Howmet Aerospace Inc (HWM) — Q4 2020 Earnings Call Transcript

Thank you, Sia. Good morning, and welcome to the Howmet Aerospace Fourth Quarter 2020 and Full-year 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 this 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 have 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 would like to turn the call over to John.

Thanks, PT, and welcome, everyone, to our fourth quarter call. Following the same format as last quarter’s earnings call, I plan to give an overview of the fourth quarter Howmet performance, Tolga will then speak to segment information, and Ken will provide further financial detail. I will return to talk to the outlook for the 2021 financial year. So please move to Slide number 4. And first, let me provide some qualitative commentary regarding the fourth quarter before moving on to specific numbers. The fourth quarter played out as expected and guided. In fact, the results were above both consensus and the improved outlook that we provided in November. Revenues rose compared to the third quarter due to a lesser impact from commercial aerospace inventory corrections. Performance improved again and the decremental margin year-over-year was 24%, which was an improvement from the decremental margin in the third quarter, which was 37%. The incremental margin on the revenues benefited from the utilization of labor that we held onto in the third quarter in order to meet the expected increase in fourth quarter revenues, which were 9% as approximately forecast. Furthermore, the third quarter included the $8 million write-down of long-term contracts that we bought out. Moving to specific numbers. Revenues improved over the third quarter by 9% and were 29% lower than the fourth quarter of 2019 due to the reductions in commercial aerospace. The fourth quarter EBITDA margin was 22.8% and ahead of outlook. The fourth quarter EBITDA margin in 2020 was, in fact, the same as the fourth quarter of 2019, while mitigating the market reductions and commercial aerospace adverse mix. Performance was driven by permanent cost reductions and price increases. Lastly, the fourth quarter earnings per share was $0.21, again, ahead of consensus and at the top end of our outlook range. Moving to cash. Free cash flow for the fourth quarter was positive at $268 million, which is the third consecutive quarter of positive free cash flow since separation. As you know, we define free cash flow very conservatively as the net cash after everything, after pension, AR securitization, paydown, et cetera. Q2 through Q4 free cash flow was $487 million and above the outlook, which includes an $80 million reduction in accounts receivable securitization, a $70 million cash flow to pay down in incremental voluntary pension contributions, and $47 million of severance costs, although we did receive a $45 million tax refund. Without these one-time items, free cash flow would indeed have been $638 million. Full-year free cash flow as a percentage of net income was 115%, well above our guide of approximately 90%, and would have been approximately 160%, excluding the one-time items mentioned. Year-end cash balance was also ahead of outlook at $1.6 billion after repurchasing $73 million of common stock throughout the year at an average price of $18.98. Now let me turn it over to Tolga to highlight segment performance.

Thank you, John. So let’s move to Slide number 5, please. The safety of our people is a top priority as COVID-19 continues to increase worldwide in the fourth quarter. Our operations secured continuous customer demand with no major events. Our segments remain focused on cost containment and cash preservation targets in the fourth quarter. Structural cost reductions exceeded the outlook. Effective variable costs were maximized, and furloughs continued in specific locations to manage sales fluctuations across different segments. Cash management actions continued with Class B. Strict capital expenditure control, strong accounts receivable collections, and effective inventory management, including key customer stranded inventory discussions, contributed to Howmet’s fourth quarter cash performance. Let’s move to slide 6 please. I will start with engine products. Commercial aerospace revenue showed quarterly improvement, with the third quarter seasonal shutdown impacts not repeating and inventory adjustments slowing in line with our expectations. Defense aerospace and industrial gas turbine growth continued in the fourth quarter. Effective variable cost flexing and driving permanent cost-outs ahead of the plan have contributed to our incremental margins from the engine side in the fourth quarter. We expect the strengthening inventory discussions with our key customers to continue. The Fastening Systems Industrial business continued to grow, balancing the timing of commercial aerospace distribution business in the fourth quarter. I mentioned in our last earnings release that the Fastening business has the highest number of locations, and permanent cost reductions gained traction across these locations in the fourth quarter. We continue to bridge the timing of pending reductions with targeted furloughs and successful variable cost flexing, improving our operating margins with relatively flat revenue in the fourth quarter versus third quarter. The Engineered Structures segment revenue showed a small increase in the fourth quarter compared to the third quarter, while we continue level-loading our operations for an optimized operating model for long lead time orders. We are ahead of our Costa plants as we've implemented additional headcount reductions to prepare for the latest announcements regarding the 787 build rates. Costa plants are running ahead of plan and contributed to incremental margins as well on the Structural segment. The commercial vehicle market recovery in the fourth quarter led to a record quarterly profit margin for the build segment. As these markets continue to recover, increasing our low-cost country content while keeping permanent costs compressed, and increasing the share of our revolutionary 39-pound wheels has led to very healthy incremental margins in the fourth quarter. Let me now turn it over to Ken to provide more details on the financials.

Thank you, Tolga. Now let’s move to Slide 7. For additional details on the fourth quarter, let’s start with revenue. As expected, revenue was down 29% year-over-year, driven by a 51% reduction in commercial aerospace and a 10% reduction in commercial transportation. These markets were partially offset by continued growth in defense aerospace and industrial gas turbine markets. On a sequential basis, although commercial aerospace grew 5%, we do not expect a meaningful recovery in commercial aerospace in the first quarter of 2021 due to lingering customer inventory corrections. Regarding the defense aerospace, commercial transportation, and IGT markets, all had double-digit sequential growth. Operating income, excluding special items was down 28% year-over-year, with commercial aerospace representing 40% of total revenue compared to 60% in 2019. Permanent cost reductions and price increases continued in the quarter. Permanent cost reductions were $60 million in the quarter and $197 million for the year, which were ahead of our outlook. Price increases were $11 million for the quarter and $39 million for the year, which were in line with our expectations. Decremental margins improved to 24% in the fourth quarter compared to 37% in the third quarter. Fourth quarter earnings per share was $0.21, which was ahead of consensus and at the top end of the outlook range. Moving to the balance sheet and cash flow, John covered the full-year and post-separation numbers, which were ahead of the outlook. I would add that in the fourth quarter, we finished the year with $1.6 billion of cash after repurchasing an additional $22 million of common stock in the quarter at an average price of $23.99. The remaining common stock repurchase authority from the Board of Directors is $277 million. Lastly, net debt-to-EBITDA was 3.2 times, and our revolving credit facility of $1 billion remains undrawn. Please move to Slide 8. Slide 8 is a summary of EBITDA margin performance. The fourth quarter EBITDA margin of 22.8% was ahead of the outlook and the same level as the fourth quarter of 2019, despite a 29% revenue decline and an unfavorable commercial aerospace mix. The improvement in EBITDA margin was driven by price increases, variable cost selection and permanent cost reductions. Now let’s move to Slide 9. Before moving into the revenue and segment profitability, I would point out that the fourth quarter revenue was in line with the outlook at $1.238 billion, while profit was more than 10% or $27 million better than the outlook. Now for more detail on fourth quarter year-over-year revenue performance. Revenue was down 29%, driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter. As previously mentioned, commercial aerospace was down 51% year-over-year, which showed a 5% sequential increase. Our second-largest market, defense aerospace, continued to show growth and was up 24% in the quarter and 10% sequentially driven by demand for the joint strike fighter on both new airplane builds and engine spares. Our next largest market, commercial transportation, which impacts both the forged wheels and the Fastening Systems segments, was down 10% year-over-year. However, we continue to see favorable trends for increased demand in this market, which improved 15% sequentially. Finally, industrial and other markets, which is comprised of IGT, oil and gas and general industrial, was flat, but up 12% sequentially. IGT, which makes up 45% of this market, continues to be strong, and was up 38% year-over-year and up 3% sequentially. Moving to Slide 10, we will quickly cover full-year revenue performance. For the full-year, revenue was down 29%, driven by commercial aerospace, which was down 38%. Commercial aerospace represented approximately 50% of revenue, down from approximately 60% in 2019. Defense aerospace was strong throughout the year and was up 14%, representing almost 20% of total revenue. Commercial transportation was down 31% for the year, but showed a strong recovery trend in the third and fourth quarters. Finally, industrial and other markets were up 1%, with IGT up 28% as the IGT market rebounds from a weak level in 2019. Now let’s move to Slide 11 for the segment results. As expected, engine products’ year-over-year revenue was down 33% in the fourth quarter. Commercial aerospace in the segment was down 58%, driven by customer inventory corrections. Commercial aerospace was partially offset by a 30% year-over-year increase in defense aerospace and a 38% increase in IGT as IGT benefits from continued favorable natural gas prices. Decremental margins for engines improved to 18% for the quarter compared to 34% in the third quarter. In the appendix of the presentation, we provided a schedule that shows how all of the segment’s decremental margins improved from the third quarter to the fourth quarter. Now let’s move to Fastening Systems on Slide 12. Also as expected, Fastening Systems year-over-year revenue was down 30% in the fourth quarter. Commercial aerospace in the segment was down 38%, and commercial transportation was down 21%. Like the engine segment, we continue to experience inventory corrections in the commercial aerospace market. Decremental margins for Fastening Systems improved to 45% for the quarter compared to 58% in the third quarter. Now let’s move to Engineered Structures on Slide 13. Engineered Structures year-over-year revenue was down 30% in the fourth quarter. Commercial aerospace in the segment was down 52%, driven by customer inventory corrections and production declines for both the 787 and 737 MAX platforms. Commercial aerospace was partially offset by a 40% year-over-year increase in defense aerospace. Decremental margins for engineered structures improved to 24% for the quarter compared to 27% in the third quarter. Lastly, let’s please move to Slide 14 for Forged Wheels. Forged Wheels revenue was down 6% year-over-year but increased 18% sequentially as expected. Despite the lower revenues, the wheel segment’s operating profit was higher than last year, and operating profit margin was at a record high of 30%. The improved margin was driven by continued cost reductions. Moreover, with the reduced volumes, we are able to shift production temporarily to low-cost countries, including Hungary and Mexico, which improved our margins. Lastly, we have been increasing market share with a new innovative 39-pound wheel. Now let’s move to Slide 15 for special items. Special items for the quarter were a benefit of approximately $14 million after tax, primarily due to insurance proceeds received for fires at 2 of our plants. Additionally, a favorable outcome of a Spanish tax assessment primarily offset our severance cost. I would like to comment and provide further perspective on how much post-separation special items. For the past two years, we have undertaken a major restructuring and performance improvement program, including the separation of Arconic Corporation. Post-separation, the after-tax charges of 2020 were approximately $100 million driven by two items: first, a voluntary U.K. pension settlement charge of $55 million in the second quarter, which reduced our gross pension liability by $320 million. Second, in April, we paid down and refinanced our debt and incurred an after-tax cost of $50 million. The refinancing added $420 million of cash to the balance sheet and refinanced a portion of the 2021 and 2022 bonds to maturity in May of 2025. Regarding the balance, the other special items have pretty much all netted out. So now let’s move to the capital structure and liquidity on Slide 16. We continue to focus on improving our capital structure and liquidity. All debt is unsecured, and our next significant maturity is in October 2024. Gross debt at the end of 2020 was $1.5 billion, and net debt was $3.5 billion. Strong cash generation in the year has reduced our net debt by approximately $370 million since separation. Moreover, as we previously mentioned, we decreased our U.K. gross pension liability by $320 million. A few additional items of note include: first, our $1 billion five-year revolving credit facility remains undrawn. Second, we have reduced our AR securitization by $100 million in 2020. This reduction in AR sold was effectively a repayment of debt, which increases working capital and reduces our 2020 adjusted free cash flow, as John mentioned. Lastly, on January 15, 2021, we used cash on hand to complete the redemption at par of our 2021 bonds that were due in April. By paying down the bonds three months early, we will not incur additional costs. We saved $5 million of interest costs and will see interest costs reduced by approximately $19 million on an annual basis. Now let me turn it back over to John.

Thank you, Ken, and please move to Slide 17 for closing remarks on the fourth quarter and 2020 before we discuss the 2021 outlook. Revenues are in line with the outlook, while profit and margin exceeded expectations. Our differentiated products and ability to scale resulted in price increases in line with expectations. Permanent cost reductions continued and accelerated throughout the year, which also exceeded our outlook. The fourth quarter EBITDA margin rate of 22.8% exceeded the outlook and was at the same level as the fourth quarter of 2019, despite approximately 29% less revenue and an unfavorable commercial aerospace mix. Regarding liquidity, adjusted free cash flow and cash balance exceeded our outlook. Full-year accounts receivable securitization was reduced by $100 million, and voluntary pension contributions were made of $70 million. While severance costs of $51 million were incurred, we had tax refunds of approximately $78 million. Full-year CapEx was favorable to the outlook at 3% of revenue. The $155 million spent was over $100 million less than the depreciation of $269 million. Adjusted free cash flow was ahead of outlook at $487 million for the second through fourth quarters, and $387 million for the full year. Net debt was reduced by $370 million since separation. Additionally, the gross pension liability was reduced by approximately $320 million. Cash increased to $1.6 billion, a $100 million beat to guidance after the repurchase of $73 million of common stock throughout the year at an average price of $18.98. 2020 was another year of heavy lifting; after separation, we refinanced the balance sheet, phased into the COVID pandemic and the impact on our operations and sales demand and further improved balance sheet. Now let’s move on to Slide 18. First, let me comment on the 2021 outlook qualitatively. Our end markets of defense aerospace, commercial transportation and industrial gas turbines continue to be healthy and growing. Commercial aerospace has less visibility and reflects our view regarding the global vaccine rollout, its acceptance and potential impact on travel. Airline travel should improve, especially for short-haul routes, which may help dissipate narrow-body inventories, particularly for Boeing. We expect to gain improved clarity on these factors as we move through 2021. Regarding commercial aerospace, we expect increased aircraft build, especially as we move forward into 2022 and beyond. This will help both with inventory clearance and shift to an inventory build situation, which will aid in rebuilding the pipeline of aircraft parts. Now let’s move to the specific numbers. Revenue for the first quarter is expected to be $1.2 billion, plus or minus $50 million. For EBITDA, we provided you with a baseline figure with a range of minus $5 million to plus $15 million, so between $245 million and $265 million. Our EBITDA margin is estimated to range from 20.8% to 21.3%. And earnings per share is anticipated at $0.16 baseline with a range of $0.15 to $0.19. In Q1 2021, we expect commercial aerospace to decline slightly from Q4 due to lingering inventory corrections. Please note that for the second, third, and fourth quarter average was $1.208 million, and the baseline guide is in-line with the average of the last three quarters. For the year, we expect revenues of $5.1 billion at baseline with a range of $5.05 billion to $5.25 billion, in other words, minus $50 plus $150. EBITDA baseline of $1.1 billion with a range of $1.07 billion to $1.15 billion, again, minus $32 plus $50. EBITDA margin for the year is projected at 21.6% with a range of 21.2% to 21.9%. Earnings per share baseline at $0.80 with a range of $0.75 to $0.89. And free cash flow at $400 million, plus or minus $50 million. Let me provide you with a few assumptions. The cost restructuring carryover into 2021 will be $100 million. Price increases are expected to exceed the 2020 increases. Pension/OPEB cash contributions are expected to be about $160 million compared to last year’s $236 million. The operational tax rate is in the range 26.5% to 28.5%, similar to the average rate for 2020 at 27.5%. Adjusted free cash flow conversion is expected to be 115%, again above our long-term outlook of 90%. The cash tax rate will increase to about 15%. And CapEx is set in the range of $200 million to $220 million. Maybe a couple of further comments to put 2021 into perspective. You can see by the revenue guide of $1.2 billion for the first quarter versus $5.1 billion for the year at baseline, but there is an expectation that quarterly revenue begins to accelerate during the year. Margins are respectable and above 2020 levels. And in our baseline versus the normal outlook, we use a smaller, lower bandwidth to the downside and a higher bandwidth to the upside. That concludes my commentary before we move to question and answer. Thank you.

Yes, thanks, good morning, guys. John and Ken, I was wondering if you could give us a little bit more of your assumptions on Q1 and 2021 guidance. Because it looks like it is sequentially lower in Q1, the implied EBITDA margin for the year is below that of Q4. And I’m just wondering if the mix worsened sequentially or if the 787 situation has gotten worse from what you last updated us on in November. What kind of explains the sequential? And then if I could have a follow-up after that. Thank you.

Let me have a go at that, Gautam. I will give you a round number. Last year, our second quarter revenues were $1.250 billion, Q3 $1.130 billion, Q4 $1.240 billion, give or take $1 million or so. The average is $1.208 billion. So we placed what we call baseline at $1.200 billion with a bandwidth around it, plus or minus $50 million. Our view is that Q1 is essentially the same as the average of the last three quarters. My feeling or I would say, statement is that Q2, we were not seeing much by way of customer inventory reductions, although we had certain customer plants being closed as we went into April last year. There were significant inventory corrections in the third quarter, particularly, and a lower correction in the first quarter. Right now, it just feels as though things are pretty opaque. The rollout of the vaccine, airline load factors have reduced substantially in Europe with the near closure of travel in certain countries, particularly into the U.K., and international air travel has actually become more problematic rather than improving. So right now, there is little to observe and celebrate. Looking at the vaccine rollout, it feels also below what we could have or maybe should have expected. And indeed, some of the processes to actually get that into people’s arms have also been underwhelming. From personal experience, having got my first shot a couple of weeks ago, the entire process of trying to register and get the vaccine has been challenging, to say the least. When you think about travel at the moment and therefore the impact on build, there is little to the upside to celebrate. The first quarter is roughly aligned with the average of about three quarters. That is the best we can see. I mean, it is a bandwidth of variability around it, so it could be as we put what we call baseline rather than outlook, to try to say this is what we think is likely, so that you can rely upon it with a relatively small downside and a greater upside. So we have given you an asymmetrical picture compared to what we normally do. As for the EBITDA margin in the first quarter, we also provided an asymmetrical picture for the year, calling one baseline and then a lesser reduction and a greater upside. It really reflects the degree of opaqueness regarding future demand. We have had the courage again to provide guidance not just for the quarter, but for the year. I just don’t want to get ahead of ourselves and say, do we really have the absolute foresight to see the full year. Any reasonable person would recognize that it is difficult when there are so many factors that remain uncertain. Commercial transportation feels pretty solid. The defense and industrial markets for us are still looking quite stable. The oil and gas market is improving with rising oil prices, and natural gas remains the prevalent fossil fuel in power stations. All of that is positive. However, we still carry uncertainty concerning commercial aerospace. Commercial aero, while we noted a lower inventory reduction in the fourth quarter, remains 51% down year-on-year. Presently, we don’t yet see enough data to confidently predict significant improvement in the first quarter or the first half of this year. The good news is that Airbus has indicated an increasing build rate for the A320, which would help clear inventory, and we expect this situation to improve. However, with Boeing, we haven’t received significant news lately. The 787 has also been somewhat more reduced than what we anticipated. Therefore, while we see potential for growth this year, the outlook remains cautious.

It does. And maybe you can give us, based on what you know as of now, late in Q1 or middle of Q1. What segments do you expect to be sequentially up or down if you have that visibility at this point?

I likely feel good about the commercial transportation business being slightly up and cautious around commercial aerospace. With the others, I’ll call it roughly in-line. I recognize I didn’t elaborate much on the margin question, so let me address that now. In my thoughts around the first quarter, we have guided for that, I think, give or take a margin of 21% or possibly even higher throughout 2021. Conceivably, because I feel confident about the margin more than I do on the revenue side, we could be at the upper end of that range. We are certainly expecting this first quarter to run at rates higher than 2020. While I acknowledge we are currently projecting that it may not be quite as strong as the fourth quarter. That is within the bandwidth of risk and uncertainty surrounding the commercial aerospace market at the moment, where we remain cautious. We are hoping for improved conditions, but we are planning to be in a zone where we feel more secure regarding our projections. Hopefully that covers the margin side of it as well for you.

Hi good morning. Just a quick follow-up to that. On the variable cost flexing and furloughs, can you give us a sense of how much of that is a headwind to the profit in 2021 that is built into your plan?

At the moment, we have just said to ourselves, there is the potential that we may need, and we hope to bring people back from furlough. There could be some required retraining to ensure we maintain our quality promises and delivery commitments. Despite the pandemic disruption last year, both our quality indices and other measurements have actually improved again. We want to maintain that track record. We have assumed that there may be a small drag if we bring people back earlier than required for the demand profile, just to ensure that we have fully trained staff ready to go. Just like in our third quarter, we held onto some labor ready for the fourth quarter, and you saw that resulted positively. So again, it is just a planning assumption, and we have not brought anyone back yet, but we are hopeful that we may have that challenge to deal with because that would signal better days ahead for us; I call it a high-quality problem. It is just about managing the efficiency in that process.

Okay. And then just another quick one. On the forged wheels, low-cost sourcing and the Hungary move, can you give us a sense of how much of that transition has now taken place? Is it substantially complete? And when did it all get transferred over? Is there any additional benefit that we should consider is still rolling in for 2021?

Yes. Firstly, for the investment we made, we have been utilizing it and increasingly staffing it. There’s still more to come in that regard compared to where we were in the third and fourth quarters last year. So in terms of utilizing that new plant, we have tended to try to base the move on efficiency rather than some of the older methods, enhancing the overall margin. There is still some improvement expected in the first half of 2021. We have also been adjusting our manufacturing footprint, which has led to benefits. We chose to invest additional resources into Hungary for our wheels business, and that will come online in the fourth quarter of 2021, which I believe will lead to a healthy run rate as we exit the year and progress into 2022. My previous commentary indicates we see 2022 being at levels similar to 2019, with 2023 exceeding that. The incremental margin we saw in the fourth quarter was quite impressive and should be replicable in our commercial aerospace businesses as volume recovers. While we believe that recovery is on the horizon, it remains unclear as to the timing of that growth.

Great. Thanks for the color, John.

Thanks so much. Good morning. John, I just had to follow-up on what you said earlier on Airbus and the A320 and also Boeing on the MAX. How much inventory do you think there is still in the chain related to your product? When can we expect to see the transition from destocking to restocking, and what kind of forecasts have you built into your 2021 numbers?

When we originally built our plan for 2021, we assumed the 40 A320s would remain flat throughout the year. We also recognized that we had not been supplying parts at the 40 rate. We estimated the output at 32 to 35 build sets. Both first-year and second-tier levels in the supply chain can be somewhat difficult to gauge. Based on our expectations, we think the destocking will be fully resolved by the end of the second quarter, and we will start building certain products as we aim for the 45% buildup rate in the fourth quarter this year. This is one of the few bright spots we see; we have a solid commercial transportation business and a potential opportunity with Airbus, which brings optimism. On the other hand, with Boeing, they completed builds at seven monthly units by the end of 2020, whereas we know we supplied less than half of that rate. The numbers are small, and we expect this trend to continue through the first half of this year. For the later stages, we will have to monitor their planned increases to see if they reach 10, 20, or perhaps the 30s by the second quarter of 2022, at which point we can begin matching our part shipments to the aircraft build rates. The uncertainty regarding how quickly Boeing can clear its parked inventory complicates the situation. We have yet to witness significant drops sequentially over the past 18 months since all we have seen is reductions in confirmed builds.

That's great. Thanks, John.

Thanks. Good morning, guys. Probably for Ken. There are a lot of moving pieces here on the free cash flow walk from 2020 to 2021, and it looks like you’re at the midpoint forecasting about flat. Could you walk us through, Ken, just net working capital? What are you thinking? I guess pension is down a little; cash taxes are up; CapEx is down; and severance is down. What you’re assuming for the securitization program? Is that also projected as a headwind this year?

Yes, a couple of points on the free cash flow we have provided. We saw a nice improvement on pension cash contributions and OPEB contributions on a year-over-year basis. As you know, as we exited 2020, the discount rate didn’t work in our favor. It was about 80 basis points unfavorable, costing around $200 million on the liability side. However, asset returns were strong for the business, exceeding 14%, which somewhat mitigated the loss. With regards to the work that we’ve done on the pension and OPEB program over the past 12 months, we expect to see favorable outcomes moving forward. The tax rate is pretty much in line with what we’ve experienced before. You should anticipate around a $290 million interest expense for the year. The big question, David, that we’re all focused on is working capital. In 2020, working capital was not a source or use of cash. We reduced the AR securitization program, which was a $100 million burn in that number. So that’s all accounted for. For 2021, we expect working capital to be a modest source of cash embedded in the $400 million guide we provided.

The one aspect we didn’t cover was that we’re not planning any changes in AR. The $100 million is complete, and we anticipate leaving that unchanged in 2021 at this point.

Alright. And John, obviously, sitting with a pretty big cash balance, nothing on the debt side, I guess, to do. How are you considering share repurchase? And does your EPS guidance reflect any sort of capital deployment benefit or not?

We haven’t assumed any changes in our EPS regarding share repurchases. Right now, I am primarily focused on the 2022 bond maturities. Should we just roll them up on the maturity date, or should we move early on refinancing? That’s in consideration currently. In regard to further share repurchases, I believe the trigger for being more aggressive will hinge on the solidification of commercial aerospace build rates. My perspective on cash deployment for share buyback of any significant scale hinges on the aircraft build numbers that I feel confident in. We have completed some modest share buyback in the last couple of quarters; however, I would require further confidence in the planned build rates for commercial aerospace before committing to significant actions regarding larger cash deployments.

Alright, it makes sense. Good luck. Thanks.

Thank you.

Hi good morning. John, just getting a bit more specific. Are there any kind of one-off opportunities that might drive commercial aerospace up in 2021? What I’m thinking of is that MTU talked about a 20% to 30% increase in MRO for them on the GTF on some incoming GTF work, low-pressure turbine upgrades, normal first-time shop visits, hot section upgrades, those sorts of things. Are there opportunities you see that could drive 2021 up?

At this point, we have determined our capacity profile remains unchanged for the first two quarters of 2021 compared to the last two quarters of 2020. When we consider our engine business for commercial aerospace, the effective revenue run rate for the last couple of quarters was around 75% to 85% down, depending on specific months. We have made the assumption that this pattern will persist and do not believe the conditions are ripe for any unexpected enhancements. a couple of our customers have provided insights into solidifying their timelines for the latter half of the year, and we remain open to that possibility, though it's essential to approach this with caution. Typically, I believe we would observe narrow-body build rate increases ahead of substantial MRO increases. However, when those MRO opportunities materialize, they could be beneficial, especially as our volumes have been around 25% of normal levels or even lower up to now. We merely presume that it will align with the previous two quarters.

Okay. And I know it is a delicate topic, but I thought I would revisit just the idea of Pratt and their new airfoils facility. Is there any more insight into what is happening there? Will that work share with your markets, or is it separate from what you do?

First of all, it is not a delicate topic. It is straightforward. Pratt decided back in 2017, the year after they sold their previous airfoils business, to embark on selective reimbursement. They identified the need to acquire capabilities to improve their casting quality for accurate coring, which hadn’t achieved required yields and cost-effectiveness in prior instances. The investment remains as previously stated at $650 million. It encompasses casting, coring, hole drilling, machining, and coatings—essentially considerably broad coverage. Our assessment is that increased spares demand projected for the years 2023 to 2027 will utilize this capacity significantly. We’ve also renewed our LTA with Pratt in this area, so all appears aligned with nothing more significant to mention. Thank you.

Thanks very much, and good morning. We saw some nice growth in the defense end market, and you talked about further growth going forward. The main customer, I guess, Pratt & Whitney had some good growth in 2020. You talked about conditions stabilizing. Lockheed’s talked about the F-35 production rate nearing a run rate. Do we think about defense growth this year as the year-end run rate normalizing, not driving the growth? Or are there share gains or areas outside the F-35 that might still drive growth there?

To provide perspective, the F-35 accounts for about 40% of our defense sales; it is less than half. We have significant defense business with various clients beyond Pratt & Whitney, supplying to GE and other military applications. Military budgets can vary; historically, they typically see higher spending, particularly in the fourth quarter due to replenished budgets. We anticipate solid defense sales growth in 2021, but the F-35 will contribute more modestly, possibly with slight growth in spares. It is worth noting that the military budget remains robust in 2021, and we expect to see a comparable pattern to previous years, with marginally lower spending early in the year and slightly higher spending in the latter half, when budgets are allocated.

Thanks. As a follow-up, the topic of inflation has become a bit more prominent. I recall there have sometimes been aluminum impacts back at Arconic in the TCS segment. Should we be mindful of this for the Forged Wheels business? And in the aerospace sector, it’s noteworthy that raw materials aren't really actively discussed at this time. Should we expect this trend to continue, indicating that the pass-through is effective?

Let me clarify and say if I find myself addressing materials as a primary concern, I might shoot myself in the foot. In the 90% to 95% range, a pass-through is quite effective. In typical cases, this may imply a quarter or two of lag, especially if metals’ prices surge significantly. However, in standard circumstances, there is enough coverage in our agreements with customers concerning metals—or anything else in the aerospace and commercial aluminum wheel space. Such as cobalt, nickel, vanadium, and aluminum; these materials are generally stable and managed effectively.

I’d like to add, as John mentioned, the pass-through is at 95% plus. Additionally, we have hedging agreements to mitigate volatility. Therefore, the challenges experienced back at Arconic Inc. are not a concern for Howmet.

That clarifies things. Thank you.

Also, please remember that we managed to address many of the aluminum pass-through issues associated with Arconic Corporation in previous years, ensuring they no longer pose a challenge for Howmet.

Hi, good morning, everyone. John, everything I’m hearing from you on this call seems to indicate that this forged wheel margin, a little over 30%, is sustainable; is that accurate? Also, I wanted to circle back to the incremental margin you mentioned in the part of the business that saw better volume; can you quantify it for us? Furthermore, it sounded like you were suggesting that you think this number can be replicated in the aerospace business, possibly in the back half of 2021 or into 2022; is that correct?

When I say it is sustainable, let’s consider that I expect the fourth-quarter margins seen in the wheels business, which are around 30% EBITDA margin, to hold at the volumes we anticipate. As for the incremental margin, I would ask Ken to provide specific insights, as I understand it was quite impressive. Overall, I believe the margins in the wheels segment remain stable, and we should see comparative replicability in our aerospace businesses once volume improves, leading to promising returns in both aerospace and commercial sectors.

Noah, we have included detailed slides in the appendix regarding wheels and other businesses as well. However, from an EBITDA perspective, we are currently seeing margins at around 35.5%. Our team has performed excellently in the wheels segment by quickly eliminating costs. As volumes increase, there is still considerable scope for improving costs further and increasing productivity, evidenced by our quality performance, with PPMs in our wheels business being less than 10.

Thank you very much.

Thanks.