Q4 2024 Howmet Aerospace Inc Earnings Call
Good morning and welcome to the Helmet Aerospace fourth quarter and full year 2024 conference call.
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Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, VP of Investor Relations. Please go ahead.
Speaker Change: Thank you, Anthony. Good morning and welcome to the Hammett Aerospace fourth quarter and full year 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.
Speaker Change: After comments by John and Ken, we will have a question and answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
John Plant: With that, I'd like to turn the call over to John.
John Plant: Thanks, PT, and welcome everybody to today's call. Let's move to slide four, and I'll begin commentary on our fourth quarter.
Bye.
John Plant: We closed out 2024 with healthy results, which exceeded the high end of our guide. Revenues a record, as was EBITDA, EBITDA margin and earnings per share.
John Plant: Fourth quarter earnings per share was $0.74, an increase of 40% over the prior year, and that concludes the year at $2.69.
and a good year, as we put it.
John Plant: For the full year, this represents a 46% increase year-over-year and is 25% higher than our initial guide for 2024.
Operating margin for the quarter was 23%.
John Plant: Pre-cash flow for the year was also a record at $977 million, representing an 88% conversion of net income.
John Plant: Of the $977 million of free cash flow generated in the year, all was deployed to share repurchases, debt reduction and dividends.
Hammett: During 2024, Hammett repurchased $500 million of common stock, of which $190 million was completed in Q4.
Hammett: Regarding dividends, we recently announced a 25% increase in the quarterly common stock dividend, which will be paid later this month.
Hammett: The balance sheet continues to strengthen with the leverage of net debt to EBITDA improving to 1.4 times.
Hammett: Ken will now provide additional color regarding end market revenues in the quarter and year before moving to segment results.
Hammett: The one segment I'll highlight is the improvement in profitability of the structure segment since it showed the largest quarterly increase.
Hammett: This was clearly welcome and helps with our confidence moving into 2025. The commentary regarding Outlook will be provided later after Ken's comments.
Ken Giacobbe: So thank you, John. Good morning, everyone. Let's move to slide five.
So, another solid quarter for ALMED.
and markets continue to be healthy.
Ken Giacobbe: We are well positioned for the future and continue to invest for growth.
Ken Giacobbe: Revenue is up 9% in the fourth quarter and up 12% for the full year.
Ken Giacobbe: Commercial aerospace growth remained strong throughout 2024 with revenue up 13% in the fourth quarter and up 20% for the full year driven by all three aerospace segments.
Ken Giacobbe: Defense aerospace growth accelerated in the fourth quarter and was up 22%.
Ken Giacobbe: For the full year, Defense Aerospace was up 15%, driven by fighter programs and fighter engine spares demand.
Ken Giacobbe: Commercial transportation was expected to be challenging as revenues were down 12% in the fourth quarter and down 7% for the full year.
Ken Giacobbe: Although down, we continue to outperform the market with how much premium products.
Ken Giacobbe: I would also note that despite the challenging market, Howmiss Wheel Segment delivered a healthy 27.2% EBITDA margin for both the fourth quarter and the full year.
Ken Giacobbe: Finally, the industrial and other markets were up 11% in the fourth quarter, driven by oil and gas up 22%, general industrial up 12%, and IGT up 5%.
IGT up 7% and General Industrial up 5%.
Within our markets, we had robust spares growth.
Ken Giacobbe: The combination of commercial aerospace, defense aerospace, and IGT spares was up approximately 25% for the full year to $1.28 billion.
Ken Giacobbe: Fares revenue in 2024 represented 17% of total revenue and accelerated in the second half of the year.
Ken Giacobbe: As a compare, Spare's revenue in 2019 was 11% of total revenue.
Ken Giacobbe: In summary, continued strong performance in commercial aerospace, defense aerospace, and industrial, partially offset by commercial transportation.
Now let's move to slide 6, starting with P&L.
Ken Giacobbe: The focus of my comments will be on full year performance.
Ken Giacobbe: Full year revenue, EBITDA, EBITDA margin, and earnings per share were all records.
Ken Giacobbe: On a year-over-year basis, revenue is up 12%, and EBITDA outpaced revenue growth up 27% while absorbing approximately 700 net new employees.
Ken Giacobbe: The engine segment added approximately 1,205 employees, while we reduced employees in fasteners, structures, and wheels as we improved labor productivity and are seeing the benefits of our CapEx investments.
Full year EBITDA margin increased 310 basis points.
to 25.8% with a fourth quarter exit rate of 26.8%.
Ken Giacobbe: For the full year, incremental flow-through of revenue to EBITDA was excellent at approximately 50% year-over-year.
Ken Giacobbe: Earnings per share was $2.69 per share, which was up a healthy 46% year over year.
Now let's cover the balance sheet and cash flow.
Ken Giacobbe: The balance sheet continues to strengthen. Free cash flow for the year was a record $977 million, which exceeded the high end of guidance.
Ken Giacobbe: Free cash flow conversion of net income with 88% as we continue to deliver on a long-term target of 90%.
Ken Giacobbe: CapEx investments in the year were a record $321 million, up approximately $100 million year-over-year as we continue to invest for growth.
The year-end cash balance was a healthy $565 million.
Ken Giacobbe: Net debt to trailing EBITDA continues to improve and was at a record low of 1.4 times.
All long-term debt is unsecured and at fixed rates.
Ken Giacobbe: ALMED's improved financial leverage and strong cash generation were reflected in S&P's Q4 rating upgrade from BBB- to BBB.
Ken Giacobbe: As you will also recall in Q3, Moody's upgraded helmet two additional notches in investment grade up to BAA1.
Ken Giacobbe: Liquidity remained strong with a healthy cash balance and a $1 billion undrawn revolver complemented by the flexibility of a $1 billion commercial paper program.
Ken Giacobbe: Regarding capital deployment, we deployed approximately 975 million of cash to common stock repurchases, debt paydown, and quarterly dividends.
Ken Giacobbe: For the year, we repurchased $500 million of common stock at an average price of $87 per share.
Q4 was the 15th consecutive quarter of common stock repurchases.
Ken Giacobbe: The average diluted share count improved to a reckless low exit rate of 408 million shares.
Additionally
Ken Giacobbe: In January 2025, we repurchased an additional $50 million of common stock at an average price of approximately $116 per share.
For the year, we reduced debt by $365 million.
Ken Giacobbe: This included a partial pay down in Q4 of $60 million of the U.S. dollar denominated term loan that's due in November of 2026.
Ken Giacobbe: The combined debt actions for the year will reduce annualized interest expense drag by approximately $37 million.
Finally, we continue to be confident in free cash flow.
Ken Giacobbe: For the year we paid $109 million in dividends, which was an increase of 53% year-over-year from $0.17 per share to $0.26 per share.
Ken Giacobbe: We also recently announced a 25% increase in the quarterly Common Stock Dividend from $0.08 a share to $0.10 per share.
Ken Giacobbe: Now let's move to slide 7 to cover the segment results for the fourth quarter.
Engine Products delivered another strong quarter.
revenue increased 14% year-over-year to $972 million.
Ken Giacobbe: Commercial aerospace was up 13% and defense aerospace was up 19% driven by engine spares growth.
Ken Giacobbe: Oil and gas was up 31% and IGT was up 5%.
Ken Giacobbe: Demand continues to be strong across all of our engines markets with record engine spares volume.
Ken Giacobbe: EBITDA outpaced revenue growth with an increase of 30% year-over-year to $302 million.
Ken Giacobbe: gave it a margin increase of 380 basis points year over year to 31.1% while absorbing approximately 220 net new employees in the quarter.
Ken Giacobbe: For the full year, revenue was up 14% to $3.7 billion, EBITDA was up 30% to $1.15 billion, and EBITDA margin was 30.8%, which was up approximately 360 basis points year-over-year.
All were records for the engines product segment.
Ken Giacobbe: Moreover, the engines product segment added approximately 1,205 net new employees to support future growth.
Now let's move to slide 8.
Fastening systems had another strong quarter.
Revenue increased 11% year-over-year to 401 million.
Ken Giacobbe: Commercial aerospace was up 17% including the impact of the wide-body recovery and the Boeing strike.
Ken Giacobbe: General Industrial was up 32%, Defense Aerospace was up 2%, and Commercial Transportation, which represents approximately 14% of Fasteners revenue, was down 13%.
Ken Giacobbe: Year-over-year EBITDA outpaced revenue growth with an increase of 39% to $111 million.
Ken Giacobbe: EBITDA margin increased 550 basis points year-over-year to a healthy 27.7%.
Ken Giacobbe: The FASTRS team has continued to expand margins through commercial and operational improvements.
Ken Giacobbe: For the full year, revenue was up 17% to $1.6 billion. EBITDA was up 46% to $406 million. And EBITDA margin was 25.8%, which was up approximately 520 basis points year over year.
Ken Giacobbe: The Fasteners team delivered solid year-over-year revenue and EBITDA growth while reducing head count by approximately 135 employees.
Now let's go to slide 9.
Engineered structures, performance continues to improve.
Revenue increased 13% year-over-year to $275 million.
Ken Giacobbe: Commercial Aerospace was up 9% and Defense Aerospace was up 51%, primarily driven by the F-35 program.
Ken Giacobbe: Year-over-year, segment EBITDA outpaced revenue growth with an increase of 55%.
$251 million.
Ken Giacobbe: EBITDA margin increased 500 basis points to 18.5% as we continue to optimize the structure's manufacturing footprint and rationalize the product mix to maximize profitability.
Ken Giacobbe: For the full year, revenue was up 21% to $1.1 billion. EBITDA was up 47% to $166 million, and EBITDA margin was 15.6%.
Ken Giacobbe: Even a margin was up approximately 270 basis points year-over-year and head count was reduced by approximately 235 employees year-over-year.
Ken Giacobbe: The team continues to make progress and we expect continued improvements in 2025.
Finally, let's move to slide 10.
Ken Giacobbe: Forged Wheels revenue was down 12% year over year as the slowdown continues to take hold of the commercial transportation market.
Ken Giacobbe: EBITDA decreased 8%, however EBITDA margin continued to be healthy at 27.2% as the team flexed costs and expanded margins through commercial and operational performance.
Ken Giacobbe: For the full year, revenue was down 8% to $1.1 billion, EBITDA was down 7% to $287 million.
Ken Giacobbe: EBITDA margin for the full year was a healthy 27.2% in a challenging market and was up approximately 30 basis points year over year.
Speaker Change: Lastly, before turning it back over to John, I wanted to highlight a couple of items that are in the appendix. First, the operational tax rate for 2024 was 20.5%, which represents a 170 basis point improvement year-over-year.
Speaker Change: Second, pre-tax return on NEDAC assets improved by 800 basis points.
Speaker Change: from 33% in 2023 to 41% in 2024, driven by a strong profitability and the optimization of working capital in fixed assets.
John Plant: So with that, let me now turn it back over to John.
Thanks again and let's move to slide 11.
John Plant: I'm going to provide some commentary by each market segment and also then move to specific guidance.
John Plant: but before I do that maybe it's worthwhile just making sure that everybody understands that we did again outgrow each of our respective markets in 2024 and that's been a theme of recent years and we expect to do so again in 2025.
Let's start with the commercial aerospace segment.
John Plant: Air travel and freight transportation have continued to grow, especially in Asia Pacific.
John Plant: backlogs for Airbus, Boeing and Comac have never been higher, principally due to the under build of aircraft schedules by all of the aircraft manufacturers, but most notably by Boeing, given the strike which commenced in late quarter three and which lasted for almost two months.
John Plant: and was then followed by a further month of employee retraining with no aircraft bill.
Hence, backlog increased again.
John Plant: Given the continued production of many parts by suppliers, starting with Spirit Aerosystems during this production gap, the runway is wide open for bills to now increase.
John Plant: Airbus came close to their revised 770 aircraft build and showed promise going into 2025.
John Plant: Comac delivered 10 C919 aircraft in 2024 principally to Chinese airlines and we can expect higher production volume in 2025.
John Plant: While we have an estimated OEM build volume for each aircraft, perhaps the most interesting build assumption is the Boeing 737 MAX, which we see is about 25 aircraft per month on average for the year, but skewed towards the second half.
John Plant: This assumption enables investors to adjust their models up or down according to their own assumptions.
John Plant: Of course, should Boeing build at rate 38, or indeed rate 42, we will match this.
I'll now touch on spares before moving to defence.
John Plant: Our total revenue from spares was 1.28 billion, representing 17% of Hamlet revenue.
John Plant: Spares revenue increased approximately 25% in the year, and with acceleration in the second half of 2024.
John Plant: We envision spares to continue to be healthy again in 2025 and growing towards our previously stated projection of 20% of HMAT revenue.
John Plant: Defense was also a source of strength last year and we see this continuing to 2025 for both legacy aircraft and the F-35.
John Plant: In 2035 or early 2026 at the latest, we should see the crossover occur where spares volumes for F-35 will exceed the F-35 OE engine F or revenues.
John Plant: Then it will continue to grow as the fleet of aircraft expands worldwide.
Speaker Change: Industrial is expected to be at mid-single digits, led by demand from IGT and oil and gas.
Speaker Change: I provided extensive commentary regarding the future IGT demand during the November earnings call.
Speaker Change: Since then, the overall picture has become even brighter for electricity demand from data centers due to the incoming U.S. administration's focus, which is less on renewable subsidies and more on fossil fuels.
Speaker Change: We see demand increasing from running the existing fleet of turbines harder and hence more spares being required. Moreover, we expect increases in new turbine bills to increase globally in 2025, 2026 and 2027 and beyond.
Speaker Change: The growth requirements for increased megawatts of demand were set out in November.
Speaker Change: while the change is currently towards natural gas and hence favours hermits.
Speaker Change: The expected growth in IGT drives an increase in IGT CapEx investment for 2025 compared to 2024.
As in 2024, CapEx investments are linked to customer contracts.
Speaker Change: as the global leader in IGT turbine blades will continue to focus on additional global capacity demand for Siemens, Mitsubishi Heavy, GE Vanova and Anseldo.
Speaker Change: We're optimistic about the next few years of IDT growth and how MIT is well positioned for both future OE build and for SPARES growth.
Speaker Change: Moving to commercial truck, demand continues to be muted as expected. We were pleased with our ability to increase wheels margin, despite the severity of the downturn in Q3 and Q4, and printing a very respectable 27.2% EBITDA margin for the quarter.
Speaker Change: The outlook is unchanged, with some return to growth expected in the second half of 2025.
Speaker Change: In summary, we see demand increasing in 2025 with the profit being back end loaded principally due to the Boeing build and likely increase in build moving into 2026 with the increased second half truck builds as well.
Speaker Change: The overall midpoint of the revenue guide has moved upwards from 7.5% to 8% plus or minus compared with the November estimate, and this extra growth is on top of closing out a very strong fourth quarter of 2024.
Speaker Change: Moreover, we expect in 2025 first quarter, we expect revenues to be 1.935 billion, plus or minus 10 million, EBITDA of 520 million, plus or minus 5, and earnings per share of 76 cents, plus or minus a penny.
The guided Q1 incrementals are healthy at over 70%.
Speaker Change: And for the year, revenue to be $8.03 billion plus or minus $100 million, EBITDA $2.13 billion plus or minus $25 million, and earnings per share of $3.17 plus or minus $0.04.
Speaker Change: Finally, free cash flow is expected to be above $1 billion at $1 billion and $75 million plus or minus $50 million.
Speaker Change: The full year incrementals are healthy, at approximately 36% in the guide, while we await more clarity on the second half and, in particular, the commercial aerospace narrow body builds.
Speaker Change: Before moving to capital allocation, a couple of comments on tariffs.
Speaker Change: We're closely monitoring the situation and the situation as everybody knows remains fluid but we expect to be well positioned due to our strong commercial agreements and the mission-critical nature of our products.
We'll pass on additional costs through to our customers.
Speaker Change: We've demonstrated our ability to do so and quickly pass on costs following the steep inflation that we saw in 2022.
Speaker Change: I'll make a few closing comments on capital allocation for 2025 before moving to Q&A.
I invite you to view the 2024-2025 summary for commentary.
Speaker Change: The helmet balance sheet is strong, we were rated well into investment grade, and net leverage closed at 1.4 times net debt to EBITDA.
Speaker Change: The dividend payout has been increased by 25% starting in Q1.
Speaker Change: and hence the dividend payout for the year will repatriate further funds to shareholders.
Speaker Change: The share buyback program will continue with plenty of availability under the current board authorization.
Speaker Change: We expect that the total buyback in 2025 will exceed the buyback of 2024. Debt pay down will be muted compared to 2024. This provides the company with both good shareholder return profile and also great optionality.
And with that said, let's move to questions. Thank you.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
We please ask that you limit yourself to one question.
Speaker Change: At this time, we'll pause a moment or two to sum our roster.
and others. Thank you. Bye-bye.
Speaker Change: Our first question will come from Doug Harnett with Bernstein. You may now go ahead.
Good morning. Thank you.
and Doug.
On fastening systems
Speaker Change: you you came up you've got even down margins of 28% roughly I mean this is a it's kind of been a big step up
Speaker Change: Now, you know, you've got, I think, a mixed improvement working here with more...
A350-787 Fasteners
Speaker Change: But, can you talk about, is there anything unusual that happened in the quarter?
Speaker Change: Or are you really on a path here to get materially higher margins going forward, either from mix, performance improvement, or operating leverage?
I think I
Speaker Change: look back at a faster business. The track we're on is really very good, Doug.
focusing the business from all aspects of both operational
and Productivity Improvements.
Speaker Change: has been even better than I had expected and combine that with, I will say, commercial discipline has enabled us to move a long way along the pathway to restoring previous margin hires.
and so I'm pleased with that.
Speaker Change: I don't think that the wide body mix has changed fundamentally yet for the positive. I mean there's a small positive mix change relative to narrow body that's gone on during 2024.
But I do expect that the bills for 2025
Speaker Change: to be better than 2024. And so I think there's still some positive mix that's there for us.
especially as we look forward to hopefully a rate 10.
and maybe more for the Boeing 787.
And also, I think you'll recognize the Airbus
Speaker Change: future monthly build has been stated to move to 12 aircraft a month by 2027, and that compares to probably last year's about five a month. So I think the rate of increase for widebody is going to pick up.
Speaker Change: over the next two to three years, and that should be a further benefit for the business.
Speaker Change: naturally you know the rate of increase in margin I would expect to be you know I'll say less aggressive in the future but I don't think that we finished yet
Okay, very good, thank you.
Speaker Change: Our next question will come from Miles Walton with Wolfe Research. You may now go ahead.
Miles Walton: Thanks, good morning. John, just looking at your implied guidance after the first quarter, it implies margins start to step down and certainly incrementals are half of what you're implying for the first quarter.
Miles Walton: Can you rationalize some of that for us? What's growing? What's a headwind? Or is it more conservatism given your lack of visibility beyond the first quarter?
Miles Walton: It probably would have been fairly easy for us to have been a little bit more optimistic, but at the same time, you know, there's lots of things going on during 2025.
Miles Walton: The rate of growth could be materially changed by additional narrow body builds as an example and you know we've chosen to be fairly conservative in that view for our financial guide.
and also...
Miles Walton: There's always a possibility of some cutbacks given the statements of the
And so we don't want to get ahead of ourselves.
Miles Walton: That's the way I think about the narrow-body side. Again, I'm wide-bodied. It could be better. But let's wait and see until we are clear that some of the supply chain challenges that have been quoted publicly, whether it's been seats or...
Miles Walton: I say heat exchange, all these sort of things which have been mentioned, are those now clear? And so we want to be a little bit cautious there as well.
Miles Walton: and also, as you know, we're building out a couple of new manufacturing plants this year, facilitating them.
Miles Walton: And so, you know, we want to be a little bit cautious in that regard, till we've really got our feet well under the... and firmly placed under the table on those two things.
Miles Walton: and it's also, as you know, always a little bit uncomfortable having a back-end load to things. And so, at this stage, I think we've given
best visibility that we have, which is...
Miles Walton: and another strong step forward in Q1 and choose to be a little bit more muted in the balance year till we know a bit more about the profile FBU and how it all pans out.
Miles Walton: And as you know, we also said the second half of the year for commercial truck
is also expected to improve.
Miles Walton: But again, it's an expectation, not knowledge. And so again, there's no need for us to get ahead of ourselves until we've got better visibility of all the things to play out in this year, which is.
Miles Walton: the demand increases from what customers say they may achieve and what markets might do and while we're as you know building out a substantial amount of infrastructure to enable us to to match the demand as we go into the second half and into 2026.
Speaker Change: Just one follow-up. What is the headcount growth you're thinking about to match that that expansion of capacity?
Speaker Change: I'm guessing about a thousand net heads for the year at this point.
Speaker Change: We'll have a higher gross number than that to net down to $1,000, but a little bit less than that.
Speaker Change: in 2024 can venture with us also improving our productivity. But again, it's something which is yet to be determined. That's directionally how we're thinking about it.
Okay, thanks again
Thank you.
Thank you.
Speaker Change: Our next question will come from Robert Stollard with Vertical Research. You may now go ahead.
Thanks so much. Good morning.
Good morning, all.
Speaker Change: John, I just wanted to follow up on your 737 production forecast. I was wondering what sort of purchase orders your various businesses are seeing at the moment and whether you've got any more clarity on how much inventory is in the system at this point.
so
Speaker Change: Clearly our fourth quarter wasn't stellar in terms of requirements for Boeing and we have seen and have fully taken account of the
Speaker Change: in a couple of product lines, the cutbacks that have occurred due to inventory. And so that's already baked into our first quarter guide. And so there's nothing for us to be concerned about there.
The thing that I do worry about is if we...
Speaker Change: are unable to, let's say, smooth some of those, is that demand on us could actually accelerate to an even much higher rate in the balance being going into 2026.
Speaker Change: and so it's that potential for some instability in the demand profile that we've taken account of.
Speaker Change: But the most important thing is that which we see at the moment is fully baked into our first quarter, which I think is pretty healthy anyway. So nothing to worry about there.
Speaker Change: Again, as you know, we are... I'd say, just to go a bit further, we...
Speaker Change: not yet changing over the turbine airfoils for the LEAP-1B and so we expect that to continue with the existing product as we go through 2025.
Speaker Change: and looking towards a later implementation compared to the Leap 1A, so it's just worth mentioning that in the context of the dynamic of the year.
Okay, thanks so much, John. Thank you.
Speaker Change: Our next question will come from Scott Duschel with Deutsche Bank. You may now go ahead.
Scott Duschel: Hey, John, you referenced engineered structures benefiting from product rationalization this quarter. If you can just explain in a bit more detail what that product rationalization point is referring to and if there is opportunity for further benefit from beyond this quarter going forward.
You may remember, Scott, that we did...
Scott Duschel: closed down a couple of facilities in Europe earlier in 2024.
Scott Duschel: and also sold one of our less profitable structures business. So, that's...
Scott Duschel: Some of the effect on margin, albeit probably even bigger than that, has been the step up in productivity and performance of the business.
Scott Duschel: do not think there's anything to worry about in terms of going backwards in that regard. So I think the combination of having thrifted out say three
Scott Duschel: underperforming operations while still having revenue grow, which is always a great time to do it.
Scott Duschel: improvements in productivity and also again commercial focus has paid dividends for us.
Scott Duschel: and for us to be able to step up from a 14% level to an 18% EBITDA margin was really good and that's why I chose to call it out in my opening comments and hope to be as good as that or build on it during 2025.
Speaker Change: Thank you. And just to clarify, can you say what the guidance is assuming on the GTF Advantage certification timing?
Speaker Change: So let me just step through the overall picture on the changeover on both
Speaker Change: the GTF and also it's worthwhile mentioning the changeover on the the leap engine so GTF
certification has not occurred.
We still await final approvals
Speaker Change: from Pratt & Whitney regarding sign-off for tooling to be able to make at high rate.
You know, we have done some early production.
Speaker Change: And so we're optimistic that changeover occurs during the, say, the 2025 year.
It's unclear to us yet.
Speaker Change: exactly when the changeover will occur, and substantial volumes will do so. But let's assume at this point, a mid-2025...
Speaker Change: change, albeit with everybody wanting that change to occur as soon as possible, both for the durability improvements in the engine, and for HIAMAT additional, I'll say, content.
Speaker Change: and overall mix within the business. So we see that as a good change, but still struggling to put a pin in exactly which month we'll change over.
In the case of GE, the changeover for the LEAP
1A has finally occurred, and so that's good.
and if you think about
Q4
Speaker Change: I mean, we were, during that quarter, uncertain about changing, in fact, we...
Speaker Change: We've had to change and didn't change and then change over again, so there's a little bit of disturbance in our fourth quarter engine.
Speaker Change: margin performance due to that changeover, which I think everybody can understand. But the most important thing is as of now, in January into February, we've changed over to the new improved version.
Speaker Change: and we believe that will be a net good for both GE and for Hamas.
So,
Speaker Change: The Leap 1B, my expectation is that won't change over at all during
Speaker Change: 2025 and that will be sometime more like mid-2026 but again with timing to be determined and the changeovers need to be approved by both
Speaker Change: GE, Boeing, and also the FAA. So that timing is less clear. So in summary, GTF by hopefully mid-year this year.
and we look forward to that change.
Speaker Change: The Leap 1A has now changed as of January, and that perturbation in our margin is behind us.
Speaker Change: with all the what's required in a major changeover like that and so all good on that front for increased robustness of those narrowbody engines.
Thank you.
Speaker Change: Our next question will come from Ron Epstein with Bank of America. You may now go ahead.
Good morning, John.
Ron Epstein: Can you speak a little more to the Opportunity Industrial Gas Turbine? Because it does seem like over the past several quarters you've gotten, how do I say, more more built up on it, right? So is there any more color you can give around it and ultimately how big could it be for you guys?
Thank you.
Speaker Change: It is tough to get me balled up on something. I'd like to believe I'm fairly level-headed, Ron, but I do think...
the picture for IGT is exceptional.
the big picture is
and others.
Speaker Change: But I'll just stick with the U.S. because it's easy. Then you can just extrapolate it. But the data centers require massive amounts of electricity, both for the build-out of them, the functioning of these new chips.
Speaker Change: in the service, and also electricity for pooling them down as well, so the demands are extraordinary.
Speaker Change: and it will be interesting to see how both the electricity is provided and also the grid is able to cope with. And also I think that certain...
data center clusters are going to have their own.
Speaker Change: It's a source of electricity because of the security they need for it, which will require gas turbines to be on site.
Speaker Change: and so the the overall blend of electricity provision between that which will come from
Wind, solar
and for natural gas I think has changed.
Speaker Change: with the new administration, and I think that everybody is seeing an even brighter prospect for
for Natural Gas and Industrial Gas Turbines going forward.
Speaker Change: and we have been in deep discussions with some of our customers to create the capacity and in fact we're actually in that CapEx guide I gave we're actually going to build out
Speaker Change: Of course, none of these things happen without some disturbance, and we all are familiar with Deep Seek and Was That a Revolution?
Speaker Change: And the best way I can explain it is that it was using the benefits of the open language models developed by other hyperscalers.
Speaker Change: but fundamentally in terms of the hyperscales that we think about which is
and Microsoft and Meta and Google and Oracle.
Speaker Change: Then I think the requirements for building out the servers and in data centers, it's all intact.
Speaker Change: and I expect it to be really good for that segment going forward.
Speaker Change: In the short term, it's going to have to be provided by running the existing turbines harder, which means...
Spastic man
Speaker Change: And at the same time, everybody of all of the major gas turbine providers in the world are gearing up to add capacity, and for them to do that, they need the most critical component, which is the turbine blades, which leads back to HAMAP.
and we do have the leading market share above 50%.
Speaker Change: of that global market. So we're pretty optimistic about it, conscious we don't want to get ahead of ourselves, and so I expect that we're going to be constrained in our ability to supply over the next couple of years.
as we build out this compared to what's there.
but are very pleased to be investing in it.
Speaker Change: and what we think is going to be a bright future both for sales revenue and for margin going forward. And I think on the last call I did state clearly that our margins in IGT are similar to our aerospace turbines.
Yeah, got it. Thank you.
Thank you.
Speaker Change: Our next question will come from David Strauss, Barclays. You may now go ahead.
Thank you. Good morning.
David
Speaker Change: Then, John, in terms of Tumblr, you know, we should expect to...
Speaker Change: less in the way of, you know, kind of gross debt reduction this year. And you talked about a higher buyback. Is it fair to think about that, you know, you could look to return pretty close to 100% of free castle in terms of buyback and dividend? Thanks.
Speaker Change: Maybe I'll go first, Ken, and then you clear out the wooden capital assumption.
So,
Speaker Change: What we're very clear on, David, is that if you look at 22, 23, 24, is that our cash flow
obviously repatriated to shareholders either by
Speaker Change: share buyback dividend, or I also think of debt reduction and its improvement in future free cash flow as also as part of that. Given our net leverage is that
Speaker Change: The way I look at it is that we can increase the dividend, but that's not going to fundamentally change the contours of our cash flow and its usage.
but this year in 2025
Speaker Change: I just don't see us doing anything like what we've done in the last couple of years in terms of putting our debt stacks into really great order.
Speaker Change: and also putting out an average interest cost of our long-term debt in a really good condition below the average of the 10-year Treasury. So, again, good work there.
Speaker Change: That leaves us with share buyback. The commentary I've given so far is that it will be above 2025. I've not put a pin in the exact number, but you can assume that
Speaker Change: If you look at the combination of all of that, is that the benefits of our cash flow will be largely, if not wholly, repatriated to shareholders because everything else is in such great shape.
Thank you. Thank you.
Thank you.
Speaker Change: Can I have a view on the working capital? Yeah, so David, so in terms of free cash flow, working capital, so again, starting with $24, that $9.77,
Speaker Change: of Free Cash Flow was a record, as we talked about, that 88% conversion, very pleased with the performance of the team on that, especially considering, you know, embedded in that was record CapEx investment, right, around $321 million.
Speaker Change: And as you can see in the reports that we have here, that $100 million increase in CapEx, you can see the year-over-year primarily in the engines business, which has tremendous return on net assets in the business.
So, as we move forward into 2025,
Speaker Change: We try to give you the assumptions on slide 15 and the deck in terms of some of the building blocks of free cash flow
Speaker Change: But north of a billion dollars of free cash flow in 2025
Speaker Change: If you look at the working capital, specifically to your question, embedded in there is a burn of around $180 million of working capital burned. And the way I would look at it is...
revenue year-over-year is up.
$600 million-ish on the guide.
Usually you have about a 20%
Speaker Change: working capital burn associated with that revenue increase. So you're looking at a, normally you would expect $120 million, the working capital burn, but we're going to build more inventory, right, as we look at
Speaker Change: Commercial Aerospace, specifically in narrow body, if our assumption is maybe conservative on narrow body, if that's higher and say Boeing can go to 38, 42, we will be ready for that and that's why we're going to put some incremental input towards that working capital number.
Perfect. Thanks very much, guys.
Thank you.
Our next question will come from Sheila Kayaglou with Jeffries.
You may now go ahead.
Sheila Kayaglou: Thank you. Good morning, John, Ken, and PP. Maybe can you talk about the step-down in engines margins in Q4? They were down about 150 bps Q over Q, a surprise given the continued volume growth there. And how do we think about margin levels?
Sheila Kayaglou: in 25 and 26 for engines given new capacity coming online and the narrow body engine kits you talked about and maybe a follow-up to Miles's question what segment decelerates the most from Q1 levels?
Okay, so, first of all...
In my view, Sheila, the...
Sheila Kayaglou: Small margin change in engine in the fourth quarter is what I call noise, and I wouldn't be too much into that at all.
Sheila Kayaglou: It doesn't bother me, of course I'd have liked it to occur, but at the same time in terms of the long-term thematic for that business, it really, I think, is fairly inconsequential.
Sheila Kayaglou: The thing I said earlier in the call, which maybe is amplifying a little bit about, as you know, we went through
the changeover in terms of preparing for
Sheila Kayaglou: the new LEAP-1A Stage 1 Turbine Blade, which has been noted.
Sheila Kayaglou: Probably what's not been noted is the change of dates in terms of implementation and final FAA certification and then readiness. So we incurred some costs.
Sheila Kayaglou: during the fourth quarter in that whole changeover and the most important thing is that changeover is behind us.
Sheila Kayaglou: The new blade, as far as we can see, is performing well.
and so we don't see any of those changeover costs.
Kenneth Giacobbe: Paul Luther, Kenneth Giacobbe, Kenneth Giacobbe, Kenneth Giacobbe, Kenneth Giacobbe, Paul Luther,
Kenneth Giacobbe: That's a TBD. And then, of course, there will be the changeover coming for the GTF.
which we see as positive.
Kenneth Giacobbe: and possibly even more positive for the LEAP engines, just because it's needed so much and the technology change is considerable.
Kenneth Giacobbe: and so we look forward to that, and again with it being data uncertain.
Kenneth Giacobbe: So I think the most important thing is, you know, Q4 was, I mean, was the normal, like, all
Kenneth Giacobbe: I don't think anybody can be that good in terms of what's a fractional change for a percentage point while undergoing such significant change. So that's how I'd categorize it. I think the second part of your question was about margin.
It's hard to guess at it in terms of
Kenneth Giacobbe: total change year-on-year from an average of 24 to an average of 25.
Kenneth Giacobbe: I'm pretty positive about our structures business and the changes we've been making.
and I see that a lot of those things...
Kenneth Giacobbe: came right in the fourth quarter and You know, we we hope that there's nothing that's going to occur that will put it into reverse at all again It's always a view and a forecast
Kenneth Giacobbe: But year-on-year is that I think structures will probably be the biggest percent of improvement here But heck, you know, I'd like all of them to be continuing to move forward and We'll see how it goes
Okay thank you. Thank you.
Speaker Change: Our next question will come from Seth Seifman with J.P. Morgan.
You may now go ahead.
Thanks very much and good morning.
Speaker Change: I guess maybe following up on that last question with structures, you know, impressive margin performance.
You've kind of exited some areas.
Speaker Change: So, not a place where you've been looking to, you know, add incremental capital. Once you've kind of got it performing the way you want it to perform, you know, how do you think about its place in the portfolio?
Speaker Change: You know, one quarter doesn't make a year, but if you say, what would I guess at, I'd say that we will probably be able to repeat that in 2025.
Speaker Change: And so, you know, inevitably, when you begin to do many of the right things,
Speaker Change: in the business, it does earn its way to have some additional capital deployed.
Speaker Change: towards it, whereas we've been really, I'll say, starving that business or certainly not reinvesting at its depreciation rate because of its overall
I think the good news is, is that, um, the...
Speaker Change: The inventory overhang that was at Lockheed in terms of bulkheads is, I think, behind us and you can see some of the effect of that.
Speaker Change: I also see that titanium demand continues to be healthy in 2025.
Speaker Change: are the beneficiaries of some geopolitical tensions there versus Russia and who knows where all of that goes. At the moment, I think it's certainly a higher team's margin business.
Speaker Change: and there's no reason why we need to stop there and so whether we can move it into the 20s
Speaker Change: that remains to be seen, but ultimately I still don't stand behind those claims. I don't see that as a business which can intrinsically have the rate of margins that we have in our engine business.
Speaker Change: and that's why we've been really pleased to to really capacitize
Speaker Change: there, just because of the growth of the defensive mode around the business and the technology and the, you know, technologies which are yet to come. And so, you know, I'm very positive about all of that.
Speaker Change: but the structure is so far so good and I'm pleased with its performance but nothing in terms of its place in the portfolio, it's a good contributor it's creating value and so all good as far as I'm concerned.
Excellent, thanks very much.
Thank you.
Moderator: Our final question will come from Ken Herbert with RBC Capital Markets. You may now go ahead.
Hey John, thanks for squeezing this in.
Ken Herbert: You had really strong spares growth in 25, or in 24. What's the underlying assumption for spares growth in 25, if you can provide that? And I guess specifically.
Speaker Change: You know the last few calls you've talked up in particular demand around the CFM-56 and SPARES activity there. Can you comment within SPARES on the aerospace outlook in particular and what you're seeing? Thank you.
Speaker Change: Okay, so let me deal with the CSM-56 comment first, is that my view has been is that
the statements, which was probably
Speaker Change: viewed about three or four years ago, that 2025 would be the year of peak demand.
for CFM 56.
Speaker Change: I think in my view that's being pushed out to more like 2027.
Speaker Change: and I think it all comes back to the existing fleet is being worked harder. You can see that the demand into the MRO shops for Hosea's legacy engines is still increasing.
Speaker Change: are being created, and more deeper overhauls are being performed. And so I really do think that my statement holds.
Speaker Change: And then, if 27 is the peak, and it might be later than that,
Speaker Change: That's what I stand at the moment. Is there any degradation from that would be very marginal and will take many years into the next decade So I don't see massive change there and if you think about it
Speaker Change: When we started out in 2024, the assumption around lead production was much higher than it turned out.
Speaker Change: and those new engines are not in the market and therefore...
Speaker Change: and therefore that in itself creates more demand for CFM56s because airlines are still using those planes as much as they possibly can and trying to accelerate their transition through any MRO repairs.
Speaker Change: So that deals with CFM-56. In terms of demand for leak range of engines...
I think the spares demand continues to grow.
Speaker Change: and, if anything, the demand for LEAP 1B, I think we're going to see that accelerate in 2025.
Speaker Change: and building on a very strong demand for Leap 1A blades so I think the important things to remember is we don't control when our blades leave us and are passed to CFM, let's call it.
Speaker Change: We don't control how many of those are built into new engines and how many goes to spares. And so that'll be an interesting dynamic as we go through 2025.
But my expectation is that...
the needs for Boeing will be fulfilled.
and those LEAP-1B engines will be produced.
Speaker Change: for them and all of the balance goes to spares. On the other hand, if spares are prioritized first and OE engines last.
Speaker Change: then that does have an impact and so we've provided some caution around that fact and so that if
Speaker Change: Spurs is to be prioritized and at the expense of OE bill, then we would not be selling our structural castings and also all of the other parts in the low-pressure turbine that's built out by Safran.
Speaker Change: and so when you think about it, overall what does that say?
Spares are going to increase again in 2025.
Speaker Change: And so I think we're going to see a very healthy increase in spares.
Speaker Change: and I'm hoping that we're going to see both a healthy increase in spares and a healthy increase in OE engine build.
and the numbers for production.
will actually be higher than it's currently being called out.
but that again is to be determined.
Speaker Change: But I think every one of those engines is going to be necessary to allow Airbus and Boeing to enable them to achieve.
above the mid-50s and also Boeing, you know,
Speaker Change: part of what we produce is going to be necessary to build out those engines to enable the aircraft to be built and whilst also maintaining and fulfilling the spares demand which is going to be very healthy going into 2025.
Great, thank you.
Thank you.
Speaker Change: This concludes our question and answer session, as well as the conference. Thank you for attending today's presentation. You may now disconnect.