Howmet Aerospace Inc (HWM) — Q3 2020 Earnings Call Transcript

Thank you, Fiya. Good morning and welcome to the Howmet Aerospace third quarter 2020 results conference call. I'm joined by John Plant, Executive Chairman and Co-Chief Executive Officer; Tolga Oal, Co-Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John, Tolga and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. With that, I'd like to turn the call over to John.

Thanks, PT, and good morning, everyone, and welcome to this morning's call. I plan to give an overview of Howmet's third quarter performance. Tolga will speak to segment information, and then Ken will provide further financial detail. Lastly, I will return to talk about the outlook for the fourth quarter and the 2020 financial year. Please move to Slide #4. The third quarter performance was good and in line with expectations, including strong cash generation. Revenue in the quarter was $1.1 billion, down 37% year-over-year, and was impacted by commercial aerospace being down 56% driven by customer inventory corrections. We continue to expect that this is the low point for Howmet revenues while anticipating there could be some lingering inventory corrections that could carry over into the fourth quarter and possibly the first half of 2021. Commercial transportation was down year-over-year, but we had healthy sequential growth to 42%, which mitigated the impacts in the forged wheels and commercial transportation fastening segment. Moreover, we had growth in defense aerospace and in the industrial gas turbine business year-over-year. The mix of our portfolio has changed with approximately 40% of Q3 revenue being tied to commercial aerospace. Operating income excluding special items was $100 million and this includes the buyout of an unfavorable long-term contract, which costs $8 million. This hopefully should be the last of the cleanup items over the last year. Segment decremental margins including the contract termination were 37% year-over-year. I had indicated on the Q2 call that the third quarter was likely to be more decremented than the second quarter and reflects that we chose not to take out costs for one quarter and risk not having the people assets in place to meet what we expect to be an uptick in future demand. For example, early in the third quarter, we completed all of the people reductions in our wheel segment and I've since pulled people back on furlough, and I have begun recruitment in certain countries as we bring production assets back online, both in our forgings and machining lines. Structural cost reductions will continue within each of the aerospace segments to the end of 2020 and in the first quarter in Europe. The third quarter reflects further structural cost takeout of $56 million making our year-to-date cost takeout $137 million, which is ahead of target. This structural cost takeout is in addition to the flexing of variable costs, which we expect by the end of the first quarter 2021 to be at a perfect flex. Furthermore, price increases of $14 million were achieved in the third quarter compared to $9 million in the second quarter. Year-to-date price increases are $28 million. I am pleased that all of the 2020 long-term contract negotiations are now completed and price negotiations are well underway for the 2021 long-term agreements. Now let's move to the balance sheet and cash flow. Adjusted free cash flow in the third quarter was very good at $188 million before further reductions in the accounts receivable securitization program and cash flow was $143 million after the reduction in the AR program. The $45 million of the accounts securitization reduction was effectively repayment of debt. Cash severance payments in the quarter were $14 million. The third quarter cash balance increased to $1.4 billion after the $51 million of common stock share repurchases, which were at an average price of $17.36. Our peak operational cash requirements are approximately $300 million, which results in excess cash in hand of well over $1 billion. Net debt to EBITDA is approximately 3.2 times and our revolver of $1 billion continues to be undrawn. So let us move to Slide 5. All plants are running with employee and partner safety being a top priority. We're actively monitoring employee health risks and all programs meet or exceed local standards. To best serve our customers, we're effectively managing daily adjustments for customer inventory corrections and shutdowns. Regarding cost containment, most of the North American permanent personnel reductions have been completed and are ahead of targets. Therefore, we will be raising our 2020 permanent cost outlook. We also continue to flex variable spending and labor effectively with revenue. Our strict and disciplined capital expenditure process has been effective. And we will once again be reducing our annual capital expenditure outlook. Lastly, we're focused on working capital, but expect it to be a use of cash in 2020, as we have reduced our AR securitization program by approximately $95 million year-to-date. Moreover, we have stranded inventory, which we expect to be a source of cash in 2021. Now, let me turn it over to Tolga.

Thank you, John. Please move to Slide 6. We summarized on Slide 6 the status of our segments. Aerospace segments continue with revenue adjustments that follow slightly different trends. Let me start with the Engine Products. Although strong defense aerospace and industrial gas turbine growth continued in the third quarter, commercial aerospace faced expected customer inventory corrections and seasonal shutdowns. We continue to expect that the third quarter will be the lowest revenue quarter of 2020, and we are ahead of our permanent cost reduction plans. Additionally, we are flexing variable labor and indirect costs with revenue. Regarding our long-term agreements, 2020 negotiations are now complete and we are actively working on 2021 contracts. Our philosophy on pricing has not changed. The Engine Product segment's biggest challenge continues to be managing the stranded inventory, which had a modest reduction quarter-over-quarter. Moving to Fastening Systems, the Fastening Systems segment follows the lagging, reducing revenue trends mainly due to the timing of the commercial aerospace distribution business. The decline in commercial aerospace is partially offset by growth in the fasteners industrial business. Regarding permanent cost reductions, that's the largest number of European locations within our business, which impacts the timing of cost reduction actions, but follows directionally the revenue reduction threat. We are bridging this timing with heavy furloughs and effective variable cost flexing. Maintaining our critical talent and skill sets is our priority during this period. The Engineered Structures segment has long lead time orders requiring close discussions with our customers to level their demands for an efficient operating model for the next six to nine months. Permanent cost reduction actions are ahead of plan. Long-term agreement pricing negotiations are complete for 2020, including weeding out unprofitable products. In the Forged Wheels segment, third quarter 2020 revenue started recovering from second quarter 2020. As John mentioned, third quarter sequential revenue was up 42% as top U.S. shipping ports are near or above record levels of volume, which drives tracking demand. We expect continued growth in the fourth quarter and have called employees back from furloughs and restarted operations. We have compressed permanent costs and are effectively increasing production to meet customer demand. Lastly, we renewed one of our largest customers’ long-term agreement while increasing share with our innovative, lightweight, 39-pound wheel. I will now hand it over to Ken to give more details on the financials.

Thank you, Tolga. Now let's move to Slide 7. Before moving into the revenue and segment profitability, I wanted to note that the third quarter revenue and profit was in line with expectations and better than the implied outlook that we provided on the second quarter earnings call. The improved performance will be reflected in the updated outlook for the remainder of the year. Now to the third quarter. Total revenue was down 37% year-over-year driven by commercial aerospace, which now represents approximately 40% of total revenue in the quarter. Moving to the right-hand side of the slide, commercial aerospace was down 56% year-over-year. Consistent with our previous outlook, we expect the third quarter to be the lowest revenue quarter of the year as customers adjust inventory levels. Regarding the remaining 60% of the portfolio, I would point out that our second largest market, defense aerospace, continues to show year-over-year growth and was up 15% in the quarter, driven by strong demand for the Joint Strike Fighter on both new engine builds and engine spares. Our next largest market commercial transportation, which impacts both the forged wheels and the fastening system segment, was down 31% year-over-year. However, as Tolga has mentioned, we are seeing favorable trends for increased demand and this market improved 42% sequentially. Lastly, the industrial and other markets, which comprise industrial gas turbines, oil and gas, and general industries, were down 4%. I would point out that industrial gas turbines, which make up approximately 40% of this market, continue to be strong and were up 23%. Now let's move to Slide 8. On this slide, we are providing historical information for the combined segments with an estimated operational view of corporate. Compared to the prior year, third quarter revenue declined approximately $660 million with a corresponding segment operating profit decline of $246 million. Despite the 37% year-over-year revenue decline, we remained profitable and generated strong adjusted free cash flow in the quarter. Included in the third quarter results are continued price increases of $14 million and continued permanent cost reductions of $56 million for a combined benefit of $70 million in the quarter. On a year-to-date basis, price increases were $28 million and cost reductions were $137 million for our combined benefit of $165 million. One last comment on cost reductions of the $137 million realized year-to-date, this includes carryover benefits from our 2019 cost reduction program. This program generated $54 million of benefit year-to-date for 2020 and finished ahead of target. The program is now substantially complete. In the appendix, we have provided additional information, including historical financials for each of the segments. Now let's move to Slide 9 to go into more detail on the segments. Engine Products year-over-year, revenue was down 43% in the quarter. In the segment, commercial aerospace was down 65% driven by COVID-19, 737 MAX production declines, and customer inventory corrections. Commercial aerospace was somewhat offset by an 18% year-over-year increase in defense aerospace and a 23% increase in industrial gas turbines. Third quarter results were impacted by an $8 million charge to exit an unprofitable long-term contract. Cost reductions and price increases continued in the segment, and the team continued to flex variable spending to mitigate the impact in the quarter of the significant decline in commercial aerospace revenue. Now let's move to the fastening systems segment on Slide 10. Also as expected, we experienced a deeper revenue decline in fasteners as the third quarter year-over-year revenue was down 31% driven by commercial aerospace and commercial transportation, both being down over 35%. Continued cost reductions, combined with third quarter price increases, helped mitigate the decrease in revenue. However, a weaker product mix, with less commercial aerospace and the expected delay in European cost reductions unfavorably impacted results. In the near term, we are furloughing employees to offset the delay in European cost reductions. Now let's move to Slide 11 to review engineered structures. For the engineered structures segment, third quarter revenue was down 35%. Commercial aerospace was down 54%, driven by COVID-19 production declines on both the 787 and 737 MAX, as well as customer inventory corrections. Commercial aerospace was somewhat offset by a 26% year-over-year increase in defense aerospace. Cost reductions and price increases helped to mitigate the decrease in revenue, but structures experienced a weaker product mix with less commercial aerospace. Lastly, let's move to Slide 12 for forged wheels. In the third quarter, revenue for the forged wheel segment was down 29% year-over-year, but increased 52% sequentially as expected. Employees are returning from furloughs and we continue to flex staffing at variable cost to meet changing market demand. Despite revenue being down 29%, the impact of cost reductions resulted in a healthy EBITDA margin for the quarter of 26%. Now let's move to Slide 13 for special items. Special items for the quarter generated a net benefit of approximately $23 million after tax and included two items: first, a $36 million after tax benefit related to a U.S. tax law change; second, a $12 million after tax charge related to severance programs. These severance programs are tied to the permanent cost reduction actions. Now let's move to Slide 14. We continue to focus on improving our capital structure and liquidity. All debt is unsecured and our net significant maturity is in 2024. Our cash position remains strong and increased to $1.4 billion in the quarter and is expected to increase again in the fourth quarter. As we look into next year, we will use cash on hand to pay down the 2021 outstanding notes in the first quarter of 2021. A couple of additional items of note, first, our $1 billion five-year revolving credit facility remains undrawn. Second, we have reduced our AR securitization program. Prior to the separation earlier this year, we historically sold $350 million worth of AR each quarter. Beginning in the first quarter of this year, the amount of AR sold through the securitization program was decreased each quarter approximately $20 million decrease in the first quarter, a $30 million decrease in the second quarter, and a $45 million decrease in the third quarter. The total decrease has been approximately $95 million year-to-date from $350 million of AR sold at the end of 2019 to approximately $255 million of AR sold at the end of the third quarter. The $95 million reduction in AR sold is effectively a repayment of debt, unfavorably impacting year-to-date adjusted free cash flow. Before turning it back to John to cover the 2020 outlook, let me review some assumptions on Slide 15. Depreciation and amortization is expected to improve to approximately $270 million for the year. The annual operational tax rate is also expected to improve and be in the range of 27% to 29% for the full year. Regarding CapEx, we’re once again reducing our annual CapEx spend outlook to approximately $160 million for the year, which is a historical low at 3% of revenue. Lastly, as a result of the common stock share repurchases in the third quarter, we’re allowing the expected fourth quarter diluted share count to approximately 437 million shares and the full year average diluted share count to approximately 439 million shares. Now let me turn it back over to John.

Thanks, Ken. Now let me discuss the outlook for the remainder of 2020. We are improving the outlook and narrowing the ranges; the improvement strengthened sales, increases EBITDA, increases EBITDA margins, and enhances earnings per share compared to the prior outlook. Revenues in the fourth quarter are expected to be $1.23 billion plus or minus $30 million, and price increases are expected to continue. EBITDA in the fourth quarter is expected to be approximately $255 million plus or minus $15 million. We are once again increasing our annual permanent cost target to $185 million from $150 million. These are savings realized in the year. Our fourth quarter EBITDA margin is now increased to 20% to 21% from the prior midpoint of 20%. I think this may be the most significant item of our call this morning beyond the good cash generation. Annual earnings per share improves to a range of $0.68 to $0.76. Cash generation in the quarters from separation Q2 to Q4 is strong and unchanged at $450 million plus or minus $50 million despite the third quarter incremental reduction in AR securitization of $45 million. Year-end cash is expected to increase once again to approximately $1.5 billion. The event cash balance includes $95 million of annual reduction in AR securitization and $51 million of common stock repurchases at the average price of $17.36. Approximately $300 million of share purchase authority remains under prior announced Board authorization. Fourth quarter net debt of approximately $3.6 billion, which is an improvement post-separation, which was started out at $3.8 billion. As we move into 2021, we plan to use cash on hand to repay the outstanding 2021 bond maturities. During these uncertain times, we are focused on the areas we control, including price, variable cost flexing, structural cost reductions, CapEx reductions, and free cash flow, while being prudent with our cash to opportunistically pay down debt and repurchase shares. Moreover, a diverse portfolio with less than 50% of revenue tied to commercial aerospace is delivering strong results while we wait for commercial aerospace to recover. Let’s move to Slide 17. To summarize, our third quarter delivered in line or better than the implied outlook. Cost and price leverage has been deployed. We have healthy and improving liquidity with positive cash flows in this COVID environment. The fourth quarter outlook improved regarding revenues, margins, and profitability with earnings per share guidance raised. Now let me turn it over to take your questions.

Thanks very much, and good morning.

Good morning, Seth.

John, I’ll have to make my one question about this news we saw recently about Pratt & Whitney planning to start building airfoils in North Carolina. And basically, how you view that, what it might reflect about customer behavior and what implications you may have for Howmet and for your own strategy.

Okay. First of all, we’ve discussed this with Pratt, but when you reflect on the situation in the industry, we work with companies that already have their own casting capabilities. For example, GE, Rolls-Royce, and Safran all have casting foundries. So that in itself is nothing new to us. As we look at Pratt & Whitney, they indeed had their own casting capability until they exited in 2016. So we have a pattern and a history of working with our customers in this environment. So it's, I would say, it's nothing new for us. We do feel confident in our position as an innovation and technology leader, especially in the hot section of the engine. Indeed, we produce some very specialized plates that showcase our extraordinary capabilities for the Joint Strike Fighter, which is a fighter jet engine. Furthermore, we go to the extent of building our own furnaces. We have proprietary core preparation, waxing, casting processes, and measuring and controlling the temperature gradient starting off with an average of 300 degrees Fahrenheit higher than the maximum casting temperatures of our competitors. So one of the things we do is by keeping all of that production equipment in-house, and not discussing the technical details too much, enables us to maintain an edge in technology, particularly on the scale that we have and the know-how capability. We've been in this business now for 50 or 60 years. We have all three levels of casting capabilities and all of the sub-processes. To replicate that, it would require in the region of $10 billion in capital plus or minus. I always anticipate everything that our customers do. More importantly, we have already a competitive environment with other competitors. Currently, we are the market leader by probably 1.5 times, but ultimately, it comes down to those unique capabilities and the experience of working collaboratively with our customers to execute extraordinary applications where they already have in-house capabilities. This would mark Pratt & Whitney returning to having in-house capability alongside GE Aviation, Rolls-Royce, and Safran. So hopefully, that covers it for you.

Okay, very good. Thanks very much.

Thank you.

Good morning. John, two things. First, a clarification on what you just said, and then a question. Just specifically on Pratt, how protected is that position with contracts and long-term agreements, if you think about your overall revenue there? And then just given your visibility on commercial aerospace, which I don’t know if it’s any better than anybody else’s, but you seem to have the confidence to guide up today to buy back stock. Can you talk about trends from here on that 56% decline in Q3 in commercial aero revenue? How you’re thinking about that percentage number as we go forward the next few quarters? Thank you.

Okay. I don’t think there’s much more to add to the Pratt & Whitney conversation. We do have a long-term agreement in place. So I think that’s good in all of this. Unless there’s anything else, I’ll move on to how we see the balance of the year and into 2021 for us. We did call out the third quarter in a previous earnings call in early August that we felt it would be the low point. We felt that it would be the most severely impacted by inventory reduction to customers. As you know, we operate both at the first tier level with Boeing and Airbus and also at the second tier level, in terms of some of the engine parts that we supply to the engine manufacturers. You have an increased inventory effect as you go deeper through the supply chain. We felt that back in August and indicated that we would try to accommodate our customers sooner rather than later, rather than let it drag out over a long period. We are clear that while we’re not completely through this, it’s going to continue and we’ll have an impact on the fourth quarter and in some areas into the early part of 2021. This is taking into account planned increases in Airbus narrow-body sales. We are not reflecting that in our current projections but we do feel that revenues will improve in the fourth quarter. That gives us a platform for 2021 that we are trying to frame as best as we can. Maybe to amplify that point, we laid out back in the depths of the situation back in the second quarter when we were still very uncertain. Our target was to act quickly and address the challenges we saw from commercial aerospace markets. We ambitiously tried to achieve an exit rate EBITDA margin in the 20% area. We indicated that we feel confident enough now to increase the midpoint of that fourth quarter guidance a little bit, which supports what we believe about the 2021 profitability outlook. While we are not guiding for revenues or margins for 2021, that will really be addressed at the end of January or early February. We are confident the third quarter was low. We see revenues in the fourth quarter increasing, not just in commercial transportation, which is evident, but also in commercial aerospace for us, partially from the natural rebound from the adjustments made in Q4. Where do we go from here? There are many factors to consider for 2021, and a year from now is too far out for us to predict with precision. We hope for increased production from Boeing next year for narrow-bodies, not expecting anything from wide-body. We await confirmation on Airbus production schedules, as they announced an increase of nearly 20% in narrow-body production partway through next year. So I feel good that we see an improvement in the fourth quarter, as well as defense strength continuing in the IGT segment, leading into 2021. But it’s too early to predict the exact trajectory for each quarter.

Do you see commercial aero trending up sequentially quarter by quarter from here, at least from the down 56% in Q3?

I’m not going to go beyond the fourth quarter at this point. I don’t feel that I know enough to provide clarity publicly about sequential production through next year. I think we need a little more insight. I’m hoping that the production of Boeing begins to increase next year for the narrow-body segment, and we are waiting for confirmation on Airbus regarding their production schedules, which has been indicated to see an increase in narrow-body production in the latter part of next year. So I’m optimistic about revenues improving in the fourth quarter but specifics for 2021 will need further information before I can comment.

Thanks. Good morning, everyone.

Hi, David.

John or Ken, I wanted to go back on your comments on working capital. I think prior you’ve been calling for working capital to be a tailwind this year, but it sounded like now you’re talking about maybe it being a headwind for the full year, but then some inventory release in 2021. So if you could clarify that, and then, I guess, any sort of early indication or early look in terms of how you’re thinking pension next year. Thanks.

So maybe, if I start at a top level to explain why we see working capital recorded differently. I’ll then hand it over to Tolga to talk about dropped inventory, and then into next year. So let’s do in that sequence. Covering why it was used this year and then addressing the pension side. The use of working capital this year is primarily due to AR securitization payouts. It goes through the cash flow statements line related to working capital. If you exclude the AR of $95 million, then there would be a working capital inflow for the year. It’s a function of the accounting around securitization. One thing I’ve always felt uncomfortable about is having off-balance sheet financing that has carried over from Alcoa and the 2016 separation, as well as the Arconic separation. I wanted to gradually work that down, which effectively reduces our net debt and I feel that’s a good step. It also improves our interest carrying costs. So that’s the main reason behind it. If you consider that, you’ll see AR improving, AP under good control and our inventory being reduced. The normal definition of working capital would appear healthy, and it’s just a function of this AR securitization payout, which weighs on the working capital line. I will make a comment on the pension situation and then turn it over to Tolga. So pension contributions are expected to be lower in 2021 compared to 2020. We’ll provide a more precise figure when we announce our fourth quarter results in early February. Tolga, please comment on dropped inventory.

Sure, John. It's important to highlight that we are reducing our inventory and supporting cash generation. However, we feel looking at the scale of the reduction set by this stranded inventory, it will continue to be under pressure. The two segments that faced the most pressure from stranded inventory are our Engines and Structures businesses. I mentioned that we are working closely with our customers to level their production demands, especially on the Structures side, where long peak orders require careful management. Therefore, we project that this stranded inventory will continue into 2021, and we should manage it throughout next year. We are also actively managing stranded inventory on the Engine side and have made some adjustments, but we expect that impact to be much smaller. We are minimizing impacts for segments like Fasteners regarding stranded inventory, as we are doing effective management today.

Great, thank you very much.

Thank you.

John, if you wouldn't mind opining on kind of the pricing opportunity in 2021, 2022, and 2023. At the Investor Day, you gave a longer-term outlook, and I wonder how that's changed relative to 2020’s actual price realization, if you can give us any flavor for that. That'd be helpful. Thank you.

Thank you. First of all, let me comment on 2020; it's not complete. You saw the third quarter compared to the second quarter; we’re solidifying and completing those increase opportunities for 2020, so that’s all set. Regarding 2021, several long-term agreements are involved; as always, there are different customers, products, and specifics for each. I’m pleased with progress so far on 2021. There are a couple of major ones within 2021. Everything we are seeing is consistent with what I’ve said before: 2021 will be a larger year for us than 2020, assuming similar volume conditions. This lays the groundwork for significant increases in 2022 and 2023, which are contingent on commercial aerospace volume recovery. As it stands, we’re about 60% through 2021 negotiations, a bit earlier than normal. However, 60% of what 2021 looks like is still to be filled in. I anticipate that 2022 will not perform as well as 2021, but there’s minimal clarity I can provide on those years yet; however, overall, we feel positively about it.

Thank you very much.

Thank you.

Hey, good morning, gentlemen.

Hey, Carter.

John, I wondered if you could clarify the share comment you made earlier. The 1.5 times — does that imply a 60-40 split? And if that's not right, could you correct that for me? And then I just wondered if you might kind of give us a sense of the hot section versus cold section. You went to great length talking about the capabilities in the hot section airfoils, and I just wondered if you could clarify around that share disclosure — give us a better sense where in the engine that might be higher or lower than the aggregate. Thank you.

Okay. When we exited 2019, our share in the airfoil market was around 49% plus or minus 0.5% or 1%. The next largest competitor was around 32% or 33%, which means we were about 50% greater than the next largest competitor. On a relative market share basis, we’re currently 1.5 times as high. If you break it down further, our market shares would be higher in the earlier stages of the turbine; for example, at the hot end we’d be closer to 60% or more. Depending on the application, that could go as high as 100%. This gives you some idea of the relative market share and context within the engine.

Great. Thank you for the color.

Thank you.

I was wondering in your raise for the year, was that mostly due to how much wheels have recovered and aerospace was comparable to what you saw last quarter, or could you provide some color on that? And then also, the incremental margin on a sequential basis in wheels was around 49%. I mean, what's a sustainable incremental margin for that business? Thanks very much.

Okay. First of all, clearly, wheels provide a benefit to our Q3 to Q4 performance. That is not the sole reason for the improvement in the EBITDA margin guidance. We’re also seeing positive developments in the commercial aerospace business, so it’s really across all areas. There’s nothing currently lagging in our plans or implementation in terms of cost flexing. We are seeing strength in all aspects of the business, not just in wheels. I’m hopeful that our EBITDA as we move into 2021 will get close to or even back to the 2019 margin levels, even though we anticipate revenues in 2021 will not reach those of 2019. In the last earnings call, I did state that we anticipate revenues in the wheels business achieving 2019 levels in 2022. However, I think we’re looking at margins returning sooner, given the structural cost reductions and improved cost base.

Thank you very much.

Thank you.

Hey, good morning, John and Ken. Just a question on fasteners; you mentioned some weeding out of unprofitable products. How much volume did that include? Have you outright exited any aerospace products in particular? Adding some color would be great.

First, let me back up and give Tolga some time to think on the Fastener side. Regarding the unprofitable contracts, we haven't specified that segment of particular interest. It wasn’t the fasteners segment directly; we’re largely in good shape there. However, there are always areas to improve by evaluating specific performance. This was an action related specifically to a loss-making contract that needed to be addressed to avoid carrying a problem forward. Generally speaking, fasteners appear to be in a solid condition, but there are always things worth examining.

Yes, I’d like to clarify that my comment about weeding out was on the structure side; we are in the process of renegotiating our pricing there, which has been positive. On fasteners, our contract negotiations have been quite favorable, and we haven't targeted any specific contracts that have presented margin issues. Overall, contract renewals have been very good across all our segments, including structures, fasteners, and engines.

Is that clear for you, Josh?

Yes. Thank you.

Thank you. And thanks, John and Ken for all the color. Actually, I had a question for Tolga, if I may. Tolga, you've been with the firm now for a bit longer. So just curious, any initial impressions as to what you have seen and what are some opportunities for the firm that you see ahead? Anything that surprised you? Obviously, very unusual time to start a new role, but any thoughts would be appreciated.

Sure. I think I'd like to start by stating that continuity of leadership at Howmet Aerospace is key for our success. I have been deeply immersed in our businesses since my announcement at Investor Day, working through both the separation process and the COVID-19 crisis. I have been leading cost containment and cash preservation activities, as well as driving key supplier and customer negotiations. Most importantly, I want to emphasize that I have been focused on strengthening the fundamentals of the operating playbook that John introduced at Howmet last year. John and I have a detailed plan that we are implementing step by step, and we continue to see positive results and benefits from having our disciplined training playbook in place as we carry on into next year.

Yes. I appreciate that. Thanks.

Thank you, Paretosh.

Thanks, Paretosh.

Yes, John. I just wanted to closely pursue my questions. So is aerospace better in the fourth quarter than you thought it was going to be in the third quarter? And if so, in what way? Thanks.

I suspect the benefit is slightly better volumes than we'd anticipated. The revenue increase is not only attributable to wheels; it’s also indicative of a strong performance across areas. However, this aligns with the conservative assumptions we typically make, leading to the atmosphere where we’re able to surpass our expectations. The cost takeout that you’ve observed, both on the structural side and through variable cost management, has been even better than expected. The flexing of the cost base is at a higher level than anticipated especially with our commercial aerospace business. This perfect flexing of the cost base exceeds our prior plans and could yield a more favorable outcome. But know that we are seeing improvements and will assess as necessary into subsequent quarters.

Thanks very much for the follow-up.

Thank you.

Thanks for the additional question. John, I was wondering if you could frame for us or level set us on why the company is able to get pricing in what looks like a particularly stressed time for your customers. Is it a rolling one-time mark to market on some of the contracts that Howmet inherited from the legacy companies that may have been under commercial terms compared to your competitors, thus allowing you to reset the market? Or is it recognition from customers of the value you provide, indicating price inflation in the end market? Because, again, I’m trying to reconcile the current situation with what you’ve previously stated; the deflationary pricing pressure in aerospace and the prior measures circulation of floating bar charts depicting that on your slides. Any clarity would be helpful. Thank you.

I'm unable to comment on the previous management stance directly. My background comes from industries that are more accustomed to price deflation. Hence, in my experience, even in those areas, I’ve observed significant performance differentiation in product capabilities. I believe Howmet demonstrates this capability in product quality, technology, delivery, and consistency alongside our collaborative relationships with customers. Hence, I don’t view the aerospace parts market in absolute terms of consistent price deflation. There are highly specialized and safety-critical components produced that present unique value. I believe the market dynamics reflect ongoing improvement in those areas. We’ve addressed some of our less favorable contracts to ensure we are up to standard with market trends, improving our position moving forward, which is crucial for our future contract discussions. Customer collaboration continues to yield fruitful negotiations.

Thank you.

Thanks, Gautam.