both the UTF and to the LEAP engines.
Speaker Change: and improvements coming with the increased robustness of the suite of products which is being introduced, of which the early stage turbine blades is only but one of those improvements.
Speaker Change: So we're part of much bigger packages of improvements for reliability.
Speaker Change: But...
Speaker Change: The way it stacks up is that I've talked about climbing one wing which is creating, you know, higher
Speaker Change: and excessive demand now, but there's been a long-term trend with growth every year for the next many years because of the Cyfler shop, which we anticipate as those new aircraft are adopted, even with the robustness improvements that we've talked about.
Speaker Change: So I think I've covered all of it that's in your question. So the only thing I'm saying is that the legacy engines will also continue to peak yet.
Speaker Change: Excellent. Thanks very much.
Speaker Change: Thank you.
Speaker Change: And our next question will come from Ronald Epstein with Bank of America. Please go ahead.
Ronald Epstein: Hey, yeah, good. Good morning guys Yeah, we've got a lot of turf, but One area we haven't talked too much about is just kind of your continued capital deployment focus
Speaker Change: Is there any M&A to do out there or not? How are you thinking about that? Can you expand the business out into maybe some adjacencies in your core skill set?
Speaker Change: Yes, so we certainly
Speaker Change: are in the position of...
Speaker Change: choice have the ability to look at potential
Speaker Change: acquisitions and to study those things which come to the market even though the majority have really been companies coming out of private equity hands in the more recent past.
Speaker Change: It's possible, given the change of administration, given the election, is that
Speaker Change: deals which we thought may run some hurdles in the past may have less hurdle constraints in the future. Don't know yet, it's too early, too important, just speculative commentary there.
Speaker Change: So, we are in a position to consider, you know, we do, but also, you know, we want to be disciplined enough to say we'll do small ones if they're a technology player, and you possibly saw that we did by a company in the last quarter.
Speaker Change: It's fairly small, but important for us to enable us to take our
Speaker Change: engine capability to another level.
Speaker Change: and tuck that one in.
Speaker Change: But we're also willing to say if we're going to do others and they need to be of some
Speaker Change: You know, decent size given the market cap of the company.
Speaker Change: So we're willing to look. We also have to compare that to
Speaker Change: The
Speaker Change: cash-on-cash returns of buying our own stock back and again looking at it on a risk-adjusted basis.
Speaker Change: And so we want to be very disciplined in terms of the returns for that money for shareholders.
Speaker Change: And so we still see that buying our stock back is healthy and positive in terms of
Speaker Change: You name it, bro.
Speaker Change: well above our cost of capital.
Speaker Change: but also willing to look at the returns from any M&A move as well, albeit nothing that we have currently on the stocks to go at in the next quarter or two that we can see. But we'll continue to look and examine it as appropriate and obviously we'll keep you informed.
Speaker Change: You got it. Thank you very much. Thank you.
Speaker Change: And our next question here will come from Dalton Cona with TD Cowan. Please go ahead.
Dalton Cona: Hey, good morning and great results, guys.
James Carson: James Carson
Dalton Cona: Hey John, I wanted to ask on the high-pressure turbine blade that you guys are working on.
Speaker Change: on the 1A, two things. Does it confer a higher pricing to Helmet because it's more or less an aftermarket type product? And second of all, relatedly, GE mentioned it might be easier to manufacture and do you view that as true and therefore?
Speaker Change: Is there a good opportunity to get throughput up quickly on this?
Speaker Change: I'll say I don't understand that comment because every new engine
Speaker Change: of the LEAP-1a variant.
Speaker Change: when that
Speaker Change: when that package of change is approved.
Speaker Change: is going to go to the new configuration and new turbine blade. So we'll see that fitted both for full OE production and full spares production going forward.
Speaker Change: and anything where additional performance is obtained then it goes to that whole question of content, etc.
Speaker Change: You know we have some optimism that it may be
Speaker Change: And we have, as I said, provided some several hundred engine sets this year, in addition to manufacturing all of the increase in production to the existing type of turbine blade.
Speaker Change: So, you know, I'm pleased with that, but I still think it's early days yet in terms of absolutely giving, you know, clarity over what the long-term yields will be in production.
Speaker Change: But see nothing at this point, which you know
Speaker Change: It leads us to have concerns.
Speaker Change: You know, so we're well into it.
Speaker Change: and looking forward to very, you know, hopefully a very near-term cutover to the new type of blade. And then, you know, several months or a year or so later, then also on the Elite 1B for Boeing as well. But that's going to be, I'll say, another...
Speaker Change: several quarters from now in terms of timing for that, but again, subject to, you know, the FAA and EASA oversight.
Speaker Change: And this concludes our question and answer session in addition to today's conference. Thank you for attending today's presentation and you may now disconnect your lines.
Speaker Change: Thank you. Bye.