Howmet Aerospace Inc (HWM) — Q4 2021 Earnings Call Transcript

Thank you, Natalia. Good morning. And welcome to the Howmet Aerospace fourth quarter and full year 2021 results conference call. I am joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today’s discussion will contain forward-looking statements relating to future events and expectations. 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. Reconciliation 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. Let’s move to slide four. First, let me frame the quarter for you. The environment was challenging with the new variant of Omicron emerging the day after Thanksgiving. Fortunately, once we take time to understand the changing nature of the pandemic, we find that the virus appears to be weakening albeit it's quite transmissible. Boeing also continues to test us with reduced build or zero build of the 787 wide-body aircraft as recertification is once again delayed and unclear. Despite these impacts, Howmet performed well, with revenues of $1.285 billion, improving well above last year and in line with Q3. Adjusted EBITDA improved both over last year and sequentially and was $296 million, with an EBITDA margin at 23%. We were pleased with the margin exit rate for both Q4 and the second half of 2021. The sales picture is one of strengthening Commercial Aerospace narrow-body production, healthy Defense and IGT sales combined with constrained sales of our high-performance Wheels segment due to the supply chain constraints at our customers in the Commercial Truck Manufacturing business. Clearly, both the Delta and Omicron variants of the virus impacted production operations. But nevertheless, we were able to achieve a good level of efficiency. Turning to the balance sheet now and the cash flow of the company, adjusted free cash flow was a record at $517 million for the year and well ahead of both last year and guidance, with a conversion rate of 117% of net income. We also made incremental voluntary pension contributions in the quarter, and if we exclude these contributions, adjusted free cash flow would have been 123% conversion of net income. For your information, the free cash flow conversion has continued in the last three years at a level well in excess of our long-term guide of 90%. The year-end cash balance was $722 million and reflects both the strong cash flow conversion and the fact that in the fourth quarter, Howmet repurchased $205 million of shares at an average price of $30.32. For the fourth quarter average diluted share count reduced to 431 million and the year-end diluted shares stood at 428 million. The repurchase of shares continued in early 2022 with a further 3 million shares purchased for $100 million during the month of January. As of the end of January, the diluted share count has been reduced to approximately 425 million shares. And finally, the 2021 tax rate was reduced by the work we have done and the effect was $0.01 on earnings in the fourth quarter. We look forward to 2022, and I will provide commentary when we get to the outlook section of our presentation. Meanwhile, I will hand the call over to Ken Giacobbe.

Thank you, John. Let’s please move to slide five. Fourth quarter total revenue was up 4% year-over-year and flat sequentially. Commercial Aerospace increased to 44% of total revenue, which is an improvement sequentially but far short of the pre-COVID levels of 60%. Commercial Aerospace recovery continued in the fourth quarter, with Commercial Aerospace revenue up 13% year-over-year and 4% sequentially, driven by the Engine Products segment and the narrow-body recovery. Defense Aerospace was down 22% year-over-year and 4% sequentially, driven by customer inventory corrections and production declines for the Joint Strike Fighter. Commercial Transportation, which impacts both the Forged Wheels and the Fastening Systems segment, was up 20% year-over-year, driven by higher aluminum prices. However, the market was down 1% sequentially as the market continues to be impacted by supply chain constraints at our customers, which is limiting commercial truck production. Finally, the industrial and other markets, which is composed of IGT, oil and gas, and general industrial, was down 2% year-over-year and 3% sequentially. Now, let’s move to slide six, which sums up the year nicely. Let’s start with the P&L. For the full year, price increases were up year-over-year and in line with expectations, as they are primarily tied to long-term agreements. Structural cost reductions were approximately $130 million, which exceeded our target of $100 million. Adjusted EBITDA margin for the year was 22.8%, which was an increase of 220 basis points year-over-year, despite $285 million of lower revenue. The fourth quarter exit rate was 23%. Adjusted earnings per share was $1.01 or 31% higher than 2020. Moving to the balance sheet, our cash balance was healthy at $722 million. Adjusted free cash flow was a record $517 million, which was well above the guidance. Free cash flow conversion was 117% of net income, and if we exclude voluntary pension contributions of $28 million, adjusted free cash flow conversion was 123% of net income. Net pension and OPEB liabilities were reduced by approximately $275 million, while pension and OPEB expense, as well as the associated cash contributions were each reduced by approximately 54%. Net debt-to-EBITDA improved to 3.1 times. Regarding capital allocation, we have taken a balanced approach. Capital investment projects for Forged Wheels at Hungary and Mexico are now essentially complete. Concurrently, we have been investing in automation projects in the Engines and Fasteners segments. During the year, we paid down gross debt of approximately $845 million, with cash on hand and reduced annualized interest costs by approximately $70 million. We also reinstated the quarterly dividend of $0.02 per share of common stock in Q3 of 2021. Lastly, we repurchased approximately 13.4 million shares of common stock for $430 million, with an average acquisition price of $32.07 per share. To sum it up, during the year, we enhanced our profitability, strengthened the balance sheet and we are balanced in our capital allocation. Let’s move to slide seven to briefly cover the segment results. Engine Products year-over-year revenue was 9% higher in the fourth quarter. Commercial Aerospace was 39% higher driven by the narrow-body recovery. Defense Aerospace was down 26% year-over-year, driven by customer inventory corrections and production declines for the Joint Strike Fighter. Operating profit increased 10% year-over-year and operating margin improved 20 basis points, despite adding approximately 150 employees in the fourth quarter, which now brings our total employees added since Q1 to approximately 950 employees. Now let’s move to slide eight. As expected, Fastening Systems year-over-year revenue was 3% lower in the fourth quarter. Commercial Aerospace was 15% lower, as we continued to experience production declines for the Boeing 787. Commercial Transportation was up approximately 46%. Year-over-year, Fastening Systems was able to maintain segment operating profit on $7 million of lower revenue. As a result, operating margin improved 50 basis points. Now let’s move to slide nine. Engineered Structures year-over-year revenue was 12% lower in the fourth quarter. Commercial Aerospace was flat, as the narrow-body recovery was offset by production declines for the Boeing 787. The Defense Aerospace market was down 26% year-over-year and flat sequentially. Year-over-year, Engine Structures was able to generate $3 million more in segment operating profit on $27 million of lower revenue, primarily due to permanent cost reductions and a favorable $2.5 million non-recurring adjustment related to a customer contract negotiation. As a result, operating margin improved 260 basis points. Finally, let’s move to slide ten. Forged Wheels year-over-year revenue was 15% higher in the fourth quarter. Approximately $28 million of the $31 million revenue increase was due to higher aluminum price pass-through. Pass-through of higher aluminum prices did not impact operating profit dollars, but unfavorably impacted operating profit margin by approximately 350 basis points. On a sequential basis, revenue and operating profit were essentially flat. Commercial Transportation demand remained strong, but volumes continued to be impacted by customer supply chain issues. Aluminum prices were flat sequentially, resulting in minimal impact on sequential operating profit margin. One final comment on the segments, the incremental profit flow-through for the segments in Q4 was 30% year-over-year and can be found in the appendix. The 30% includes a 55% increase in aluminum prices year-over-year, which adversely impacted the incremental profit flow-through. If we adjust for aluminum prices, incrementals were above 70%. Now let’s move to slide 11. We continue to focus on improving our capital structure and liquidity. In 2021, we took actions to lower our annualized interest costs by approximately $70 million through a combination of paying down gross debt by approximately $845 million with cash on hand and refinancing higher-cost debt with lower-cost debt. Gross debt remains at $4.2 billion. Net debt-to-EBITDA improved to 3.1 times, despite cash used for debt refinancing, share buybacks and dividends. All debt is unsecured and the next maturity is in October of 2024. Finally, our $1 billion revolving credit facility remains undrawn. Before turning it back to John to discuss the guidance, I’d like to point out a few items that you can find in the appendix. First, there’s a slide in the appendix that covers special items in the quarter. Special items for the fourth quarter were a net charge of approximately $53 million, mainly driven by costs associated with non-cash pension plan settlement charges. Second, there’s a slide in the appendix that summarizes the share repurchases that occurred in 2021, as well as the share repurchases in January of 2022. Remaining common stock share repurchase authority sits at $1.25 billion as of February 1, 2022. Finally, in the reconciliation of adjusted free cash flow, you will notice the cash receipt from sold receivables is zero dollars in the fourth quarter. As a result of restructuring our accounts receivable securitization program in Q3 2021, cash receipts from sold receivables will be zero going forward, and the entire impact from the sale of accounts receivables will be in cash from operations. Therefore, starting with Q4 of 2021 and beyond, the definition of free cash flow will be simplified and be cash from operations less CapEx. Please note that the net cash funding from the sale of accounts receivable has been $250 million since Q4 of 2020, which means that the sale of accounts receivables has neither been a source of cash nor a use of cash in 2021. So, with that, let me now turn it back over to John.

Thanks, Ken. Let’s move to slide 12 for guidance for 2022. The leading indicators for air travel continue to show improvement, notably for domestic travel. We continue to hold the view that we will see an acceleration in revenue growth during the course of the year, following a fairly flat Q1 compared to Q4. The Engine Products business has led the recovery to date and we now expect the Engineered Structures business will see lower revenue in the first half of 2022, due to the continued delays with the 787. Fastening Systems is expected to show growth in the first half of 2022, starting in the first quarter. In terms of specific numbers, we expect the following, the guidance for Q1 revenue at $1.3 billion, plus or minus $20 million, EBITDA of $295 million, plus or minus $9 million, EBITDA margin of 22.7%, plus or minus 30 basis points, and EPS of $0.29, plus or minus $0.01. And for the year, we expect revenue to be $5.64 billion, plus or minus $80 million, EBITDA at $1.3 billion, plus or minus $35 million, EBITDA margin of 23%, plus 30 basis points and minus 20 basis points, EPS to increase to $1.37, plus or minus $0.06, and cash flow to be $625 million, plus or minus $50 million. Moving to the right-hand side of the slide we expect the following. Revenue to be up approximately 13% versus 2021, driven by Commercial Aerospace, Commercial Transportation and the IGT market. The 2022 revenue guidance includes more than $125 million of material pass-through impacted margins by at least 50 basis points. And for clarity, the price increases are excluded from the $125 million of pass-through. Adjusting for that $125-plus million of material pass-through, then the incremental EBITDA margins fall nicely in the 30% to 35% range. Adjusted EBITDA is expected to be up 15% versus last year, adjusted earnings per share to be up approximately 36% versus 2021, pension and OPEB contributions of approximately $60 million in the year. CapEx should be in the range of $220 million to $250 million and that continues to be less than depreciation and amortization, resulting in a net source of cash. Adjusted free cash flow compared to net income is approximately 110%. Incrementals adjusting for the metal are between 30% and 35%, as previously stated. So let’s move to slide 13 for the summary of 2021. In conclusion, Howmet delivered exceptionally well in 2021, and I note the challenges that we overcame. EBITDA and EBITDA margin increased with the Q4 exit rate of 23%. Operational productivity was healthy and structural costs reduced by $130 million. Pricing improved during the course of the year and was well above inflation recovery. Free cash flow was excellent and allowed for further share buybacks of $430 million or 13 million shares while also improving the net leverage of the company and reducing gross debt by $845 million, and furthermore, reducing interest carrying costs of $70 million, thereby improving future free cash flow yield of the company. Furthermore, pension and OPEB growth liabilities were reduced by $440 million, which is another huge step in the improvement of the balance sheet of the company and net liabilities by $275 million. Lastly, work performed and the tax rate showed improvement with the rate reduced by 250 basis points to 25%. Thank you. And now let’s take your questions.

Hi. Good morning.

Hey, Rob.

John, I wanted to ask you about what we have been hearing on castings and forgings potentially being a bottleneck with capacity ramp from some of the OEMs and other folks in the industry. Could you talk about that?

Yeah. I mean, I will probably just give you what I seem to be, what I think are three levels of response to your question. I’d probably just cover the first two. At its most simplest, no CEOs that have commented publicly have contacted me to register any concerns whatsoever. I could leave it at that. But I think I’d like to go a little bit further, and say, I am really glad it’s recognized just how hard and how exacting the production of such products are. And it’s a good job that there is inventory in the pipeline at many levels, starting with completed engines at Boeing and Airbus, and also in the pipeline between us and the engine manufacturers. I think it would also be great to recognize the lead times with scheduled commitments to back up the skylines and aircraft production in full, assuming that these volumes are required. And then the third level of commentary would be, I will say, commenting on the whole supply chain, labor availability, skills, response times, et cetera. But for right now, I have no recognition of this as a significant issue in any dimension.

I think that’s a fair point that there’s so much uncertainty in the production rates. The other thing I’d ask, John, is just, if the competition might not be able to keep up, does this present an opportunity for you?

Obviously, it always depends upon the parts that are in question. My expectation is that the spot business will pick up in 2022 and that will be to our benefit. And hopefully, we can respond in the same way that we were able to respond in 2019 and pick up the additional business should it occur and I think that’s probably as far as I can go at this point, Rob.

Fair enough. Thank you, John.

Thank you.

Hey. Thanks, guys.

Hi.

Could you clarify the change in guidance from the Q3 earnings call? I understand sales have decreased, but what are the updated rates for the 787 and 777, as well as any other relevant details compared to what you previously shared?

Yeah. So if I exclude metals from that revenue line, then the volume increase is around 11%. So, close to that 12% to 15% that I previously called, and the reason for it being at the lower end of that is the 787 and the lack of visibility that we have to be going that aircraft. And we note that our customer hasn’t provided any solid view skyline, and therefore, we have to make our own assumption of volume of production. And in addition, I’d say, there’s a bit of an inventory overhang on F-35, given that while we supplied to schedule during 2021, I note that Lockheed did not build the full quantity of aircraft. So while the aircraft production is going to increase in 2022 and increase in 2023 then that’s great, but we have got to burn off a bit of an overhang in the early part of 2022 and then we will see further volume improvements as we go into 2023 when that overhang, hopefully, will no longer be there and it will be a bit rise in the first part of this year. So those would be the, let’s say, a couple of comments regarding the revenues for 2022 and the early part of the year. Does that cover it or do you need a bit more?

Thank you. No. That’s very helpful. And just to follow-up on Rob’s earlier question on pinch points. Have you seen any pinch points upstream with respect to nickel billet or what have you given the PCP strike and Carpenter having the outage, the unexpected outage at Reading, I don’t know. How do you feel about...

Yeah. So far nothing on nickel. I recognize the Carpenter matter and I think that’s going to be a little bit of a pinch point in the first half of this year. Nothing dramatic that we see at this point, but definitely having some impact.

Thanks. Good morning.

Hi, David.

Hi, John. So, I guess, within that 11% revenue growth, John, that you are talking about, can you just give us an idea by end market, what you are assuming, I guess, Aero Defense, Commercial Transportation being the big ones, maybe Industrial, if you want to throw it in there? And then on MAX, can you give us an idea of what you have produced in 2021 and what you are assuming for production in 2022? Thanks.

By the end of the year, we expect growth in the Commercial Aerospace market, particularly in narrow-body aircraft, though there will be limited activity in wide-body due to uncertainties surrounding the 787. The Integrated Gas Turbines segment should remain strong, and I believe it will improve throughout the year. Our Wheels business in Commercial Transportation is also set to grow, and if supply chain constraints ease, we anticipate a robust second half of the year and an excellent 2023. Currently, the Defense sector appears to be stagnant or slightly declining for the year, particularly in the first half. As for oil and gas, it's difficult to predict, but we remain hopeful for an uptick without making any assumptions. Regarding the 737, I don’t have exact figures, but production has increased in the latter half of last year. This improvement has been observed while we have been supplying below that level, particularly with the LEAP 1B engines as we clear out our inventory. We expect healthy growth this year, particularly as we see further rate increases and eliminate pipelines of leftover inventory. If Boeing feels confident enough to raise production rates, that would benefit us beyond our guidance. As for spare parts, we anticipate strong performance this year, projecting a potential 30% increase in our aftermarket revenues on the Commercial Aerospace side, although this is starting from a low base. The revenue figures are starting to look promising, although still below our levels from 2019.

Yeah. And in terms of, David, the exit rate on the 737 in Q4, we were at about 17 aircraft. And as we look into 2022 consistent with what we said last quarter, probably, low 20s in the first half and low 30s in the second half.

Thanks so much. Good morning. John, to follow up on this 787 issue, have you taken the 787 out completely from your 2022 revenue guidance? And then, secondly, assuming that’s an accurate forecast, can you use this capacity for other stuff?

We estimate around 35 aircraft will be in production for the year. This is just an approximation, especially given the very limited or possibly zero production in the first quarter. While we anticipate some production, we are not entirely certain, so we have estimated it at the 35 level. Regarding production facilities, the resources allocated for the engines will free up some capacity, but since the equipment is specifically assigned to that aircraft, there will be no changes in that area. For the most part, the fastening systems and titanium structures are also dedicated to the aircraft, although we do have enough capacity to support other customers for different flight types or bulk fasteners. Despite the potential to use these for other purposes, we have already made arrangements to maintain production rates for everything else. Therefore, we don't see any benefit in the 787 being down. We are hoping the aircraft gets recertified and production resumes, as that would greatly benefit us.

Yeah. That’s great. Thanks, John.

Thank you.

Thanks. Good morning. I was wondering who would address this, Ken or John. Regarding cash flow, there has been improved performance in 2021 and 2022, with cash conversion rates still at relatively high levels. My question is, why aren’t you increasing working capital as you prepare for the expected double-digit growth this year and next? Are customer receivables arriving on time, and are purchase orders coming in better than your historical expectations, or are we just adjusting our expectations for cash conversion compared to the long-term target of 90%?

No change to long-term guidance. When capital expenditure is below depreciation and amortization for a period, that’s a positive sign. We expect pension contributions to be lower in 2022 compared to the previous year. We're anticipating some working capital build, and if we achieve our targets regarding receivables and payables, I would be very pleased to utilize the increased working capital later in the year. This would indicate a very strong exit rate and great momentum heading into 2022. While working capital drag isn't our main concern due to strong margins, we certainly prefer to see rising revenues. Additionally, we aim to further enhance our inventory efficiency throughout the year as it is part of our operations. This helps us minimize the working capital drag from increased revenue. In summary, there is a working capital drag on cash flow; we strive for improved efficiency, but we welcome a larger drag as it signifies strength, especially in the second half of the year.

And Myles, this is Ken. As John mentioned, we are experiencing a modest cash burn in working capital. However, as we finished 2021, we increased our inventory in the Engines business for some key platforms to prepare for the upcoming growth. We believe we are in a strong position.

Hey. Hi. Thanks very much and good morning.

Hey, Seth.

Could you provide some insights on the LTAs this year? Specifically, in terms of how many might be coming up compared to the usual timeline of three to five years, considering that around 25% typically comes up each year. Is this going to be a heavier or lighter year, and what are the expectations for what that could achieve this year?

Yes, as I've mentioned before, 2021 was a significant year for us, and you saw that reflected in our results. By the end of the third quarter, we had achieved over $60 million in price increases, not accounting for inflationary adjustments. We'll release the Q4 figures in about a week. For 2022, the long-term agreements won't be as substantial as in 2021, which is consistent with my earlier statements. Nothing has changed; we're well into our negotiations for 2022, though they are not finalized yet. Our expectations for price improvements are in line with what I've previously communicated.

Hi. Good morning, everybody.

Hey, Noah.

John, I heard your comments on the math of the pass-through versus the pricing in terms of what that does to margins. But just the midpoint of the EBITDA margin guidance is a little constrained year-over-year. It seems like sort of the high-end of the EBITDA versus the low-end of the revenue gets you to 35% incremental, but a lot of different places in the ranges don’t get that incremental you have been speaking to. So maybe you are just trying to tell us there’s risk to revenue, but you feel good about your operating performance. But just wanted to get your latest thinking on your incremental margin potential versus what you were saying last quarter?

Yeah. Well, last quarter, I gave you 35%, plus or minus 5% approximately and we are well within that. So I think it’s exactly in line. I don’t think anybody is going to argue for a couple of percent with all of the variables around us. So those variables will be Omicron, production disruption, I could talk about inflation, I could talk about recovery inflation, I could talk about 787, the F-35, the management of LEAP 1B inventory and also things like container availability, never mind the cost of containers. So there’s a lot of stuff going on and within that overall context of uncertainty, then I think the guide is just exactly in line and we will see how things pan out during the course of the year.

Okay.

I am not accustomed to disappointing and the most important one, not to disappoint myself. And so at the moment, I think, we are in line. I think the most important thing is, we are passing through, we can pass through these significant material changes and others. So that’s the important thing. It’s not an excuse me for reduced margins.

Excellent. And is this...

Once we reach that point, it won't be a discussion. We have provided a range for our goals, and we aim to improve margins in 2023, similar to the improvements we achieved in 2022 and 2021. As you're aware, 2021 saw an improvement of over 200 basis points compared to 2020, and we have projected a 23% midpoint, which would be an increase from 2021.

And Fastening didn’t see that as much in 2021 and is the furthest below pre-pandemic. Now that the revenue has stabilized there, is that where there’s the most upside left moving forward?

Well, I am certainly optimistic for our Fastener business, because that’s a good margin business. I’d be a lot more bullish about it if I knew more about the 787.

Yeah.

But while I don’t, I am going to be fairly cautious. I still think that given, I mean, when you go into like sort through this, given, I think, in the Q4 revenue slightly down, but margin up, and if you think margin up when the wide-body is down and 787 down, and given the differential mix of Fastener on aircraft, it was a real credible and creditable performance for the Fastener business.

Hey. Good morning, guys. John, on Russia, there are discussions again on sanctions. How do you think this will pan out for the titanium industry? And is that a risk point or potential pain point for you? How are you thinking about all of this?

I noticed comments in the press from Boeing about their concerns regarding geopolitical stability and the effect on titanium. If those concerns become significant, it would benefit us because we have the capacity for titanium. We would be open to establishing a long-term agreement with that customer or any others. So, if there’s geopolitical uncertainty affecting defense contractors or civil aerospace production, we would be glad to hear from you.

So, John, I mean, following up on that, I mean, how much capacity do you have for titanium, how much of the aerospace industry’s demand can you meet, should this come about?

Well, it’s clearly not the whole of the VSMPO demand, that’s for sure. But it’s like those who come first will get the contracts locked and the capacity we are able to offer. Our reuse of reverse and also titanium sponge, which for the most part for us comes from Japan, is not affected by the geopolitical uncertainties. And I would certainly want to guarantee for myself that I have got access to titanium.

Hey. Good morning, guys. Thanks for the question. Could you kind of share your thoughts on headcount additions at this point? You added a lot of people in 2021, are you sort of covered for this year or are there a lot more that you need to add to support some of the ramp-up later this year?

So we have tried to put headcount in sequence to those businesses that, I will say, the early movers in the aerospace recovery map. And so you have seen just under, I think, the number of 950 net adds in our Engine business. We think we are going to start adding in our Fastener business shortly, already are adding our Fastener business and so trying to get ahead of that volume recovery that we see. In terms of access and the availability of labor, so far, it’s been okay. I am saying about 70% of its come from people that we have recalled, and let’s say, therefore, 30% from fresh labor for us. My expectation is that, if things work out as we expect then we will probably be recruiting an additional similar number, probably, somewhere between 800 and 1,000 people during the course of 2022, and if things work out well, we will be on the upside of that, and if not, we will be on the downside, but we will keep adjusting it as we see fit during the year. But, again, if you think about what we have said to you today is that, we have tried to be thoughtful about the addition of labor to be ahead of the curve and training and taking those costs up so that we are not only able to meet our customer’s demand in these, especially in those very difficult parts to manufacture I already talked about. But also we took the time and effort and cash cost of building some additional inventory such that we could protect some of the volume ramp that we expect coming. And we think that the demand actually could be quite healthy and rather than get stressed about our production, we want to be ahead of the game and that’s where we think we are currently.

Yeah. Hey. Good morning. I just had a follow-up…

Hi.

… on asking about capital allocation, I know you mentioned that 2021 was a balanced approach. You did mention you don’t see a lot of CapEx needs. So I guess really just remaining trying to get an understanding of how you are looking at dividends versus buybacks versus refinancing and other opportunities? Thanks.

Yeah. My guess at this point is that, given our healthy cash flow, we will still be returning money of note to shareholders during 2022. In fact, if you think about it, we have already done $100 million in the first few weeks of January. So that gives you an idea of our confidence and strength in the cash flows of the company. We will feel our way through the year and see how we go. But, clearly, if all things go as we expect, then we will be buying additional shares back during the course of the year, with the cadence yet to be determined, but we have plenty of authorization to do so. Clearly, we are also going to make sure we fund the business appropriately and that’s taken care of in a slightly higher CapEx number than before. And I guess that when we get through our first quarter, which we will be reporting to you in early May, we will obviously just take a view of the dividend and whether we feel as though that would benefit from being lifted or not or just do a sense check as we go through. So I expect a balanced approach, but with probably more share buybacks as a dividend in terms of any cash flow implication for the company, but I am willing to consider all things. My guess is that when we exit 2022, we are going to also have improved leverage once again of a similar order of magnitude of turns compared to 2021. So I think we are going to have another conversation where we are going to buy back shares, consider dividends and improve our debt structure, and improve our leverage as we exit 2022, and that will set 2023 up in a really good way.

Hey. Good morning.

Hey, Phil.

A question was on the pricing evolution. Safe to say that last year pricing gains were about $80 million and I think you already said this year is probably going to be something a bit less than that, is that fair?

Yeah. Well, the second part is I haven’t commented on the first part, because that will be okay in a week or so it’s time.

You mentioned the pass-through, particularly in the Forged Wheels business for 2022. Besides the labor costs you anticipate throughout the year, are there any other inflationary factors that might be higher than you expected a few months ago or things that you haven't hedged against?

Energy costs are notably high, especially in Europe. In almost any European country, energy costs differ significantly due to their policies regarding renewables and energy security, leading to elevated prices. While energy costs are also higher in the U.S., they haven't experienced increases to the same extent as in Europe. It's important to focus on energy costs, and we are all aware of the general rise in inflation, which is still in the early stages.

And then just a second part to that, energy comment that you just made, are you all hedged in terms of your energy exposure there or are you feeling the brunt of the spot market gyration?

You can assume that it’s pretty costly to hedge energy, and therefore, we will be incurring additional energy costs during the course of the year. And those which are, let’s say, not covered by our customers are all contained within the guidance we have given. And as I said, our guidance is within the incremental range you already provided but just for that metal pass-through.

Thanks. Thanks. Good morning. On your CapEx guidance…

Hi.

... and recognizing it’s below depreciation in 2022, but is there any larger project that you are undertaking that’s worth flagging?

There are no significant projects at this time, so we are not expanding capacity in our Engine business as we have done in the past. As Ken mentioned, we completed the capacity expansion in our Wheels business in Hungary and Monterrey, Mexico, which is now behind us. We expect to see the benefits of this capacity available to our customers as we progress through the year and into next year. If there's one area where we anticipate higher spending compared to previous years, it will be on various automation projects that we have initiated across the company. I am confident that these projects will yield returns by improving our labor intake and helping us manage future inflationary costs related to productivity. Additionally, I believe that enhanced productivity will contribute to further improvements in our quality metrics. As I have mentioned in prior earnings calls, Howmet has made strides in quality and delivery over the last two to three years, and we aim to maintain that momentum. I see automation as crucial in achieving this as we navigate through the volume increases expected over the next two to three years.

Interesting. Thanks. And then just a quick follow-up on your comments regarding the aftermarket, sorry, if I missed that, but did you say how big your aftermarket business was last year in 2021?

I did not. But to provide clarity for everyone on the call, in Defense and Aerospace, the mark we mentioned in 2019 was about $400 million, and that has now grown to close to $500 million. The $400 million in Commercial and Industrial has been affected by the pandemic, dropping to around $100 million. In comparison to 2021, we saw a slight improvement at the end of the year, particularly in the Commercial Aerospace sector, where I anticipate we will achieve over a 30% improvement in 2022 for spares, covering both narrow-body and wide-body aircraft.

Yeah. Good morning, John.

Good morning, George.

For the last couple of quarters, you have been a little bit less in revenues than you thought, but the margin has either been as good or better than what you have been guiding to. So how long can you continue to do that, if we see the recovery somewhat slower, so the revenues continue to be a little bit less than expected out there?

Certainly, if we look back to the end of 2021, revenue would have been disappointing. However, our supply is determined by customer demand. It's important to note that the 787 program has overshadowed our results, particularly due to its production dropping to zero in the fourth quarter. While the revenue figures are disappointing, we've managed to maintain profitability through our cost reduction initiatives and efficiency efforts, despite challenges from Omicron and production disruptions. Additionally, we've implemented measures to protect our employees to sustain production, which has been complicated by changing government mandates. As for our guidance for the first quarter, approximately half of our revenue consists of material pass-through, which affects volume numbers. However, once adjusted for that, our margins are in line with where we ended in the latter half of 2021. We believe we can continue to effectively convert as we wait for volume increases. The key will be how the second quarter and the latter half of the year unfold, especially regarding the stability of production schedules. We're starting to feel cautiously optimistic for the second quarter and more so for the second half of the year. While it's never ideal to be back-end loaded in a year, it's common during recovery phases, particularly in the Commercial Aerospace market, which will continue to see this pattern through 2022 and into 2023. Overall, we are managing to hold things together during a challenging market environment, and if we start to see sales growth like we experienced in the third quarter, I believe we'll be able to capitalize on that momentum.

Okay. No. It’s been impressive performance. I am just wondering how long you can keep it going if you don’t get the revenue.

I believe we've faced significant challenges over the last couple of years, but we've adapted and delivered results. I'm optimistic about the upcoming volume improvements, which I expect to occur sometime in 2022. I think it’s also important to keep the big picture in mind despite, I will call, all the little bits of stuff that you deal with, the big picture is, let’s just consider, revenues are going up in recovery, the Commercial Aerospace business is going to improve, narrow-body is leading the way, volume will increase, whether it’s from Airbus and Boeing, and hopefully, stronger from Boeing, and hopefully, aircraft will start being delivered in China shortly for the narrow-body. I mean, it’s all good. So let’s keep focused on the big picture here.

Yeah. Thank you very much.

Thank you.