Howmet Aerospace Inc (HWM) — Q1 2023 Earnings Call Transcript

Thank you, Andrew. Good morning and welcome to the Howmet Aerospace first quarter 2023 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 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 in today's presentation. So, with that, I'd like to turn the call over to John.

Thanks P.T. and good morning, everyone. Howmet's Q1 results speak louder for themselves. Revenue was $1.6 billion, an increase of 21% year-over-year and an increase of 6% sequentially. Commercial Aerospace increased 29% year-over-year and 4% sequentially. Revenue was above guidance by significant demand, which was in itself an increase quarter-over-quarter and naturally increased revenues require some working capital. EBITDA was $360 million, an increase of 20% year-over-year and an increase of 7% sequentially. EBITDA margin was healthy at 22.5%, again, an increase sequentially. Earnings per share were up 35% year-over-year. Free cash flow was negative $41 million, driven by the higher revenues and will now be followed by three successive quarters of substantial cash inflow. During the quarter that was reduced by $176 million from the 2024 bonds with cash on hand. And this will further reduce future interest payments by $9 million annually, thus increasing free cash flow yield. In addition, $25 million of common stocks were repurchased. During the balance of 2023, shareholders can expect further steps regarding the application of cash flows, thereby creating shareholder value. All of the above growth, margin rate, free cash flow and the application to create value all speak to the business and financial model of the company. I will comment further on the outlook after Ken has outlined the growth by markets and performance by business segments.

Thank you, John. And good morning, everyone. Let's move to Slide 5 for an overview of the markets for the first quarter. Revenue was up 21% year-over-year and 6% sequentially. Commercial Aerospace continued to lead year-over-year revenue growth with an increase of 29% driven by engine products, engineered structures and fastening systems. Sequentially, Commercial Aerospace was up 4%. Commercial Aerospace has grown for eighth consecutive quarters and expanded 47% of total revenue, and although growing, continues to be short of the pre-pandemic level of 60% of total revenue. Defense Aerospace was up 11% year-over-year, driven by the F-35 program and growth in legacy spares. Sequentially, Defense Aerospace was flat due to strong year-end seasonality. Commercial Transportation which impacts both the forged wheels and fastening system segments was up 17% year-over-year, and up 9% sequentially driven by higher volumes. Finally, the industrial and other markets were up 16% year-over-year, driven by oil and gas which was up 53%, IGT up 14% and General Industrial up 1%. Sequentially, these markets were up 15% with oil and gas up 25%, IGT up 15%, and General Industrial of 10%. In summary, strong growth across all of our end markets. Now let's move to Slide 6. We will start with the P&L and the focus on enhanced profitability for the first quarter. Revenue, EBITDA and earnings per share all exceeding the high end of guidance. Revenue was $1.6 billion or up 21% year-over-year. EBITDA was up 20% year-over-year and EBITDA margin was 22.5%. Adjusting for the year-over-year inflationary costs pass-through of approximately $35 million, EBITDA margin was 23% and the flow-through of incremental revenue to EBITDA was approximately 25%, while absorbing near-term recruiting, training, and production costs for approximately 500 net headcount additions. Earnings per share was $0.42, which was 35% year-over-year. The first quarter represented the seventh consecutive quarter of growth in revenue, EBITDA and earnings per share. Moving through the balance sheet, the ending cash balance was $538 million, after approximately $218 million of capital allocation, debt reduction of $176 million, common stock repurchases of $25 million and quarterly dividends of $17 million. Free cash flow for the quarter was a negative $41 million, driven by higher revenues in the first quarter. Finally, net debt-to-EBITDA remained at a record low of 2.6 times. All bond debt is unsecured and its fixed rates which will provide stability of interest rate expense into the future. Our next bond maturity is in October 2024 and the $1 billion revolver remains undrawn. Moving to capital allocation, we continue to be balanced in our approach. Capital expenditures were $64 million in the quarter and continue to be less than depreciation. Capital installed prior to COVID-19 puts us in a very strong position to support the continued commercial aerospace recovery. Regarding debt, we reduced the 2024 debt tower in the first quarter by approximately $176 million with cash on hand. These repurchases will lower our annualized interest cost by approximately $9 million. The October 2024 debt tower now stands at approximately $900 million, which is below our revolver. Our continued progress on debt reduction, EBITDA growth and healthy liquidity has resulted in an upgrade to our outlook from S&P last week from stable to positive. You can find our remaining debt towers in the appendix. Moving to share repurchases, the first quarter was the eighth consecutive quarter of common stock repurchases. Since the separation in 2020, we have repurchased approximately $928 million of common stock with an average acquisition price of $31.79 per share. Share buyback authority from the board of directors stands at $922 million. Lastly, we continue to be confident in free cash flow. In the first quarter, the quarterly common stock dividend remained at $0.04 per share after it was doubled in the fourth quarter of last year. Now let's move to Slide 7 to cover the segment results for the first quarter. Engine Products continued its strong performance. Revenue was $795 million, an increase of 26% year-over-year and an increase of 9% sequentially. Year-over-year, commercial aerospace was up 31% and Defense Aerospace was up 19% with both markets driven by higher build rates and spares growth. IGT was up 14% and oil and gas was up 57%. EBITDA increased 23% year-over-year to a record for the segment of $212 million. EBITDA margin was 26.7% despite the addition of approximately 260 net new employees and the associated near-term recruiting, training and production costs. Please move to Slide 8. Fastening Systems year-over-year revenue increased 18%. Commercial Aerospace was up 15% driven by the narrow-body recovery. Defense Aerospace was up 38% and Commercial Transportation was up 19%. The year-over-year segment EBITDA increased 4% as volume increases were partially offset by inflationary costs and the addition of approximately 215 net new employees and the associated near-term recruiting, training and production costs. Now let's move to Slide 9. Engineered Structures year-over-year revenue was up 14% with Commercial Aerospace up 39%, driven by higher build rates and approximately $20 million of Russian titanium share gain. Defense Aerospace was down 23% year-over-year driven by some legacy programs. Segment EBITDA increased 30% year-over-year, while margin improved 190 basis points. Finally, let's move to Slide 10. Forged Wheels year-over-year revenue increased 17%. The $42 million increase in revenue year-over-year was driven by 18% increase in volume. Segment EBITDA increased 18% year-over-year, in line with the higher volumes. Margin increased 20 basis points as the impact of lower aluminum prices was mostly offset by inflationary cost pass-through and unfavorable foreign currency. Lastly, before turning it back over to John, one item of note, in the appendix, we've added Slide 16 and have updated the improved interest rate expense assumption for 2023 from $227 million to $222 million. This change reflects the 2023 impact of reducing debt by $150 million late in the first quarter. As you may recall, we had already included the impact of reducing debt by approximately $26 million in January before we published our original 2023 guidance. Now let me turn it back over to John.

Thanks, Ken, and let's move to Page 11. Moving to ESG, we continue to leverage our differentiated technologies to help our customers manufacture lighter, more fuel-efficient aircraft and commercial trucks with lower carbon footprints. Within our own operations, Howmet remains committed to managing our energy consumption and environmental impacts as we increase production. In 2022, our actions have reduced the intensity of Howmet's greenhouse gas emissions, energy consumption, water use and hazardous waste. We progressed against our 2024 greenhouse gas emission goal by achieving a 20% reduction in total greenhouse gas emissions through 2022 from the 2019 baseline approaching already the 2024 goal of a 21.5% reduction. Howmet is also committed to a safe workplace while fostering a diverse, equitable and inclusive work environment where all our employees can thrive. Our safety record continues to improve and is seven times better than the industry average. Moreover, Howmet was named one of the best places to work for LGBTQ equality by the Human Rights Campaign Foundation. We also increased our workforce by 1,500 people and invested nearly $200 million in 2022 to support the significant production growth. Regarding governance, the company was recognized by 50-50 women on boards having 40% of our board of directors made up of women. Lastly, 75% of our key suppliers have sustainability programs considered to be leading and proactive. I'd encourage you to read our sustainability report found at howmet.com in the Investors section. Let's move to Slide 12 and talk about our updated outlook. Firstly, demand for aircraft is very high and aircraft manufacturers' backlogs are in very good order, both for narrow-body and wide-body aircraft. Spares volume and the business jet market also continue to show strength. Airline load factors continue to be very high and robust in the west with rapid growth now seen in both short-haul and long-haul flights in Asia. This travel-led demand stimulus is further augmented by the need for modern, fully efficient aircraft, given the current cost of jet fuel and the very high cost of SAF substitute fuel. This is further driven by the commitment of airlines to meet carbon emission targets for today, 2030 and 2050, which can only be achieved by using the new fuel-efficient engines and aircraft. Current new engines fit to narrow-body jets are all looking at steps to further increase efficiency, which also helps Howmet given our capabilities in complex casting shapes to provide improved management and hence, fuel efficiency. The other divisions of Howmet are also benefiting by the increased use of titanium and sophisticated fastener suites required by composite wings and fuselages, notably, but not exclusively for wide-body aircraft. The defense market outlook is also healthy with increased budgets and strong demand for F-35s, drones, rocket motor parts and Howmet parts. The last part of the F-35 inventory correction regarding bulkheads that resulted from the prior underbuild of the F-35 fighters in 2020 and 2021 should be dissipated over the next two to three quarters. IGT turbine blade demand continues to be steady and turbine demand from the oil and gas sector is very high. The year started well in commercial trucks. Given the backlog and steady truck ordering in both North America and Europe, it should mean that any demand drop indicated after spring is now pushed out for at least one quarter or so, albeit the normal Q3 seasonality regarding Europe will obviously apply. The required emissions performance targets for trucks in 2024, especially in the U.S., will apply with no ability to have a stimulated prebuild. In reassessing all of the above, plus robust engine demand seen in Q1, the outlook for the year has increased. We remain cautious about commercial aircraft build in the second half until we see clear evidence of consistent production rate increases, which will be controlled by the efficiency of both the aircraft assembly lines and the supplier parts, which leads to the final production being set by the weakest link in all of the supply chain. We, as you know, saw the effect of this phenomenon in late Q3 of 2022 and also in Q4 when Howmet delivery requirements were curtailed to balance customer inventories. More specifically and turning to guidance for the second quarter. We now see revenue of $1.61 billion, plus or minus $10 million, EBITDA of $362 million, plus or minus $3 million and earnings per share of $0.42 plus or minus $0.01. For the year, we see revenue of $6.25 billion, plus $75 million minus $50 million, EBITDA of $1.415 billion, plus $20 million minus $15 million. Earnings per share of $1.67 at midpoint, plus $0.03 minus $0.02. And free cash flow increased by $20 million to $635 million, plus or minus $35 million. Please move to Slide 13. In summary, Q1 performance was healthy and a great start to 2023, and the outlook as seen by Howmet is improving. The balance sheet was improved with debt reductions of $176 million and net leverage will now continue towards the 2 times net debt to EBITDA in the balance of 2023, given both the reduction in debt and the improved EBITDA. The balance sheet is strong. Continuing share repurchases can be expected as cash is generated and the current authority is sufficient to continue this program. Annual cash to service legacy Penton and OPEB liabilities is modest at approximately $56 million. We look forward to updating you again in August. And thank you very much. Let's move to your questions.

Good morning. John, if I look at the actual revenue for the first quarter and then the guidance for the second quarter, to align with the full year guidance for the third and fourth quarters, it seems we would need revenue closer to $1.5 billion. Considering everything you’ve mentioned and the cautious approach regarding the end markets, how can we reach that figure? Last quarter, it was helpful to understand your assumptions about major aircraft production rates in the guidance; could you provide an update on that?

Yeah. Before I comment specifically on any aircraft build guide. Let me just back up. And we talk about how we thought about the balance of the year. I think this is really important in setting the tone because managing through an upturn has many more dimensions, especially when you have one major segment, which is commercial aerospace having such significant potential volume increases. And as you know, volumes for aircraft builds have been taken up, down, delayed with some regularity over the last year, two years. How we thought about is that we see essentially Q2 playing out very similar to Q1 and preparing for, I say, the improvement in build. In doing so, we need to add to our costs. And so in Q1, as you saw from Ken's commentary, we recruited some 500 people. We're heading probably to a similar sort of run-rate of employee addition in Q2 and all expecting that we are receiving and will be receiving the schedules to meet these potential lifted second-half volumes. Of course, you will know, as everybody else knows, is that Boeing has announced that for the 737 that they will take their production rate up to 38 at some time later in the year without specifying exactly when that is. The costs of these headcounts are clearly not matched by revenues in the second quarter. So we're prepared to support our customers where they may go in volume. We’re confident that those parts are going to be scheduled, both by the engine manufacturers and the airframe manufacturers. But, as I said in my prepared remarks, is that we’re also cognizant of what happened in the last four months of last year when cutbacks occurred because people did not achieve or our customers were unable to achieve some of their more ambitious increases that they had thought about. I did say about all marching to the place of the weakest link and whether that's in the supply base or in the final assembly of aircraft, it doesn't really matter. So we set ourselves up. We want to be cautious about the second half and we'll maintain that stance until we see actual increases in production. When we see those increases, I think we're going to have a lot more confidence that we're not going to get cut back. Hopefully, that might produce a good outcome and possibly even better than we currently see. But say, who knows? We are one of the few, almost the not quite one, but say the handful of aerospace suppliers who are actually increasing guidance. So in summary, what our thinking is whether it's commercial aero, whether it's strength in the oil and gas, increased strength in our commercial truck and pushing back some of the potential for any cutbacks there, and also the strength in defense. It's a guide up across many of those sectors, which also have to be taken into account while still maintaining that for the year, we need to be suitably cautious because we're only one quarter in. We're going to see how this plays out, even though we are optimistic that everybody achieves their plans. At the same time, I don't want to put ourselves in and give you a sense of robustness, which may not occur in the end. So hopefully, that gives you the way we thought about it, Noah. I’ve also referenced the only public change in production rate, which is for the 737 later in the year. We are not calling out any changes in any other specific numbers because we don’t know of any.

on your framework.

Okay. Thank you.

Thanks.

Thanks, good morning. John or Ken, regarding the profile of margins at Fastening Systems, I was hoping you could touch on those. Obviously, the EBITDA margin is a couple of hundred basis points below the last year or so. It doesn't really look like mix. I know you're hiring and there's a recruiting, training production costs associated with that. Can you just give us some color on the margin trajectory from here? Thanks.

The margins at Fastening Systems are not at the level I prefer. However, we need to acknowledge our current production mix, which focuses heavily on metallic narrow bodies. There's been virtually no change in demand for our widebody business, aside from some activity on the Airbus A350. We anticipate that the mix will change and improve as the year progresses. Looking at the year and margin rates, I don't expect much change, just a slight positive shift in Q2. After factoring in the costs associated with increasing production and stabilizing our workforce, along with rising volumes and an improved mix, I do believe we'll see some margin rate improvement in the second half of the year. Therefore, don't anticipate significant changes in Q2, but we are optimistically positioning ourselves for better performance later in the year.

Should the incremental margins of that segment in 2024-2025 approximate those of the whole company at that point?

Well, I'm hopeful that they're going to go up. But then you can say, well, everybody hopes for that sort of thing. But generally, our hopes for Howmet tend to come to reality. But I have no comments specifically about saying does it match this segment as well on average. What I know is that I'll be somewhat disappointed if we're not earning a margin rate in 2024 above our current Q1 level and we don't expect it to be like that.

Thank you.

Thank you.

Hi, good morning.

Hey, Rob.

John, you had this very strong sequential growth in industrial, but some peers have suggested that that's just a matter of a lot of inventory that was available to ship in this first quarter. So how does that trend as we go through the year?

In our broader industrial business, we experienced significant demand in the oil and gas sector, particularly for derivative turbines, which was exceptional at over 50%. We expect positive trends to continue for the next few quarters, indicating that oil and gas remains strong. Additionally, our gas turbine business also grew by 14%. However, outside of these two areas, the overall industrial business only saw low-single-digit growth, which is not noteworthy. For the key sectors of oil and gas and IGT, we do not believe we have accelerated any projects or have any concerns at this time.

So just to tie the loop on this, should we expect sequential growth in industrial throughout the year?

I mentioned that Q2 will likely be quite similar to Q1. Therefore, I wouldn't anticipate any significant changes following what has been an excellent first quarter. My impression is that Q2 should mirror Q1, while we prepare for increased costs in the second half. We will monitor how our customers' volumes develop. We've aimed to provide a balanced outlook moving forward, so I don't expect any additional sequential growth beyond what has already been remarkable growth.

Okay. Thanks so much, John.

Thank you.

Hey, John. Following up on your salient point on marching to the weakest link, I mean having to invest ahead of time with volumes being uncertain, it seems kind of productive for the supply chain. First, where do you see the weakest link industry? What do you think is keeping Boeing from actually getting to 38 sooner? And then also, what do you think for the 737 MAX? And what do you think the OEMs could do better to make it easier for the supply chain to meet these volume increases?

Well, really, I don't have any comments regarding any specific knowledge about Boeing's production. It's up or down except that I'm very supportive and I know that we can support them, whether it's directed for airframe parts or through parts supplied by the engine manufacturer. I don't have any specific information if there are supply challenges in any specific suppliers. Obviously, we've all read about the tail plane tail section issues and its passing to the fuselage. My guess is the finite amount of parts that they can get and how many of those parts are directed to original equipment build for the 737 and how much are for retrofit of the aircraft, which are out with airlines or even the inventory they've got, we don't know and we don't control any of that. We're just hopeful that our customers keep to their statements and their plans. I think they will absolutely schedule the parts of the partners. Should they build at that rate, they'll have a pass. If they fail to build at those rates, then of course, there is the potential to be cut back as they rebate their inventories for parts they've had, which they didn't use. It’s a very difficult question for us to answer. The takeaway really is we are ready, we're committed to support our customers. At the same time, we're not willing to get ahead of ourselves. We are willing to do the recruitment necessary, but I hope that we don't end up with what we did last year in the fourth quarter, where we shed some employees because we were a little bit too far ahead of where our customers were. That’s how we think about it. I can't call out anything specific or say if there is this issue if that was fixed, that would solve the problem.

Great. Thanks, John, and if I could follow up on Myles' question earlier. If you exclude inflationary pass-through costs, incremental margins were 25% for the whole business. So at some point, as the supply chain issue alleviates for Boeing and Airbus, we could get these higher volumes that materialize. At that point, you might have CapEx and labor already in place. When we look out to 2024-2025, where could incremental margins be for the aero businesses? Is this something that could be in the 30% or 40%?

When we discussed this about a year ago, we mentioned that we could expect a couple of years of 35% incremental margins, give or take 5%. We've seen that reflected in Spain, where it's fluctuated between the low-30s and high-30s, likely influenced by quarterly volume changes. We're ready for reasonable growth. Our conversion rate is strong, but during times of rapid growth, we've faced challenges due to the need for additional, untrained labor, resulting in increased costs and waste. This has been our experience over the past couple of years. In the first quarter of this year, we're once again gearing up for volume and hiring, which is advantageous since we anticipate strong demand. Adjusting for inflation in both metal and non-metal inputs, our margin stands at 25%. If you analyze our guidance for the year, it suggests a figure around 29%. Starting with a 25% margin for the year implies that we expect the second half to exceed 30%. You can derive this from the previously provided numbers without needing specific percentages. Should this trend continue? It will depend on the growth rate leading into 2024, but we should be in a favorable position. Currently, I'm optimistic about higher volumes because achieving these volumes along with our margin rates will help mitigate the impacts of working capital and capital expenditures, ultimately enhancing our free cash flow.

Great, thank you, John.

Thank you.

Thank you. Good morning, John and Ken and PT, thank you. Hi, just the 23% EBITDA margin. You guys had a nice base at the midpoint 10 bps, but down 10% on the high end. So maybe if you could just update us on your working assumptions for the margin mix and the $70 million to $100 million of incremental inflation that you had previously called out. Any progress there and changes given commodity prices have come in a little bit? Thank you.

Yeah. I mean we've seen some commodities come in, but also quite a few have moved out against, example, you take half-team ammonia, those have become very expensive in the last few months. In fact, we've been laying in some security stocks of certain metals to make sure that we have adequate coverage to be able to support our customers in the quest for increased volumes. At the same time, well, I think generally we see it as a big positive that inflation is beginning to come down. It's still pretty high, let's call it, 6%-7% in that zone. Non-metal inflation is where the big action is today in trying to look at control it, at the same time, recover it. For me, the major story of margin rate is volume and then do we see those flow-throughs that we anticipate. Obviously, it would be great if everybody built what they say they're going to build, then with this increased spares demand both for domestic and international, and secure some of these time-on-wing issues and that spares demand is also quite robust for us at the moment. So hoping that the revenue turns out to be that or better. Calling out a 0.1 or 0.2 on the margin rate is difficult. You're talking fractional like a million or two here or there. So I'd say it doesn’t really matter, Sheila.

Okay. Thank you very much.

Thank you.

Hey, thanks. Thanks very much. Good morning, everyone. During the prepared remarks, I think Ken mentioned the $20 million of share gain from Russia and titanium in engineered structures. I think that's the wrap around on the share gain that you made last year. Can you talk a little bit about the state of opportunity there? And maybe specifically with some of the more refined forgings, where Howmet might be in the running to do that and there aren’t many others, and whether the OEMs have moved forward there with the alternative sources or not yet?

Okay. You’re absolutely correct. The $20 million was the increase in the fourth quarter '22 volume. The way to think about 2023 is you take that $20 million, multiply by 4, and then add on to that about a 25% plus or minus growth for 2023. Currently, I think you just take that '23 number and you probably add another 25% to 30% in for 2024. That’s the way I'm thinking about it. We’ve taken a lot of very positive steps with the order intake notably from Airbus, but also from Embraer and also more recently, our first orders with Boeing, that's both for meal product and some forgings. We continue to work actively on quotations particularly with Boeing, who are getting, I’d say, more engaged given the fact that they’ve known they’ve had a very large inventory of titanium given the restricted build of the 787 and other wide bodies. We see them preparing for ordering and release of gradually increasing those requirements towards the back end of this year and into 2024. It’s all playing out as expected, and we see the titanium opportunity as very positive, only blemished at the moment by reverts. It'll be very tough to get hold of, it's expensive. So we've laid in for additional sponge requirements and are seeking really to ramp up our production in our titanium furnaces during the balance of 2023. That's important to us.

Great. Thank you very much.

Thank you.

Thanks, John. Good morning.

Hey, Rob.

I'd like to ask you about lead times. If Boeing does move ahead with this move to 38 per month on the 737, wouldn't you have to start producing these parts considerably in advance? And more importantly for you, I suppose, wouldn't you have to start ordering the metal sooner as well, almost like now if you're going to hit that by the end of the year?

Yes. Yes. You're right. We are recognizing that we are increasing rates, and some of that is occurring now. It's only balanced by the amount of inventory that we have. As you know, we carried, let's call it, $100 million-plus of inventory from '22 into '23. Because of the volume we saw, we chose not to reduce inventories in the first quarter. We wanted to keep everything healthy. We’ve tried to input materials such that we can respond to both the production requirements and scheduled and also what we think is going to be some spot-buy purchases required in the balance of the year. We are poised to respond, hopefully in a good and efficient manner. As I said before, we don’t know what all of the issues are in terms of that give the final production rate, but we’re prepared.

Okay, sorry, just to follow up on that. So how much lead time would you need from an OEM customer to, say, theoretically move your production or deliveries from where you are at the moment, low-30 to 38?

It largely depends on the path we take. For base metal access, we estimate a timeline of about six to nine months. If we’re considering alloy metal, that could extend to approximately 15 to 20 months for laying order requirements. We're already starting to plan for what 2024 might look like regarding our material orders and coordinating with our suppliers. This planning hinges on how many units are produced this year. Are we building more than needed, or will there be delays? What is the anticipated growth rate for next year? As I mentioned earlier, managing an upturn has many more aspects than handling a downturn, including labor, materials, production facilities, and capital. It's quite interesting, and I view it as a fortunate challenge. Currently, we are discussing the growth rate, but we must remain focused on the big picture, which suggests we are in a great position overall. Looking at the growth rates we expect, we are confident that we will see growth in 2024 and again in 2025. To me, that’s very promising.

Yeah, thanks a lot, John.

Thank you.

Thanks for taking the question.

Hey, David.

Hey, John. So two things. If you can update us on the status of the UAW in Whitehall, what's going on there? And then any color you want to give around the recent change in leadership at Fasteners? Thanks.

In Whitehall, we are still in negotiations with the UAW and have extended the agreement without any work interruptions. Everything is proceeding as usual, and we have been discussing this again in the past few days. I would characterize it as normal negotiations on that subject.

Yeah, thanks. The change in leadership that you announced.

We changed the leadership of the Fastener Group in the fourth quarter of 2022 and have been managing with a temporary solution by appointing an acting President of Fasteners. This change has allowed me to be more closely involved with that business, and we have now appointed what we believe will be a strong leader for the team. The new leader started and engaged with us before beginning the quarterly business operating reviews, which provided a good opportunity for learning and exchanging information. I am optimistic that the changes we have made and the increased focus on business performance will turn the possibilities I see into probabilities. In response to a previous question, I mentioned my optimism about the faster margin rate for the second half of this year, particularly if we continue to recruit in the second quarter and manage costs effectively. We are witnessing an improvement in volume and mix, especially with wide-body aircraft, and we are starting to see some positive activity from the subtiers of the 787 suppliers globally, which will necessitate our fasteners to produce parts for Boeing. The supply chain is extensive, and we anticipate further improvements in the wide-body mix in the second half of this year and into 2024, driven by increased requirements from Airbus for the A350 and further growth in the 787, which consist of significant changes in the production of wide-body aircraft and the types of composites used.

Do you anticipate having to make additional hires in the second half, John, to hit the stated production rates that are out there? Or will that all be in place with the additional hires that you talked about in the second quarter?

If it is as we think, we should be at rates in the first half, but there’s always some attrition. There is a replacement. The case for hiring in the second half will be, I will say, basically predicated on two factors is, one, what is the actual rate of production required in the second half? Secondly, particularly when we get to the fourth quarter, we’ll have to be anticipating to some degree, the rate of growth into 2024, which, as I said, we expect '24 to be another very positive year for particularly on the commercial aerospace side. It’s difficult to be precise until I know more about the final requirements for the second half and then what's the angle of increase for '24?

Thank you.

Thank you.

Hey, guys. Good morning.

Hey, Gautam.

I promise I'll keep it to one this time.

I know you had a brief one three-part question last time. I think it was.

What are your pricing expectations for the next couple of years? Could you also specify where the best pricing opportunities are? Thank you.

I think when I talked in February, I indicated too that we were about 80%-85% done in terms of moving through the long-term agreements for 2023. Now we're up at the 95%-98%. Essentially, 2023 is complete, and everything is in line with what I've previously said in terms of a similar order of magnitude in terms of further pricing that we talked about for '22. That, as you know, is over and above any recoveries for either metals or nonmetals inflation. That’s quite separate. This is just pricing. We don't normally talk about 2024 at this point. We've been studying that recently. While it's a little bit early, my guess is it’s a similar order of magnitude heading in that direction for 2024, Gautam.

Okay. Any segment that stands out with the greatest pricing opportunity over the next couple of years?

Yeah. Price is positive for four segments, inevitably for engine has to be greater because it's the largest segment. It also carries with it some of the more exceptional technologies where we're now pushing the boundaries once again of what's possible to enable really the mission of further, let’s say, lower fuel usage and improved carbon footprint. I see that those impacts not only for the fact that you've got the flight engine developments being made by our customers. Those are going to assist that whole achievement of lower greenhouse gas emissions for aerospace and airlines in particular. I think it's still good news on the Howmet are intimate in helping to achieve that at the stage of that particularly after the combustor.

Thank you, guys.

Thank you.

Good morning, everyone. Thanks for the question. John, could you share your current thoughts on the Nashville facility that Pratt is increasing production at? I believe that it is expected to ramp up production this year. Have they provided any details on the volumes, and do you think there is any risk to your oil volumes?

I don't believe there's been a significant change in the narrative over the past few years, beginning with Pratt & Whitney's decision to sell the oil castings business in Poland in 2016. In 2017, they decided to re-enter the market using new core technologies from a company they acquired, which they have continued to develop. Our relationship with GE has existed for many years, as they have their own development and production capabilities. However, when it comes to high-volume production of complex parts, Howmet has performed exceptionally well. Their achievement in managing complexity with favorable yield rates is critical for the economics of the casting business. Currently, there is $650 million still allocated to machining, coating, hole drilling, and testing. From what I understand, they are now 63% complete with their machining investment, which is typically very costly for turbine parts. They anticipate some qualification for those machine parts by May of this year, so things seem to be on track. Additionally, we have extended our long-term agreements with Pratt and have made significant technology improvements, particularly for the Block 4 Joint Strike Fighter with 28 enhancements aimed at improving efficiency and thrust, along with progress on the advantage engine. There is a lot happening, and we are closely engaged with these developments alongside our customer.

Great. Thank you.

Thank you.

Hey, good morning.

Hey, Phil.

You pointed to strength in spares demand in engine products in both commercial aero and defense. Can you give us an idea about where that business is relative to pre-pandemic levels and whether or not you'd expect that to continue?

We're seeing significant growth in our spares business. In 2019, we were at about $800 million, with approximately half coming from defense and industrial sectors. Currently, that number is around $475 million to $500 million and still increasing. The commercial aerospace segment fell sharply to below $100 million, but this year, we expect it to rebound to at least 75% of its pre-COVID levels, which used to be around $400 million. Although this segment hasn't fully recovered yet, it is expanding quickly, with growth rates of 30% to 40%. By the end of the year, I anticipate that this segment could reach 80% of the 2019 levels.

Thanks, John.

Thank you.