Howmet Aerospace Inc (HWM) — Q2 2021 Earnings Call Transcript

Thank you, Catherine. Good morning, and welcome to the Howmet Aerospace Second Quarter 2021 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. Good morning, and welcome to the second quarter call. I'll start with an overview of Howmet's second quarter performance. Then pass to Tolga, who will talk more about our market. And then, Ken will provide further financial detail. I also plan to talk to ESG and we'll do so about once a year going forward. And then provide guidance and talk to guidance for the third quarter and the full year 2021. So let's move to slide number four. Let me start with some commentary on the second quarter, which was the first comparable quarter for Howmet post separation with no pro forma numbers. Revenue was $1.2 billion and in line with expectations, while EBITDA, EBITDA margin and earnings per share exceeded our expectations. Adjusted EBITDA was $272 million, and adjusted EBITDA margin was on par with Q1 2021 and Q4 2020 at 22.8%, despite the addition of costs to prepare for the second half ramp up in commercial aerospace production. Earnings per share excluding special items was $0.22 and ahead of our expectations. Historically, the first half has been a cash outflow for the company. The increased operating performance focus of Howmet has led to improved margins, enhanced working capital control and capital discipline, which generated $160 million of cash in the first half of the year. We expect continued cash generation in the third and fourth quarters. Year-to-date, we have reduced debt by approximately $835 million by completing the early redemption of 2021 notes in Q1 and the 2022 notes in Q2 with cash on hand. These transactions reduced 2021 interest expense by approximately $28 million, and approximately $47 million on an annual run rate basis. This helps with increased 2022 free cash flow. In the second quarter, we continued to return money to shareholders with the completion of a $200 million share buyback program. The weighted average acquisition price was $34.02 per share, approximately 5.9 million shares. The second quarter cash balance was $716 million. Lastly, we continue to focus on reducing legacy liabilities. Year-to-date, we have reduced our pension and OPEB liabilities by approximately $160 million. Moreover, full year pension and OPEB expense is expected to improve approximately 50% compared to last year. Now let's move to markets and performance on slide five. Q2 revenue was 5% less year-over-year and in line with our expectations. On a year-over-year basis, commercial aerospace was 31% less driven by lower aircraft builds, spares and the lingering effects of customer inventory corrections. Commercial aerospace continues to represent approximately 40% of total revenue compared to pre-COVID levels of 60%. The commercial aerospace decline is partially offset by our continued strength in other markets. The industrial gas turbine business continues to grow and was up 13% year-over-year driven by new builds and spares. The commercial transportation business was up 89% year-over-year as it rebounds from customer shutdowns in Q2 of 2020. Truck demand remains strong as our customers manage through their own supply chain issues with several components being in short supply. At the bottom of the slide, you can see the progress on price, cost reduction, margin expansion and cash management. Price increases are up year-over-year and continue to be in line with expectations, as they are tied to long-term agreements. Structural cost reductions are also in line with expectations with the $37 million year-over-year benefit, which reflects the decisive actions we started in the second quarter of 2020 at the onset of the pandemic and continued through last year. Year-to-date structural cost reductions are $98 million, which have essentially achieved our target of approximately $100 million. The aerospace decremental operating margins continue to be very good at only 19%, while the wheel segment had an incremental margin of 47%. EBITDA margin expanded by 310 basis points year-on-year driven by price, variable cost flexing and fixed cost reductions. The team delivered strong margin expansion despite a reduction in revenue. Capital expenditure was $36 million for the quarter and continues to be less than depreciation and amortization resulting in a net source of cash. Lastly, free cash flow was $164 million for the quarter, resulting in a record first half. Now let's move to slide six. Adjusted EBITDA margin for the quarter is 22.8% and consistent with the last couple of quarters on approximately $43 million of less revenue. The margin results overcame both the effects of the low revenue and the cost of many additional employees to meet the increasing production demand coming in the third quarter. Q2 revenue at $1.2 billion was in line with expectations. You can see the benefit of our actions since the start of the pandemic in Q2 with a solid 310 basis points of EBITDA margin expansion, while revenue is approximately $58 million less in the same period. Now let me hand it over to Tolga to give an overview of the markets.

Thank you, John. Please move to slide seven, and some more details about our year-over-year revenue performance. Second quarter revenue was 5% less driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter. Commercial aerospace was 31% less year-over-year in line with our projections as expected inventory corrections continued. Defense aerospace was essentially flat in the second quarter as we are on a diverse set of programs with the joint strike fighter being approximately 40% of the total defense business. Commercial transportation, which impacts both the forged wheels and the Fastening Systems segments, was up 89% year-over-year as the second quarter of last year was significantly impacted by customer shutdowns. Finally, the industrial and other markets, which is composed of IGT, oil and gas and general industrial, was up 13%. IGT, which makes up approximately 45% of this market, continues to be strong and was up a healthy 13% year-over-year. I will now turn it over to Ken to give a more detailed view of the financials.

Thank you, Tolga. Let's move to slide eight for the segment results. As expected, engine products year-over-year revenue was 7% less than the second quarter. Commercial aerospace was 17% less driven by customer inventory corrections and reduced demand for spares. Commercial aerospace was partially offset by a year-over-year increase of 13% in IGT. The IGT business continues to be strong as demand for cleaner energy continues. Decremental margins for engines were 12% for the quarter as we hired back approximately 300 workers to prepare for the anticipated growth in the second half of this year. In the appendix of the presentation we have provided a schedule which shows each segment's incremental or decremental margins for the quarter. Now let's move to Fastening Systems on slide nine. Fastening Systems year-over-year revenue was 20% less in the second quarter. Commercial aerospace was 42% less. Like the engine segment, we continue to experience inventory corrections in commercial aerospace. The industrial and commercial transportation markets within the Fastening Systems segment were both up approximately 45% year-over-year. Decremental margins for Fastening Systems were 31% for the second quarter as segment operating profit margin was approximately 19%. Please move to slide 10 to review engineered structures. Engineered structures year-over-year revenue was 30% less in the second quarter. Commercial aerospace was 45% less driven by customer inventory corrections and production declines for the Boeing 787. Defense aerospace was relatively flat year-over-year. Decremental margins for engineered structures were 12% for the quarter. Lastly, please move to slide 11 for forged wheels. Forged wheels revenue doubled year-over-year as last year's results were impacted by customer shutdowns. On a sequential basis, volumes were down approximately 7% due to customer supply chain issues. Reported revenue was essentially flat sequentially driven by a 20% increase in aluminum prices. Although, higher metal costs are passed through to customers to avoid a profit impact, you will see a reduction in EBITDA percent resulting from the pass through. Segment operating profit margin was approximately 27% and year-over-year incremental margin was 47%. Improved margin was driven by continued cost management and maximizing production in low-cost countries. Please move to slide 12. We continue to focus on improving our capital structure and liquidity. In the first half of the year we completed the early redemption of our 2021 and 2022 bonds with cash on hand. Gross debt stands at approximately $4.2 billion. All debt is unsecured and the next maturity is in October of 2024. Finally, our $1 billion five-year revolving credit facility remains undrawn. Before turning it back to John to discuss ESG and 2021 guidance, I would like to point out that there's a slide in the appendix that covers special items in the quarter. Special items for the second quarter were a net charge of approximately $22 million mainly driven by the costs associated with the early redemption of the 2022 bonds completed in early May. Now, let me turn it back over to John.

Thank you, Ken. And let's move to slide 13. Moving to ESG, I'd encourage you to read our sustainability report found at howmet.com in the investor section. For Howmet aerospace, environmental, social and governance is about generating meaningful change for a more sustainable future, improving our diversity and inclusion inside our company and in the communities in which we operate. Regarding employee safety, we are maintaining attention on safety through uncertain operational conditions presented by COVID-19. Total recordable incidents continue to be significantly better than the aerospace and defense industry average. For 2020, we had a 20% year-over-year improvement in rate to 0.71. Additionally, 84% of our locations worldwide were without a lost workday incident. This is a tremendous testament to the dedication and focus of our workforce. We continue to underscore the importance and power of diversity, equity and inclusion in our company. We value the rich diversity of expertise, backgrounds and viewpoints that fuel our innovation, and we are committed to improving the diversity of employees at all levels. Recently, we were recognized by the 50-50 women on boards organization for our commitment to broad diversity. In addition to gender diversity, we also partner with key external organizations including the Human Rights Campaign, the National Hispanic Corporate Council and Diversity Best Practices to review and continuously improve our initiatives. With respect to sustainability, nowhere is this more evident than in the products that we provide to our customers. Our proprietary technologies help reduce fuel consumption and carbon emissions contributing to the aerospace industry's goal of a smaller carbon footprint. Five specific areas are at the bottom left of the slide. The Commercial Aerospace Next Generation Jet Engine Technology reduces fuel consumption by approximately 15%. Moreover, Howmet's increased content on composite aircraft of two times contributes to lightweighting solutions and reduces fuel use as composite aircraft are approximately 20% more fuel efficient than comparable metallic aircraft. For forged wheels, Howmet's aluminum wheels are five times stronger than steel while being 47% lighter. Customers can realize up to 1,400 pounds of weight savings from retrofitting an 18-wheeler Class 8 truck from steel to aluminum wheels. For IGT, Howmet's products continue to enable higher operating temperatures in the turbine and also pressures, which increase load efficiency towards approximately 64% and reduce nitrogen oxide emissions by approximately 40%. Lastly, for renewables, Howmet's Fastening Systems used in solar panels improved strength and clamping by five to ten times and reduced insulation time by up to 80%. Moving to STEM education and inclusiveness. Howmet is dedicated to increasing STEM opportunities and education in the local community through the Howmet Aerospace Foundation with grants to institutions and schools. Also we've renewed our commitment to support our six employee resource groups with strategic focus on community, culture, and careers. Let me now move to slide 14 for our third quarter and annual guidance. The leading indicators for air travel continue to show improvement notably for domestic travel. This includes online searches for air tickets, increases in flight schedules across most of the world, and beginnings of some international travel. Orders for aircraft by airlines and assembly partners are increasing rapidly. The expectation that Howmet will transition into revenue growth in the third quarter continues with growth of approximately 15% in commercial aerospace and total revenue growth of approximately 9%. We look forward to managing and leading this exciting growth phase for Howmet after the devastation of the pandemic on the industry. Growth is expected to continue into Q4 and into 2022 and beyond. The sequence for our businesses is that we expect increases in the engine business notably starting in the third quarter, followed by structures in the fourth quarter and fasteners starting in the first quarter of 2022. In terms of specific numbers, we expect the following: For the third quarter, revenue of $1.3 billion, plus or minus $20 million; EBITDA of $295 million, plus or minus $10 million; EBITDA margin of 22.7%, plus or minus 40 basis points; and earnings per share of $0.25, plus or minus $0.02. And for the year, we expect revenue to be $5.1 billion, plus or minus 50%; EBITDA baseline to increase to $1.17 billion, plus 15%, minus 25%; EBITDA margin to increase to 22.9%, plus 10 basis points and minus 20 basis points; and earnings per share increase to $0.99, plus or minus $0.03; cash flow baseline increased to $450 million, plus or minus $35 million. Moving to the right-hand side of the slide, we expect the following: Second half revenue to be up approximately 12% versus the first half driven by commercial aerospace, defense and IGT. Second half year-over-year incremental margins of over 50% compared to the prior year. Price increases will continue to be greater than 2020. The cost reduction carryover of $100 million is already achieved with some potential modest upside. Pensions and OPEB contributions of approximately $120 million. We are reducing cash pension contributions by approximately $40 million based upon the American rescue plan. CapEx should be in the range of $200 million to $220 million compared to depreciation of approximately $270 million. Adjusted free cash flow conversion continues to be in excess of net income at approximately 100%. Lastly, as in last month, we have reinstated the quarterly dividend of $0.02 per common stock starting in the third quarter. Now let's move to slide 15 for a summary. The second quarter was solid and it's described as a quarter to get through while we wait for the volume lift in the third quarter. It was better than expectations with improved margins and excellent cash flow. The net recruitment of production operators in the second quarter was approximately 300 people, principally in our engine business. And we, of course, will continue to manage costs very carefully during this recovery phase. In the second half, we plan to recruit another net 500 people. Liquidity is strong and we have healthy cash generation. The third quarter outlook for revenue is to be approximately $100 million higher than in the second quarter with margins somewhere between 22.3% and 23.1%. For the second half, we expect extra costs. However, year-over-year incremental margins are expected to be over 50%. Consolidated EBITDA margins for the second half are expected to be 22.6% to 23.2% setting a platform for a healthy 2022 and overcoming the drag of the increased labor costs from the recruitment that I talked about. And of course, the net effect of the metal recoveries. Thank you very much. And now we'll take your questions.

Hey, good morning gentlemen.

Hey, Carter.

John, I wondered if you could kind of give us some color on the composition of the hedge you're adding back to the system. Are some of these former employees or are new? I know last quarter you talked a lot about the training expectations and wanting to get the productivity to the right level from the start. Just any color you can give us on how that adding back resources is going?

Yes. So we talked about 300 people in Q2. And as you recall, I said, we'd add these people essentially without adding pressure. You can see that our sales did not increase, and so it was exactly in line with expectations from the revenue side. We mentioned that we would possibly recruit 400 to 500 people in the second quarter. So we're a little bit below that. And that was essentially us keeping tight control of the cost going forward. The majority of the employees that we've recruited so far, and in fact, the majority in our third quarter will be for the engine business. So far about three-quarters of the increase has come from people that we've recalled from a previous employment, and one-quarter from new employees. I expect that blend to change as we move through the next, let's say, period of time. And it's maybe to 50/50 and then the majority will be fresh employees, I think as we exit the year. To give you a roadmap for the second half, let's say, first, Q3 will be principally engine. And then we'll be looking to add selectively in our structures business in the fourth quarter. And also for our faster businesses as we get looking into 2022 to be ready for that. So, about 500 people I think we're planning for the second half. So getting towards 1000 for the year.

Great. Thank you for the color. I'll stick to one.

Thank you.

Thank you. Good morning.

Good morning, David.

John, could you comment on or give your perspective on the Airbus rate, narrow-body rate increases that they've been now proposing out. And '23, '24, '25, what that could mean for you all from a revenue perspective? Does that allow you to kind of grow above the prior peak of $7 billion in revenue? And I guess how well are you capacitized to handle those kind of rates? Thanks.

Let's discuss the total narrow-body aircraft situation, as it's the key metric for the next 18 months. In 2019, the combined production of the Airbus A320 and the Boeing 737 Max peaked at around 100, possibly slightly higher, around 105 at times. This mix is currently shifting, with Airbus expected to increase its production to 47 in January and 55 by mid-year, while Boeing plans to raise its output to just over 30, reaching 31 in January 2022 and remaining stable since then. The combined total is in the mid-80s, representing a significant increase compared to last year. However, it still hasn't returned to 2019 levels. By the middle or end of 2023, if Airbus reaches the mid-60s in production and Boeing's plan becomes clearer, we could see combined production surpassing the 100 mark, possibly exceeding 105. Should Airbus confirm plans to ramp up to 70 or more, that would indicate further potential growth. In the next 18 months, as we reach that 100 production target, we will essentially be back in familiar territory, necessitating capacity expansion. Regarding wide-body aircraft, it's still early to make definitive predictions, but I anticipate that by the latter part of 2023, we will see an increase in wide-body production, with potential benefits already visible as we approach 2022. For instance, if the 787 returns to a production level of five per month, that would represent an increase for us. My expectation is that we will see three volume increases: the initial lift due to the current low production rates from inventory adjustments; a subsequent increase in production to match demand; and then further production growth to keep up with proposed rates from Boeing and Airbus. Boeing's production plans from 14 to 31 and Airbus's from 40 to 55 represent healthy increases, but this requires replenishing inventory to sustain these production levels. If we consider a time frame around 2023 to 2024, I expect our revenue, all things being equal, to exceed 2019 levels. Taking into account the expected content increases and potential price benefits, we could be looking at around $7.5 billion to $8 billion in revenue based on the equivalent aircraft production. That’s a rough estimate, and many variables will come into play in the next few years. Ultimately, I foresee three years of substantial growth ahead before we return to a more normalized growth rate of 4% to 5%, depending on market demand at that time.

Thanks for all the color, John. It was great.

Thank you.

Hey, guys. This is Dan on for Gautam. Good morning.

Good morning, Dan.

So, my question is actually pretty similar. But I wanted to ask from a different perspective. What will be your greatest challenges in meeting the narrow-body production ramps in the short term to medium term? And also would you see any benefit on, I guess, at least on the labor side or anywhere else from depressed wide-body rate that would maybe allow for greater utilization on the narrow-body side or is that not really relevant here?

We can look at our machine tool capacity, specifically regarding casting and core scrap machines, along with the tooling for specific part numbers. Currently, we have ample capacity for machine tools, having already produced over a hundred narrow-bodies in 2019. Additionally, we've invested $250 million in our engine business to enhance that capacity. Although the pandemic affected operations, we've maintained that capacity for the last 18 months, leaving it fully available. We could ramp up to a production rate of over 400 narrow-bodies and increase wide-body production significantly as well. Essentially, there are no constraints on our plant and equipment. I am confident we can operate for at least a year with capital expenditures below depreciation since much of the capacity is already established. However, we need to understand the exact requirements for tools. Over the next 18 months, I foresee no issues in meeting customer demand; for instance, combining narrow-bodies at around 105 units poses no problems. Challenges may arise if Airbus increases to 75 and Boeing to over 50, pushing us to a total of 125 aircraft per month, which would then strain tooling or die capacity for certain Airbus components. If that situation arises, we would need additional tooling to manage the higher volume. Looking ahead, I don't anticipate any capacity limitations over the next couple of years, except for the need to onboard and train more labor. In terms of our core machinery, we are fully capable, and we should start considering how to expand tooling capacity.

Your next question comes from the line of Beth with JPMorgan. Hey. Thanks very much and good morning guys.

Good morning.

Wanted to ask a quick question about forged wheels. And just to make sure, understand the materials dynamic there, and how to model things going forward. I guess, can you talk about what happened to kind of the real demand sequentially from Q1 to Q2? And how to think about the trajectory of that? And then when it might pick up again?

Yes. Let me explain the situation regarding fundamental and market demand. The order intake for Class 8 truck trailers has remained at an exceptional level for an extended period, creating an impressive backlog. The demand indicates strong confidence in our commercial transportation business for the remainder of the year and throughout 2022. In fact, this demand is unprecedented. However, in the second quarter, despite this robust market demand, we faced challenges due to a significant number of downtime days. Different end customers struggled to finalize truck assembly because of missing parts like tires, windshields, and other structural components, particularly electronics and semiconductors. As a result, we have many partially assembled trucks in the U.S. and Europe, some of which have been delivered to dealers with missing parts that need retrofitting. The situation illustrates a strong market demand but short-term supply constraints as our customers couldn't procure the necessary parts to build trucks. This led to a 7% reduction in our delivered end product volume in Q2 compared to Q1, approximately translating to an $18 million revenue loss. We compensated for this shortfall through metal price adjustments. If you calculate our EBITDA margin from Q1 and adjust for the revenue reduction, you’ll find it accounts for a few hundred basis points of margin impact. Thus, for the second quarter, we experienced a 7% volume drop alongside a metals impact. Adjusting for these factors, our margins remained quite respectable. If we further adjust for an estimated $18 million to $20 million at the Howmet level from metal pass-through related to wheels alone, our EBITDA margins would have exceeded 23%, showing considerable improvement from Q1 on a like-for-like basis, though this was obscured by the fluctuations in revenue from metal recovery.

Thanks. That's very helpful. And then, I guess, as we look to the second half, do you see the volumes continuing to go down because these bottlenecks continue? Or can you kind of stabilize at this level and just wait for the your customers to be able to handle the increase in demand that might show up in 2022?

Yes. I think we're going to have a similar Q3 to Q2 on the truck side, that would be my thought there. Just because the part shortages haven't really eased yet. And I do think that we're going to see as best I can guess that some of those will begin to ease towards the back end of the year. So I'm hoping for a fairly robust fourth quarter on wheels. Although I can just hope it's not a strategy. But the answer is, my thought is that it should be getting better and then like a really good 2022, because I say, the order books there and the backlog is just increasing just because the demand is there, but it's the inability for truck manufacturers to satisfy the market at the moment.

Great. Thanks very much, John.

Thank you.

Hi. Good morning. John, I wanted to ask you about spares or probes and spares a little bit both commercial airfoils and defense airfoils. And just get a sense for how those have trended March to June quarters especially since another supplier surprised us with a downtick, the sequential downtick on supply chain issues? And I don't know if that's relevant here. But I understand the business isn't very big. But what are you seeing trend-wise both commercial and defense spares as we go through 2021?

So, as you know, we have to estimate that isn't the biggest number for us. But we actually saw a small uptick in the aftermarket demand for airfoils in the second quarter in the context of Howmet being nothing material at all. We are planning and scheduling that we will have an increased second half in airfoil aftermarket going through our customers of Pratt & Whitney. So while the percentage, I think is certain - I can't make that one. But certainly well into the double digits in percentage increase. Again, it's not huge numbers, but it's pleasing to see that demand and then as all goes well again as we exit this year into next year. So when I bifurcated the strength that we saw in defense and IGT spares has continued all the way through with no real let up on that side at all. And so, it's a fairly strong growth in 2020 continued into 2021. But the commercial aerospace business has been very, very muted certainly in Q1, small increase in Q2 and we're seeing higher percentage increases. But it won't become material in dollar terms until 2022.

And other than the bottlenecks you mentioned a few minutes ago. Are there any supply chain areas that we should just be focused on anywhere in the business that could be disruptive?

No. There's nothing that we see that's problematic for Howmet at all. It was scanned our supply base last year, the one area of concern we had basically disappeared by the late fall and currently we don't see any supply constraint for metal input to any of our plants. And we are securing supply as best as we know for what we believe in market demand as we go the turn of the year, because it's important to start thinking more about lead times. We're encouraging our customers to be forthcoming in trying to give greater visibility for their schedules for those parts, which I expect the world has been a significant amount of metal availability in the system, the last 12 months. That is tightening. And clearly I think for some of our product range that we will see those lead times go out to beyond six months to nine and twelve months or certainly as we move into 2022. So we really have to plan for those. But that's only covers part of the product that we make where we have those really extended lead times.

As those tighten should we expect any margin pressure or these are all under LTAs and not an issue?

Not an issue, yes.

Thanks so much. Good morning.

Good morning, Rob.

John, you mentioned de-stocking in your commentary. And I was wondering if you could run through what the latest sort of situation is there how it could differ from aircraft to aircraft model? And what sort of visibility you have on when this could end?

Okay. This encompasses what we've been focusing on in recent quarters regarding the actual level of availability. Additionally, it now also partially depends on the safety stock that our customers might want to maintain. Our belief is that by the end of this year, our narrow-body inventory will be fully depleted, and we will need to switch to an inventory billing situation, with only a few isolated exceptions. As these rate increases take effect in the second half of this year, they will consume any remaining available parts. Furthermore, we need to assess whether we are engaging with a Tier 1 supplier directly to an airframe manufacturer or an engine manufacturer to address the needs of the engine for the system.

So, it's different on wide-body by the end of the year. And I'm struggling to remember the number, but let's assume we still have some trapped inventory in the system. And we'll be carrying, I think, something but now less than about $50 million of trapped inventory in our system which will liquidate during 2022. But for narrow-body the way to think about it is essentially there's no trapped inventory in our system left and I think there'll be very little if any in our customer systems left for a narrow-body as we transition through the month of the year with tightening each quarter.

Yes. That's great. Thank you.

Thank you.

Hi. Good morning. Thank you. Could you comment on the 1% decline for defense in the quarter? What were the main factors contributing to that? And what are your latest thoughts on the F-35 rate moving forward?

I believe it’s beneficial to take a broader view on defense and then connect it to the present situation. It seems that Lockheed may not produce as many aircraft as initially anticipated. This was also the case last year and appears to continue this year, possibly due to supplier availability or COVID-related workforce impacts. However, there has been an increase between 2020 and 2021. Lockheed is now indicating a slightly reduced projection for 2022 compared to previous estimates, decreasing from around 169 to 159. Nonetheless, this figure remains higher than 2021. We expect steady growth in F-35 production from last year to this year and into the next, followed by consistent production in the subsequent years. If production were to decrease by around 5% in 2024 or 2025, which is uncertain at this point, we anticipate this would align with an increase in spare parts needs for the engine program. We foresee significant requirements for spares as we approach the middle of the decade. Overall, we project a gradual improvement in F-35 production, both from early orders and the aftermarket, benefiting Howmet over the next few years. There are additional orders coming in, like the recent order for 36 aircraft, and the proposed defense budget has seen an increase in F-35 quantities compared to the original White House budget. Currently, trends look favorable for us. You also have to consider the seasonality of defense orders, which usually see lighter activity in the first half of the year and heavier in the second half. We observed this clearly in Q4 of last year when defense demand was fulfilled based on the DOD budget. If I were to assess it now, I would describe the F-35 as relatively stable year over year, perhaps with a slight increase by the end of the year. We are seeing some positive indicators, but it's too soon to make definitive predictions for 2022. There are positive signs for some other military programs that we are monitoring for this year.

Yes. No. That's great. Thanks for the color.

Thank you.

Thank you. Good morning. John, I was wondering if you have any sense of how much of your commercial aerospace businesses are regional and business jets. So basically how much is not Boeing or Airbus linked?

Yes. I mean, we have a significant exposure to business jets and helicopters. But I'm not sure as we've ever really disclosed it. So, before I comment on this call I'll look at it and see whether we get as they can do to call you back if we have. But I'm not aware that we actually have broken that whole segment down for you. But to say, and if you called out any business jet then you'd see us highly represented whether it's for our engine products or indeed any of the structural faster products.

Understood. And maybe if you could just talk a bit about what you're seeing in the industrial segment that business for the second half both OEM and the aftermarket in that business?

Yes. So break it down between industrial and industrial gas turbine and oil and gas the IGT part of the business is very strong. And we're in a situation where we actually just can't make enough at this point in time. And therefore essentially it's on us just to make more and that's both for the new larger blades for the new turbines, which I mentioned in my earlier comment which we provide gas turbines which have fundamentally higher output and lower emissions of both carbon and nitrogen oxide. And so, we have a very strong demand for that and a significant backlog. Although for all of our customers whether it's GE, Siemens, et cetera. And that's also combined with a very strong aftermarket for what we call predecessor products. Well say, not as big blades you're trying to put that way. It's still pretty big compared to an aircraft turbine, but not as big as the new latest fleet of very large gas turbine engines. And there the supply situation is easier for us and we do have very significant demand basis because the natural gas turbines in particular are being worked harder given the relatively attractive. I'll say the input fuel content of the natural gas compared to oil or coal and certainly in their lower emissions even though that they also emit a thing. So a very healthy situation there. Oil and gas, the leading indicators of replant are going up very significantly. But we're not currently seeing increasing demand yet. I guess we're in that inventory burn out situation and therefore, I guess hope that that will turn into an increase for us in 2022. And in general, industrial is you'll see that it also continues to be strong, but not as strong as the IGT market where really I would say, we just do with you see more instead it's more plants and the sort of equipment for these turbines is not fungible from an aircraft basically.

Appreciate all the color, John.

Hi. Yes, John. I wanted to pursue a little bit more defense, because sequentially it was down 16% and engines were actually down 20%. So, was there something odd this quarter that made it deteriorate so much relative to Q1?

No, there’s nothing unusual at all, George. I believe we experienced a decline last year as well. We typically see stronger performance in Q1, while the middle of the year tends to be weaker, followed by a robust finish in the defense aftermarket. This creates some seasonal fluctuations throughout the year. So, nothing specific to note. There’s no cause for concern, and we haven’t lost anything. It’s just not very satisfying, but that’s how it goes.

Okay. Can you provide the sales mix between narrow-body and wide-body from 2019 compared to today? Also, is there a difference in profitability between these two sectors?

The metrics show that in 2019, the split was about 55% for Boeing compared to Airbus, which wasn't a question in the narrow-body segment, but for wide-body, it was just over 50%. The numbers are quite similar and have fluctuated over the past year. In terms of underlying profitability, they are also very similar, but I would say wide-bodies are slightly more profitable. However, the differences in volume and variety balance out. While wide-body aircraft would generally be somewhat more profitable, the difference is not significant enough to disrupt the overall company performance. Given the current extremes in the market between narrow and wide-body aircraft, I would be surprised if it impacted our margin by more than 1% when looking at the overall picture. This is not a significant concern and has been fully considered in our forward-looking approach. Although we haven't provided guidance for 2022 yet, we anticipate margin improvements in the second half, already factoring in the differences I discussed. The margin outlook takes into account the recovery of metal costs relative to input costs, and I highlighted that it was probably worth considering a figure around 22.8 for 2023. Additionally, this accounts for the shifts we're seeing with narrow-body sales coming back stronger, so we still expect margin improvement despite slight changes in the mix.