Howmet Aerospace Inc (HWM) — Q3 2022 Earnings Call Transcript

Thank you, Cole. Good morning, and welcome to the Howmet Aerospace Third Quarter 2022 Results Conference Call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. 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 today's presentation, references to EBITDA and EPS refer to adjusted EBITDA, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release and in the appendix of today’s presentation. With that, I would like to turn the call over to John.

Thanks, P.T., and welcome everyone. Let's move to Slide 4. Howmet continued to perform well in the third quarter, with earnings per share aligning with the guidance midpoint and an EBITDA margin strong at 22.5%. Revenue, EBITDA, and earnings per share all grew for the fifth consecutive quarter. Q3 revenue was $1.433 billion and was factually lower compared to the midpoint of guidance of $1.44 billion. All aerospace segments showed strong performance with sequential growth in the third quarter. Commercial transportation was lower, reflecting normal seasonality and the effect of the wheels issue, which has now been resolved, and production at the site was brought back fully online as of the third week of October. In September, we saw Commercial Aerospace customers rebalance their schedules, notably in engine products, reflecting two dynamics. Firstly, a lower narrow-body engine build over the summer and early fall than was originally envisaged, and due partially to the availability of structural castings. Secondly, customers are bringing airfoil inventory levels in line by year-end. I'll provide further commentary in the outlook section of my remarks. EBITDA was $323 million, with further progression on Q1 and Q2 of the year. Free cash flow was positive as forecasted; however, it was impacted by carrying higher commercial aerospace inventory levels, again, due to the scheduled rebalances of our customers. Q3 ending cash was a healthy $454 million after repurchasing approximately 2.8 million shares for $100 million at an average price of $36.17 per share and also paying the quarterly dividend. Legacy pension and OPEB liabilities continue to be reduced, which resulted in a reduced year-to-date cash contributions of approximately 45%. I'll now pass the call to Ken for commentary on end markets and each business segment.

Thank you, John. Please move to Slide 5 for an overview of the markets. Third quarter revenue was up 12% year-over-year. The commercial aerospace recovery continued in the third quarter, with commercial aerospace revenue up 23% year-over-year and 7% sequentially, driven by the Engine Products segment and the narrow-body recovery. Commercial aerospace has grown for six consecutive quarters and stands at 47% of total revenue but continues to be far short of the pre-COVID level, which was 60% of total revenue. Defense Aerospace was down 4% year-over-year, driven by continued customer inventory corrections for the F-35, which was in line with our expectations. Commercial Transportation, which impacts both the Forged Wheels and Fastening Systems segments was up 13% year-over-year driven by higher aluminum prices and higher volumes, partially offset by foreign currency. Finally, the industrial and other markets, composed of IGT, oil and gas, and general industrial were down 2% year-over-year. Within the industrial and other markets, oil and gas was up 11%, IGT was down 2%, and general industrial was down 9% on a year-over-year basis. Now let's move to Slide 6. As usual, we'll start with the P&L and focus on enhanced profitability. In the third quarter, revenue, EBITDA, EBITDA margin, and earnings per share were all in line with guidance. Revenue was up 12% year-over-year, including material pass-through of approximately $70 million. EBITDA was $323 million, and EBITDA margin was a healthy 22.5%. If we exclude the $70 million impact of higher material pass-through, EBITDA margin was 120 basis points higher at 23.7%. Adjusting for material pass-through, the flow-through of incremental revenue in the quarter to EBITDA was strong at 39%. During Q3, we continued recruitment of headcount by approximately 350 employees primarily in engines. Year-to-date, we have increased headcount by approximately 1,575 employees focused on engines and fasteners. In Q4, we do not expect significant headcount additions. Adjusted earnings per share was $0.36, up 33% year-over-year. For the quarter, the impact of foreign currency was minimal. Moving to the balance sheet, free cash flow year-to-date was $130 million, including an inventory build of approximately $270 million primarily for the commercial aerospace recovery. Cash on hand was healthy at $454 million after buying back $100 million of common stock and funding the quarterly dividend. The average diluted share count improved to a Q3 exit rate of 419 million shares. Year-to-date, net pension and OPEB liabilities were reduced by approximately $85 million, and cash contributions were reduced by approximately 45% or $35 million. Discount rates continue to be favorable and will be remeasured at the end of the year, which should further reduce net pension liabilities. We continue to expect annual cash contributions to be approximately $60 million versus expense of $20 million. Finally, net debt to EBITDA remains at 3x; all bond debt is unsecured and at fixed rates, which will provide stability to our interest rate expenses. Our next bond maturity is in November of 2024. Moving to capital allocation, we continue to be balanced in our approach. Capital expenditures continue to be less than depreciation at approximately 65% in the third quarter. Productivity CapEx continues to focus on automation projects in the engines and fasteners business to improve yields, enhance quality, reduce outsourcing, and mitigate labor risk. We purchased approximately 2.8 million shares of common stock in the quarter from $100 million. Year-to-date, we have repurchased approximately 9.7 million shares of common stock for $335 million with an average acquisition price of $34.60 per share. Share buyback authority from the Board of Directors stands at $1 billion. Lastly, we continue to be confident in free cash flow. The quarterly dividend was doubled to $0.04 per share, with the first higher payment to be made in November of 2022. Now let's move to Slide 7 to cover segment results.

Q3 was another solid quarter for engines. Year-over-year revenue was 14% higher in the third quarter with commercial aerospace up 30%, driven by the narrow-body recovery. Defense Aerospace was down 5%, IGT was down 2%, and oil and gas was up 11%. EBITDA increased 23% year-over-year and margin improved 200 basis points to 27.2%, despite adding approximately 260 employees in the third quarter. Year-to-date net headcount additions for the engine business was approximately 1,040 employees. While the headcount additions are preparing us for future commercial aerospace growth, it does unfavorably impact near-term results due to the time and cost required to train new employees, which could take several months depending on the position. Now let's move to Slide 8. Fastening Systems year-over-year revenue was 15% higher in the third quarter. Commercial aerospace was 24% higher driven by the narrow-body recovery, somewhat offset by continued production declines for the Boeing 787. Defense Aerospace was up 16%. Year-over-year segment EBITDA increased 8% despite the addition of employees to support future growth. Year-to-date headcount additions for fasteners was approximately 410 employees. Sequentially, EBITDA margin improved 180 basis points to 22%. Now let's move to Slide 9. Engineered Structures year-over-year revenue was down 3% in the quarter. Defense Aerospace was down 14% year-over-year, driven by customer inventory corrections for the F-35 as expected. Commercial aerospace was 5% higher as the narrow-body recovery offset the impact of production declines for the Boeing 787. Segment EBITDA increased 8% year-over-year. EBITDA margin improved 140 basis points to 14.5% despite the inventory burn down of the F-35, continued 0 to low build on the 787, and inflationary cost pressures. Structures Q3 2022 EBITDA margin of 14.5% was greater than the 2019 annual rate of 14.2% when 2019 revenues were over $1.25 billion. Finally, let's move to Slide 10. As expected, Portsville's year-over-year revenue was 15% higher in the third quarter. The $35 million increase in revenue year-over-year was almost entirely driven by higher aluminum prices. Commercial transportation demand remained strong, but volumes continue to be impacted by customer supply chain issues, limiting commercial truck production. Segment EBITDA decreased 11% due to the impact of unfavorable foreign currency, primarily driven by the euro. While the pass-through of the higher aluminum prices did not impact EBITDA dollars, it did unfavorably impact margin by approximately 340 basis points. The impact on EBITDA margin increases to more than 550 basis points if you also include the unfavorable margin impact of passing through higher inflationary costs like the European energy costs and the unfavorable impact of foreign currency. Before turning it back over to John, I will remind you that the impact of foreign currency to Howmet in total is minimal as the Aerospace segments provide a natural foreign currency hedge against the Forged Wheels segment. Lastly, in the appendix, we've updated assumptions, including an improvement in the annual operational tax rate to approximately 23.5%, which translates into a Q4 operational tax rate of approximately 22%. Also, we have updated annual assumptions to reflect improvements in our cash tax rate, net pension liabilities, depreciation, amortization, CapEx, and diluted share count. Now let me turn that back over to John. Thanks, Ken. So let's move to Slide #11. First, let me comment on the wider picture in commercial aerospace. Recovery continues with increasing airline schedules and load factors, especially in Europe and North America. Airline profits are rebounding well, and new aircraft are being ordered, especially narrow-body aircraft. International travel has also rebounded during the year and is showing strength, which is leading to modest increased production as we move into 2023, notably Airbus A350 and the Boeing 787 after its recent recertification. Spares for the aftermarket also continued to increase. This trend provides optimism that aircraft build volume will continue to strengthen throughout 2023 and 2024. Recent aircraft build rate issues have been more the result of parts availability, especially but not confined to engines. While we have to be cautious at this time, pending more visibility of unrestricted builds, allowing Airbus to reach their build levels of 55 per month for the A320, and Boeing to reach their build levels of 31 per month on the 737 MAX, we do envision that commercial aerospace revenue should be up around 20% in 2023. Consolidated Howmet, including commercial aerospace and its other sectors of defense, industrial gas turbine, oil and gas, and commercial transportation is expected to be up approximately 10% plus or minus 2% in revenue. Further refinement will be provided in February 2023 upon the release of Q4 earnings. In the more immediate time frame of Q4, we do envision further sequential growth. However, approximately $70 million of lower revenue compared to previously envisaged, primarily in engine products as a result of the lower engine build achieved and customer inventory drawdown towards my earlier comments. This results in an annual guide of $5.62 billion due to a small offset in other business areas beyond the engine and earnings per share of $0.38 in the fourth quarter, which again is another sequential increase as we've shown in each quarter of 2022. Higher inventory will now be needed at year-end to accommodate the snapback and increasing build starting in the first quarter of next year once we've gone through this inventory correction. More specifically, the guidance for Q4 is as follows: revenue, $1.47 billion, plus $30 million, minus $20 million; EBITDA $330 million, plus $6 million, minus $5 million; earnings per share of $0.38, plus or minus $0.01. For the full year, revenue of $5.62 billion, plus $30 million, minus $20 million; EBITDA of $1.27 billion, plus $6 million, minus $5 million; earnings per share of $1.40, plus or minus $0.01 as we've narrowed the range from previous guidance. Free cash flow of $560 million, plus $20 million, minus $40 million, and this reduction compared to prior guidance is driven by the higher year-end inventory carried into 2023 for the continued commercial aerospace growth in the first quarter. Let's move to Slide 12 for summary. 2022 is another solid year with increases in revenue and profit building in each quarter and sequentially into Q4. Momentum does continue into 2023 with commercial aerospace expected to perform above normal growth rates in 2023, 2024, and also 2025 before reverting to a more normal 4% per year growth for Aerospace. We look forward to the future. So let's now take your questions.

John, there seems to be a bit of a disconnect in commercial aero and the messaging from Boeing and Airbus. So engine deliveries for Pratt and CFM were up significantly. And Airbus has the OEMs, the engine OEMs are catching up. But Boeing talks about the bottleneck, which you referred to earlier. So are you seeing more volumes for LEAP-1A versus LEAP-1B? How do we make sense of this difference that we think is occurring on the LEAP?

Okay. So first of all, let me agree with you that it is confusing; I think it's confusing for everybody at the moment. But let's start off with the broad picture and then talk about Howmet before any commentary on a wider basis. So I think the big picture is commercial aerospace continues to grind higher. Everybody is trying to do the right things. Airlines are improving, and aerospace manufacturers are improving their throughputs, and the engine manufacturers supporting those aircraft builds are also doing their part of the whole thing. I guess not everything is going perfectly, as we've seen from some of the numbers and some of the disconnects apparent from commentary on calls last week. Let me deal with Howmet first and say we've been really well prepared through the last year and beyond. As you know, we started recruitment of labor in the second quarter of last year and hired almost 1,000 people last year. Through year-to-date, I think we're approaching now something like 1,500 people through the end of the third quarter. The most salient factor for ourselves was that during September, compared to the schedules and delivery requirements that we thought we would see for both September and the fourth quarter, we saw a complete rebasing of those requirements where we've had arrears that should be built up according to the anticipated engine mills, in particular. And as we know, the anticipated engine builds were not as high as the actual builds. You saw Airbus commenting on the fact they had lying schedules initially set at 70 at one point, then it was down to maybe 10 or 20. So while I’ll say deliveries of engines did improve, I don't think anybody believes that the quantity of engines that was originally envisaged to be built were built. In terms of the splits of whatever was delivered on LEAP between 1A, 1B, and 1C, we don't have any visibility into that. I mean, we do note that from the call last week from GE Aviation, which provides a lot of those engines is that they were significantly up with improved deliveries, I think near 350 engines. How many gone to Airbus, how many gone to Boeing, COMAC, and indeed, how many of those engines, which we also forget sometimes, they go to airlines or spares and also aircraft leasing companies or spares, I don't really know. It's difficult to judge. Certainly, you feel as though there were enough engines in the whole system, but maybe they were out of parts. It's difficult to really know. Nevertheless, the big picture is those actual builds by CFM engines and LEAP engines were less than a bit envisaged. We’ve heard in the past about restrictions around structural castings, in particular, probably not confined just to that. When customers looked at where they were and what they expected to finish the year with and what they had received from ourselves, for example, all of the airfoils they required and more, maybe to balance their own inventories for the end of the year is that they were cut back. Despite still sequential growth quarter-on-quarter, that growth was not as high as we had envisaged. So right now, we've drawn our labor recruitment down significantly. We'll probably recruit selectively in a few areas in the fourth quarter. Essentially, the rest will go to zero. Because we don’t want to stop production, we're going to carry about $70 million of additional inventory, which will impact our cash balance at the end of the year. We need that inventory to carry us into the first quarter where we do expect those requirements to be placed back on us significantly, engine build will improve, and hopefully, aircraft production will improve. We’re trying to smooth ourselves out. So we'll utilize all of the labor that we've recruited, continue production, put it into inventory, and have a smooth startup into the start of next year to keep all of our customers happy. This also allows us to stop ourselves hiring many people and eliminate some of that cost. That's the big picture. In terms of exactly what the rate of production of the 737 and A320 is, I don’t believe we are best placed to answer. I believe most people are heading off on the sell side to Seattle this week, so you'll get a clearer picture during those visits. Hope that covers it for you, Rob, just trying to give you a sweep through the whole situation.

That's really helpful, John. And even with what you just said, and I am heading out there with the others. Just on the 787, are you still looking for 15 shipsets for this year? And do you have any insight into next year?

We have a revised skyline for next year. We don't have much for this year. I think it's going to be de minimis in terms of any production on the 787. My guess is it’s probably just about the same as we've seen previously. I don't really know. It's pretty opaque to us. I'm assuming there's inventory in the system for that. We do have skylines showing clear improvements in the 787 build during the course of next year. From memory, it's probably the back end of the year at around 5 aircraft per month. I have confidence that there is a market requirement for that because when I look at the return of international demand for travel, consider the cutbacks that were made in widebody during the last few years, my guess is that there's going to be higher demand for wide-bodies, which will support rates for both Airbus and Boeing for their A350s and 787s. I'm leaning towards an optimistic view on fundamental demand. The only question we have in terms of our own guidance is how conservative we should be because we do hear this noise that you referred to regarding the actual builds and where the parts are, and what the constraints are. And this cautiousness is driven by factors we've encountered over the last month or two as we go into the end of the year, but we do expect an upward spike in the first quarter.

I wanted to ask if you could talk about share gain opportunity. So anything incremental on titanium? And are any of these pinch points on engines accruing to your benefit where customers are engaging on castings? If you could speak to that?

In the short term, the most significant pinch points for engines have been around structural castings. There's probably some engine controllers as well, but I'm not fully aware of other specifics. The commentary around structural castings is quite widely publicized. In the short term, it doesn't really present an opportunity for us because there are specific tooling and certification procedures required. While we’ve been tighter than we'd like on structural castings, we don't believe that we've caused any engine build issues and are beginning to see significant improvements in our throughput and abilities. It's not quite as good as the flow of air flows that we've been seeing, as that's been a high-class output for us during the year. In the short term, there isn't anything we can directly point to with certainty; however, in the medium to long term, we anticipate benefits on the structural casting side across various sectors of the industry. Regarding titanium, those orders continue to improve. We've booked additional orders during the third and fourth quarters, and that’s looking better for us, albeit there's still significant areas to go. One of the airframe manufacturers has a lot of inventory and hasn't yet moved to cut orders with the supply base. More to come on that subject as we move into next year.

John, so to try to simplify this. Are you at 31 a month on the MAX on the engine side, and are you at 45 to 50 on the engine side for Airbus? This is really about a shortage of other parts. Have the manufacturers slowed down things to get everything aligned given they’re building below the rate that you are currently producing at?

Yes. We've been building at rates. We’ve taken the requirements from our engine customers and the airframe manufacturers, and we've been more or less in line with that, around 50-plus for A320s as an example. We were fully planning on the 31 engines per month for Boeing and had anticipated that those production levels were to rise in the first quarter of 2023 according to verbal communication. Those production levels have likely not been achieved. The airframe manufacturers, and certainly on the engine side, have needed to scale back their inventory to align with what's actually being produced, and the requirements seen for the engine manufacturers through their own year-end inventory. There's no point in carrying additional airflow when other parts to go with the engine are lacking. It's quite simple, David.

And John, do you see, at least from your side where you sit, any constraints, whether it be hiring additional headcount, training headcount, raw material, anything? Do you see constraints to go up to the mid-50s to 60 that Airbus is talking about for narrowbody, and Boeing going up to low 40s? Do you see any constraints from your side?

Not from our side. We think our tight quantities in structural castings have been or are being addressed and so that's in good shape. We are going to pull back on our hiring, as I said, again, selectively. We will continue, for example, hiring and training in our structural casting plants. But currently, if you consider our airfoils, we will stick with the labor we had at the end of Q3 and pause it to balance our own requirements. So far, we've been able to increase our quantity of people, and it hasn’t presented a significant impediment to us. Sometimes the turnover of those people has been higher than we'd like, but the quantity of labor has not been an issue for us so far.

Looking sequentially into Q4, it looks like you're looking for a $4 million EBITDA growth on the $40 million of sales growth. Just curious, is that lower incremental driven by something like FX or mix? It sounds like labor is probably a help and raw material pass-through might be a push?

So can you start the first sentence again, if you wouldn't mind?

Yes, sure thing, John. So if I just look sequentially from Q3 to Q4, you've got pretty minimal EBITDA growth, about $4 million on the $40 million sales growth. I'm just curious what's holding you back if labor and raw materials and pass-through aren't the issue?

Let me start with commentary regarding the third quarter first. I mean adjusted for the material pass-through, incrementals were really strong at 39%, which was above the midpoint of what we talked about previously, 35% plus or minus 5%. So I think that was a strong quarter. The reason we are cautious about our fourth quarter is that we're carrying that labor into the fourth quarter that we probably don't need now for that reduced level of build. Therefore, there's a labor drag, plus also the preparation of many other production parts and facilities that could go along with that. That's the reason you're not seeing the same level of incremental pull-through in the fourth quarter. So I think you should look at that just as a rebalancing of ourselves as we have drawn down that $70 million plus of engine products, which is a high-margin business for us. I think it's completely in line with the commentary I've given.

Okay, fair enough. And then in that 10% growth sales in '23, do you have a flavor for what we should think about from incremental margins there?

I think we'll talk more about that in the February call. I know that last year, I provided a revenue guide, which I thought was important for '22. I believe the same is crucial; we really understand the wider picture around the company. Having confidence that we should be somewhere from, I would say, 10%, plus or minus 8% to 12% is a statement of confidence in the trajectory, and we're only debating the angle of the recovery. If aerospace normally grows at 4% or 5%, then it's more than double that rate. So it’s pretty healthy. But we're not ready to give any margin guidance at this point.

John, I wonder, so the 10% growth outlook for next year, if aerospace is growing 20%, and that's, let's say, 45% of the sales base this year, it implies really minimal growth in the rest of the portfolio. Could you talk about what's happening in the other end markets? And specifically, maybe help us around forged wheels? I mean, between the currency and energy pass-throughs and aluminum pass-throughs, there's a lot of ups and downs, especially regarding revenue numbers and the margin rate. If we think about the baseline of EBITDA dollars there and what this quarter says about what that might be going forward, any help there would be greatly appreciated.

In terms of the defense business and oil and gas and the industrial gas turbine, I think all of those will see low single-digit growth. My guess is that maybe oil and gas will be higher and defense lower, but expecting some growth in those. If you plan for that and lay it across with the commercial aero, then the one segment where I think we will see a revenue decrease will be in the forged wheel business for the Commercial Transportation segment. The headline number is affected by the price of aluminum, as it has fallen from its peak of $4,500 a ton, including Midwest and Rotterdam premiums, to around $2,800 now. As we rebalance the pricing because we will pass that back, there’s certain effects, which means a revenue decline that won't affect EBITDA dollars, hence leading to a margin rate improvement. At the same time, consider what we expect in terms of volumes? We note that the order intake for Class 8 trucks was the highest in September, at over 53,000 trucks, which is a great number. It's probably inflated by truck manufacturers not wanting to take orders for next year until they were clearer about input prices for their materials. Difficult to separate what's really going on. The fourth quarter should see solid production improved over where we've been, and I think that will continue in the first and second quarters next year.

John, you've been clear that you now have the labor in place to ramp up next year. When you think about their training, you said 6 months or so, how much have they pressured margins to have labor this early? And how should we think about incremental margins next year when we actually get the benefit of volume coming through?

We’re going to pause for the main in Q4 for recruitment, not totally. It will be 2 or 3 or 4 plants that will continue, but out of our complete network, we choose to pause that at this stage until we know more and let the additional people that we've already recruited during this recovery, which is about 2,500 come up to rate and let productivity improve. Depending on the job, it can take anywhere from three months to bring someone into the plant to be reasonably efficient all the way up to two years for some skilled areas. Balancing all that out. I think there will be a benefit from that stabilization. How much, it's difficult to say at this stage. It obviously depends on growth next year. We will restart recruitment again in larger numbers in January as we expect the build rate to increase in January. We’ll carry some inventory out in Q4, but we’ll continue restarting recruitment in the first quarter. Everybody expected continued buoyancy as we did for increases in builds. They’re occurring. The question is the degree. If we haven’t built as many aircraft as there’s been thought, and there seems to be a case where that's correct, going off the earnings calls from the airframe manufacturers. While a notable and real improvement in engine build is happening, overall, it's lower than expected. Everybody is trying really hard throughout the whole system, with airlines improving, and their trying hard to bring aircraft back into service. The engine manufacturers and airframe manufacturers are also trying to ramp up. However, there are still some roadblocks, particularly with COVID-related supply shortages, freight rates, and labor training issues.

How are the different customers prioritized in your queue? Are more profitable customers prioritized first?

No, we treat every customer’s requirements with equal respect. There's no prioritization; I don't think that would be appropriate. You're either a customer, and we make a commitment. When we do that, we deliver to you to the very best of our abilities.

Okay. So if you had a certain number to ship out and the demand was mismatched, there would be no prioritization in terms of who got what?

No, I don't think so. We should respect the requirement our customers have placed on us. I don't believe we have a policy, plan, or even the ability. Our shipping docs operate to the MRP schedule, customer demand, and they ship. They don’t decide to send extra boxes to some customers because they're more profitable. Those who do that don't have that information. No, we supply with what we've committed and with no instruction to prefer any customer.

John, could you maybe just give us a broader update on where your market share gain efforts stand? It seems like that's happening in part related to these supply chain challenges across the engine supply chain and then also titanium sourcing. I know you've discussed being in different RFP processes and trying to write long-term contracts. I'm curious how that’s going.

Yes. In general, during the course of the year, we go through our own planning routines and examine each of our customers for where opportunities may lie. We have planning rounds where we identify the best places to allocate resources, both engineering and capital deployment. Our job as executives is to grow above market rates. We believe if we only grow at market rates, then we aren't adding the value that we should be because we should strive to do more than that. Our process accounts for all opportunities, and then we make our own resource decisions accordingly. I believe we don’t prioritize in terms of short-term delivering projects, but in the long term, we absolutely do. We resource allocate to different areas and have a clear process for that.

Last quarter, I think you specified adding $20 million of revenue to the fourth quarter specifically related to titanium sourcing. Any update on that specifically and how that looks beyond this year?

It clearly continues to improve. We’ve booked more orders in the third quarter into the fourth quarter, and that continues to be a positive for us. However, there's still one major manufacturer engaged, but we have yet to really move on significant orders, mainly due to a lot of titanium inventory in the system right now resulting from reduced wide-body builds previously discussed. More to come; I'm hopeful we can provide improved assessment in February, but we're on track to achieve that $20 million or slightly better for the fourth quarter, and it will continue to improve in 2023 and 2024.

Could you touch on the defense decline in the quarter, specifically the F-35, and how much longer the inventory corrections you saw will continue?

Yes. Our assumption is that Lockheed will produce somewhere in that $1.45 to $1.55 range this year. If anything, let’s assume it levels down to just about $150 million or a little less; that would be our assumption showing an increase compared to last year. We note that the order intake for the F-35 seems strong, and that 150-plus rate should continue for the rest of the decade. That’s good news. For us specifically, over the last 2 years of 2020 and 2021, we produced at a higher rate than the customer schedule requirements anticipating closer to the 150 aircraft build. They ended up producing 130 to 140 aircraft, hence accumulated inventory, which we expected to correct for the most part during 2022. This inventory downdraft particularly affected our structures business, as Ken mentioned again in Q3. We expect that this correction will continue into Q4 and into Q1 next year. We are hopeful that by the second half of next year, we will achieve balance. Our production will ramp up on the F-35 to match those rates, which will significantly improve our standing.

That's helpful. And if I could do one more on pension, I know you mentioned with a higher rate. The liability is a little better. But is it meaningfully different next year compared to 2022 when factoring in asset returns year-to-date?

Yes. I'll pass that across to Ken for more specific color on that. Essentially, as interest rates have moved up, it adversely impacts the liability side greatly. Asset returns this year are lighter and lower than last year, which can negatively affect the position. When you combine the two, however, we still expect a net liability reduction. My anticipation is that we'll show a further reduction of liability in the fourth quarter, leading to a meaningful change in those legacy liabilities. We estimate we're down to around $700 million for the company, which is a significant reduction from where we were two or three years ago. Let me pass you over to Ken for commentary specific to expected liabilities and assets.

Yes. We've been doing significant work on the pension and OPEB program. When comparing our current status, we've improved around $85 million in terms of net liability. Much of this is due to actions we began implementing to eliminate gross liabilities back in Q2 of 2020. From Q2 of 2020 to now, we’ve eliminated about $600 million in liabilities, helping reduce our net liability. As John mentioned, by the end of the year, we’ll reassess where we're at. We benefited from much higher discount rates that moved from around 2.7% at the end of last year to mid-5% right now, which will be positive for the liability side. However, if you track the S&P 500, you’ll see they're negative. Ultimately, pressing the two of them together will show us a nice reduction in net liabilities. We expect cash contributions next year will remain the same or even decrease based on our previous work.

I’ll also add to give a broader perspective. In this environment with rising interest rates, if we see a further increase in the federal funds rate of 75 basis points, it's generally bad news for most companies. However, in our case, if I look at our debt, most of it is fixed rate. So, it only impacts the refinancing of bonds depending on what we've paid down. I don’t preview our interest costs going up in the next few years, which is positive. Our pension liabilities will decrease, which is also good. When examining the markets we serve, I believe we already encountered our recession back in 2020 and 2021 with COVID's impact and issues at Boeing for production of the 737 and 787. We’re ideally positioned for growth for the next two to three years, which should also improve our balance sheet due to the interest rate movements. That’s a rather unique and advantageous situation. My optimism comes through in that context.