Howmet Aerospace Inc (HWM) — Q3 2023 Earnings Call Transcript

Thank you, Betsy. Good morning and welcome to the Howmet Aerospace third 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, operating income, and EPS mean adjusted EBITDA excluding special items, adjusted operating income 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. With that I'd like to turn the call over to John.

Thanks P.T. and welcome everybody to the Q3 earnings call. The results for the third quarter were solid in all respects and exceeded the guidance given in August, which itself was a further increase on that provided in May and February. Sales of $1.658 billion, an increase of 16% year-over-year. EBITDA was $382 million, an increase of 18%. EBITDA margin increased to a headline rate of 23%. Margin rate improvements reflect the continuing good work in all segments. I would like to note fasteners with a sequential quarterly improvement of 230 basis points and additionally, the structure segment had a 320 basis points recovery from the Q2 rate. Howmet's year-over-year revenue increase flowed through to incremental EBITDA margin at a rate of 28%, which was in line with the guidance. Operating income increased by 22% year-over-year and operating income margin was 19%. Continued topline growth and healthy margins generated an earnings per share increase of 28%. Free cash flow was healthy at $132 million and helped drive shareholder-friendly actions including gross debt retirement of $200 million and share buyback of $25 million. Lastly, we also announced a 25% increase in the dividend on top of last year's 50% increase. Having provided this top-level summary, I'll pass the call to Ken to provide further details of revenue by end market and the results by business segments.

Thank you, John. Let's move to Slide 5. All markets continue to be healthy with revenue in the third quarter, up 16% year-over-year and 1% sequentially. As expected, sequential revenue growth was impacted by normal third quarter seasonality. Commercial aerospace increased 23% year-over-year, driven by all three aerospace segments. Commercial Aerospace has grown for 10 consecutive quarters and stands at 49% of total revenue. Commercial Aerospace growth continues to be robust, supported by demand for new, more fuel-efficient aircraft as well as increased spares demand. Defense Aerospace was up 13% year-over-year driven by the F-35 and Legacy Fighter programs. Commercial Transportation, which impacts both forged wheels in the Fastening Systems segment, was up 7% year-over-year driven by higher volumes. Commercial Transportation remains resilient, despite normal seasonality. Finally, the industrial and other markets were up 10% year-over-year driven by oil and gas up 29%, General Industrial up 8%, and IGT up 4%. In summary, another very strong quarter across all of our end markets. Now let's move to Slide 6, for more details on the third quarter results. Starting with the P&L and enhanced profitability revenue, EBITDA, EBITDA margin, and earnings per share all exceeded the high-end of guidance. Revenue was $1.658 billion, up 16% year-over-year. EBITDA was $382 million, up 18% year-over-year, while absorbing near-term costs associated with net headcount conditions of approximately 645 employees. The Engine segment drove a majority of the increase by adding approximately 500 employees. Year-to-date, net headcount additions are just over 1,500 employees. We continue to increase headcount for the expected revenue ramp. EBITDA margin was strong at 23%, despite absorbing the headcount additions. Adjusting for year-over-year inflationary cost pass-through of approximately $15 million, EBITDA margin was 23.3%. In the flow-through of segment incremental revenue to EBITDA was at approximately 28% year-over-year, which is right in line with our guidance. Earnings per share was strong at $0.46 per share, up 28% year-over-year. The third quarter represents the ninth consecutive quarter with growth in revenue, EBITDA, and earnings per share. Next is the balance sheet. The balance sheet continues to strengthen, while returning cash to key stakeholders. The ending cash balance was $425 million after generating $132 million of free cash flow. In the quarter, $242 million of cash on hand was allocated to debt reduction, common stock repurchases, and dividends. Net debt to EBITDA improved to a record low of 2.3 times. All bond debt is unsecured and at fixed rates, which will provide stability of interest rate expense in the future. Our next bond maturity of $705 million is due in October of 2024. Howmet's improved financial leverage and strong cash generation were reflected in Fitch's August credit upgrade from BBB- to BBB, two notches into investment grade. Moreover, Moody's upgraded Howmet's outlook from stable to positive in September. The balance sheet continues to strengthen and is recognized with the rating agency upgrades. Finally, moving to capital allocation, we continue to be balanced in our approach. In the quarter, capital expenditures were $59 million, which continues to be less than depreciation and amortization. In the third quarter, we reduced debt by another $200 million. Year-to-date, we have reduced debt by approximately $376 million, which will lower annualized interest expense by approximately $19 million. We also repurchased $25 million of common stock in the third quarter at an average price of $49.32 per share. This was the 10th consecutive quarter of common stock repurchases. Share buyback authority from the Board stands at $797 million. Since separation in 2020, we have repurchased more than $1 billion of common stock. We exited the third quarter with a diluted share count of 414 million shares. Finally, we continue to be confident in free cash flow. In the third quarter, the quarterly stock dividend was $0.04 per share. The quarterly stock dividend will be increased by 25% in the fourth quarter to $0.05 per share.

Thanks, Ken. So let's move to slide 12 and talk about the outlook for the next quarter and year-end. So first of all, regarding commercial aerospace, airline load factors continued to show improvement in resilience. Factory improvement for international travel, notably in Asia, also continues to increase. Domestic airline activity continues to be above 2019 levels in the Western countries. Given these load factors and the continued restriction of aircraft builds, the fleet of existing aircraft are having to work much harder. This is leading to robustness in the engine spares market, which is further increased by the fact that the deployment in recent years of new engine technologies which are currently operating with increased replacement parts due to lower time on wing. You look worried about this and you can be assured that Howmet is playing its part and supporting both the technology upgrades and the high-pressure turbine by providing additional service parts. This will continue over the next two to three years and probably beyond. Moving on to commercial aerospace to the defense market. This market is also showing strength with the start of the gradual buildup of engine spares over the next two to three years to support the F-35 program for which the fleet now stands at 975 aircraft and growing. These increases more than offset the continued Lockheed inventory correction in our structures business. Other markets of IGT and oil and gas continue to be very healthy. In commercial truck and trailer builds and order intake continue to be good despite the lower freight rates and increased price of diesel fuel. We continue to be cautious though as we look forward until we see several months of data for new 2024 orders, which the order books have only been opened for a month. The initial month was good. But we also know that orders can be canceled depending upon how the broader economy moves in recent months. In aggregate, we see limited risk of aircraft demand from both the commercial aircraft market and defense markets. The two markets aggregate to approximately 65% of our revenue and that moves up to 80% excluding the commercial transportation business. Beyond the fundamental demand from airlines, clearly we rely upon aircraft manufacturers being able to produce and build up the stated and scheduled quality of aircraft, particularly narrow-body aircraft. Looking forward into 2024, we envisage growth to be in the 7% range plus or minus a percentage point. The headline sales number for 2024 is likely to be approximately $7 billion. This will be further refined when we see the achieved Q4 build rates from Boeing and Airbus with the confirmed plans going into 2024. All of this will be provided in further detail in February, along with the assumed build rates. Our standard is normally one of caution. Moving specifically to the fourth quarter of 2023. We see revenue about $1.635 billion plus or minus $15 million, EBITDA $375 million plus or minus $5 million, earnings per share at $0.45 plus or minus $0.01. Regarding the full year 2023, revenues increased by about $100 million from $6.44 billion to $6.54 billion plus or minus $15 million. EBITDA has increased by a further $40 million to $1.485 billion plus or minus $5 million. Earnings per share has increased by $0.07 to $1.77 plus or minus $0.01. Free cash flow is at $635 million plus or minus $35 million. In summary, we see strong performance with healthy liquidity and an increased guide for the remainder of the year. We consider the year-to-date progress to be very good, despite the continued choppy build conditions in commercial aerospace. We are comforted by the fact that any build misses by aircraft manufacturers who have moved into backlog, given the very strong underlying demand for travel, and in particular, the absolute requirements for fuel-efficient engines and fuel-efficient aircraft with an overarching mandate of reduced carbon emissions. Our full-year guide of $1.77 earnings per share is an increase of 26% year-over-year. This builds on the 2022 versus 2021 increase of 39%. Currently, in 2023, we repurchased $376 million of debt and bought back $150 million of common stock. Our net leverage has further improved in Q3 and is heading towards approximately two times net debt to EBITDA by year-end. All of the debt actions help accomplish our goal of reduced interest rate burden in both 2023 and also going into 2024 with further improved cash flow yield, despite the increase generally of interest rates. Thanks everybody. And now let's move to your questions.

Hey, good morning, everyone.

Hi, Kristine.

John, Ken, or PT, I guess with the 7% revenue increase for your 2024 initial outlook, what does it imply for aircraft production rates for the Boeing 737, 787, and the Airbus A320 and A350? And also when you talk to your customers, how much visibility are you getting for the ramp?

Okay. I guess that's the big one, Kristine. So let me just talk generally about the 7%, first of all. The assumption is a mid-teens assumed increase in commercial aero and more like single-digit increases in industrial, things like AGT, oil and gas, and general and other, while an assumed high single-digit decrease in commercial transportation. So basically, our client solid defense and general industrial markets are seeing a healthy increase in commercial aerospace, reduced by a high single-digit assumption on commercial transportation. That's roughly now applying. I'm going to say we see assumed build rates in forecasting agencies. For the most part, we can see that they're going to increase both wide-body and narrow-body fractional increase in mix next year. At the moment, specifically for Boeing 737 is what you assumed. You asked a question about our assumption is that it's somewhere between the mid-30s and 40; somewhere in that region. We don't want to pit it specifically at this point, you can assume that's within the range plus or minus I gave. It's really important that we see Boeing achieved the rate of 38, which we know is going to be prior to now it hasn't really happened that doesn't seem to be happening just yet, but we know it's going to be very soon. But we're not yet ready to believe and input into our guidance even though we can supply at a rate of 42 should Boeing be in a position to build at that rate.

Great. Thanks for the color.

Thank you.

Hi. Scott Mikus on for Rob Spingarn. John or Ken, I wanted to ask you a little bit about pension contributions for next year. And also, just given the work you've done there, are you considering any sort of risk transfer to get rid of the pension liability and improve free cash conversion?

We've been working at pension liabilities for several years now and we've indeed taken over the last five years from where we started several billion out of that net liability of gross liabilities. We've always been focused on taking ROS and net debt together. Otherwise, you just leave yourself open to interest rate risk and mortality risk. We've managed it down now to I think about $750 million for pension and healthcare, certainly in that region. And so it's now, let's say, tiny traction of our market cap and therefore essentially is not relevant. At the same time, while I've noted one of the company, maybe a couple have continued in prioritizing this. I'm not yet at that point willing to consider that. It's not that it's off the table because I think it would be something which would be useful to do. But at the same time, I think at this current time there's other better uses of our cash and also I'm not willing to leverage to enable that to occur. Essentially, we are aware of it. We continue to work at our plans. I can see us potentially picking off one or two and do partial initiation either within a plant or in a total of a plan, but you shouldn't expect to see that liability extend. We wish not to pay the premiums to insurance companies to enable that at this point in time. I think that may come over the next say three to five years at some point, but not yet. And the assumption we have for next year is that the cash contributions will be a little bit higher than this year, but at this point not material.

Okay. Thanks. I'll stick with one question.

Thank you.

John, you mentioned your work on upgraded blades. I wanted to see if you could give a little more color there around the timing of when you think you'll be producing and delivering upgraded blades to both GE and Pratt?

So both for the GTF advantage engine upgrade and for the LEAP 1B upgrades. Those have been something that we've been working on for several years now. And if anything, let's say a little bit later into production than originally envisaged, although that is pushed back and timing have not been a result of Howmet not being ready. So we're in good shape. I commented in the past that increased performance in the high-pressure turbine leads to increased complexity and with that is value. We certainly have been intimate with the engine manufacturers to improve the performance as the engine temperatures have seemed to be higher than originally envisaged and therefore to help improve timeline wing. I feel there's though specific timing for both what was really called, now that has a different code name for GE. And I think for the advantage for Pratt & Whitney, you're best asking them for pipeline disclosure rather than myself because we have an agreed plan, but that can and has been varied according to the specific needs of those engine manufacturers at this point in time?

Okay. Fair enough. I'll ask them.

Thank you. It's far better, David.

And then Ken, I guess a two-parter for you. Just quick comments on working capital through the end of this year. It looks like you're kind of a pretty big reversal benefit in Q4 and thoughts on that into 2024? And then pension expense you brought down a little bit for 2023, but what are you looking at for 2024? Thanks.

I'm going to start with a discussion on working capital, and then Ken will provide further details and address the pension aspect. My focus on working capital is due to its connection with the current operations and the status of our various business units. Regarding accounts receivable and accounts payable, they fluctuate based on the number of days. So, as revenue increases, which it has, we naturally have more money tied up in receivables. This is expected due to the current day's dynamics, and while we haven't provided detailed disclosures, our days are fairly stable. With the increase in revenue, a bit more money has been allocated to receivables, but the days remain unchanged. The most unpredictable element of working capital is usually inventory. Currently, our inventory levels are higher than I would prefer, mainly because our production flights haven't reached the necessary levels. This is reflective of the operational status within each business and our recovery in volume. For our Wheels segment, which was the first to show increased volumes and is now gaining stability and smooth production, our inventory days are in excellent shape, nearly at optimal levels. The engine segment, which followed, is experiencing growth in revenue and staffing, and while production efficiency is gradually improving, it has not reached the same level as Wheels yet. I expect continued improvement in inventory holding days as we approach the fourth quarter and into next year. When it comes to fasteners and structures, they are in different positions. Fasteners have seen slower volume increases as we've been expanding our workforce this year. We've started to see margin improvements and better production efficiency, but our inventory days are still not where they need to be. However, I believe this will improve in 2024. In contrast, the Structures business is performing the worst in terms of inventory days. Last quarter was not particularly strong for throughput, and while I've been focusing on using inventory to stabilize manufacturing operations and improve margins, there hasn't been significant progress expected in the fourth quarter. Additionally, there's been an influx of urgent customer demand for titanium. I'm not ready to increase our workforce, working capital in inventory, or input materials until I’m confident in the economics of those premium costs. For now, I prefer to hold back because I see better opportunities for capital allocation, as I mentioned last quarter. I'm maintaining a disciplined approach to capital allocation. While we're not aggressively driving working capital in that division, I anticipate that will change next year as production stabilizes and responds to premium demands. With that, I’ll hand it over to Ken.

Thanks, David. As John explained, the days in working capital are crucial, and they also depend on our position in the business cycle. As we approach the end of this year, we've provided a detailed explanation of our assumptions, which suggests a working capital burn of approximately $190 million. This is primarily due to our increased revenue forecast, resulting in higher accounts receivable, along with a decision to maintain additional inventory to ensure timely and complete delivery to our customers. We expect another growth initiative next year, which may lead to working capital burn again in 2024, though anticipated to improve as we reduce inventory. This will also be influenced by where we are in the cycle, but overall, we’re managing things well due to business growth. Regarding pension expenses, we've successfully reduced gross liabilities by 45% since our separation, which is a significant achievement, aided somewhat by rising discount rates. However, our efforts to manage gross liabilities have played a major role in this decline. As for cash flow, it should increase next year; we will reassess it at the year's end, and we can offer more details in our next call. Currently, our annual pension and OPEB expense stands at $35 million, and for next year, based on market asset returns, we expect it to be around an additional $15 million, with a potential variation of $5 million. Overall, everything is under control.

Great. Thanks for all the detail.

Hi. Good morning.

Hi, Scott.

Two very quick questions both for John. First did price realizations accelerate again in the third quarter? I think they had accelerated last quarter. And then on Fasteners, can you say whether you're shipping at five a month on 787 at this point? Or are you still tracking a bit below that? Thank you.

Okay. I don't think we've given the third quarter detail on the commercial side. I think that would be in our 10-Q later when we file it, whilst I'd say that it's in good order and in line with what we previously said both for the quarter for the year. And I stand behind my comments regarding 2024 we made them on the last call. 787 at the moment, we're a little bit below rate and fully expecting that to move up to rate seven next year. As I've commented before, we see very strong underlying demand for that aircraft. I can see the need to go above rate seven as well. It's only a question of when.

Okay. Great. Thank you.

Thanks. John, I was hoping you could dig a little bit deeper into the fastening margin performance and obviously, sort of, troughed at the beginning of the year and has been showing some signs of resiliency and improvement. I think at the beginning of the year you told me to not expect much for a couple of years. Are we at a point where new management plus the rate increases on the wide-bodies we should start to think about getting back to 2018, 2019 Fastener performance?

Well, I think it's a bit premature to get back there because I mean the conditions there in the wide-body market in particular are quite different from what they are now. So basically in the first quarter, which is probably the low point in base margins reflected essentially a total metallic build of aircraft and you can call it zero in terms of any real volume on the composite side. So that's one factor. Of course, that's begun to change. The business itself has also begun to improve. I see very much improved signs of operating efficiency improvements, but still have a ways to go. I see additional discipline in the business commercially and there's still a ways to go. Going forward into next year, what I see is a volume increase for commercial aircraft production, also fractional improvement in mix because of the wide-body going to next year in particular in your assumptions on what the final wide-body production will be in composite aircraft through the course of the year. Hopefully, with some delivery of 777X parts as well, which has got a composite wing. So I'll say there's a general improvement in conditions for the business, but still with a big thrust on improving its productivity and throughput efficiency which needs to occur. So basically, some ways to go yes optimism will continue on the good trend over the last couple of quarters but too soon to call out any specifics on it. And I don't think we have a guide by segment anyway. But I haven't guided or have that margin for next year just given you like the revenue increases. So that gives you a picture of our business.

Thanks John.

Thank you.

Hey John, how are you?

Hey Ron.

Yes. The topic that doesn't tend to come up much is the forged wheels. And it appears that it's been running ahead of expectations. I mean how should we think about that? And what are your expectations around it? And when we think about modeling it, what would be a prudent way to do so?

The focus on forged aluminum wheels begins with the overarching trends in truck and trailer production in North America and Europe, with some participation in Asian markets as well. We need to consider whatever percentage change is involved as a positive factor in light of what we anticipate to be a tougher macroeconomic environment next year. We expect some market penetration against steel wheels, particularly due to increasing fuel efficiency requirements, though this will have a modest impact. There won't be significant shifts next year regarding powertrains, despite a general move toward electrification, but it is still a favorable direction. Additionally, we're seeing improvements in our manufacturing share. Overall, we anticipate steady growth in this segment that should mitigate some of the macroeconomic declines in our target markets, which is why I've mentioned a cautious projection of a high single-digit reduction for the business as we wait to better understand the economy. Although freight rates have started to stabilize and improve recently, we recognize there are many variables to consider for next year’s forecast. This year has been challenging, particularly in the second half, but we've managed to reduce our backlog. Even with the ongoing UAW strike impacting Mack Trucks, our operations won’t be disrupted in the fourth quarter. We expect that the UAW situation will be resolved by the first quarter of next year, allowing Mack Trucks to return. Overall, this year has been strong, and I wanted to provide you with that general outlook for next year.

And then maybe just one follow-on if I may just a little change subject. When we think about the Pratt & Whitney situation with the GTF and all the tests that need to be reworked, is that good, bad, neutral for you guys? I mean how should we think about the impact on you?

Yes. I'll start off with having to separate two issues I think on the GTF, because I think while it gets all and mashed together, I see them as quite separate and then the catalysts intertwining for convenience. So, this contamination issue clearly that requires inspection that might take, I don't know, so many days, let's call it, 20, 30, 40 days or an off wing to achieve that inspection. And then, I guess longer if those risks turn out they required to be replaced or not. A small fraction of those that will require replacements is another item or separate item. Over, let's say, previously incentive field but I'll call it, left field there is the discussion about the time on wing issues that have been publicized by everybody regarding the GTF we're particularly in harsh climate countries or pollution countries. The time working is a fraction of the predecessor engine and also what we originally thought for the GTF. The question then becomes for the problems around the combustor, the filling of holes, the higher temperature and then those temperatures and pollutants hitting the blades in the high-pressure turbine. These clearly require replacement. The question is, what is the replacement interval for them? That stands alone as an issue. Pratt & Whitney will determine what frequency they want to replace those blades, again, more of a question for perhaps than for myself. We're able to stand behind them and supply what needs to be supplied within degrees. The question is, what's the requirement? Then, of course, you can intertwine them together. So maybe where those engines are off wing for the powder metal contamination issue, maybe the opportunity will be taken to replace some of those high-pressure turbine laser and other parts on the engine or maybe it won't. That's a practice issue. The question I have in my mind is, do they go for full replacements for them as they really look at inspect and take the engines off the wing for the first time or do they stick them back on just because the lines will want the engines back on wing and only seek to replace those in harsh climates at that time? I just don't know, Ron, but it will finally turn out to be because it's a choice by ratio or Pratt & Whitney to determine to what extent do they make improvements for the time on wing issue including the high-pressure turbine parts as they take those into serve. So while it's written about us almost one issue of powder metal, I think there are two distinct issues which may come together but just depending upon the pressure to get those engines back on wing and we are still in discussions with Pratt & Whitney regarding all of that. They determined how many of our parts go to OE production and how many go to the spares market. And that's up to them and the aircraft manufacturers to decide that.

Got it. Thank you very much.

Thank you.

Good morning, everyone. John, I was hoping you could provide more insight on your view of the broader aerospace new-build ramp-up. You've had valuable insights in the past. As you mentioned, your cautious approach has proven to be correct. Around the middle of the year, especially during the air show and into the summer, you seemed more optimistic, indicating that the supply chain was finally prepared to move forward. However, we have since experienced additional issues with engines and aerostructures. Do you believe that Boeing and Airbus are effectively supporting the wider supply chain in achieving the planned higher rates? Is everything set to ramp up once the fuselage issues and similar matters are resolved? You mentioned receiving plans for next year. Are these plans now more concrete with the master schedule compared to what we've seen in the recovery so far? Are things more assured now, or is that just hopeful thinking?

I mean, I think Boeing in particular has had firm plans throughout the year, it's been the realization of those plans, which has been more of the issues. I guess it's from a combination of reasons. There's always going to be somewhere in the supply chain among all parts of difficulties. There's always going to be the degree of experience in Boeing on plants with all of the change of people in and out regarding post-COVID. Of course, we read in the press about the difficulties of, I'd say, was it strike at Spirit Aerospace and then some other production issues of some failed parts and holes and all the rest of it. Yet there seems to have been some management change there which may prove to be positive because that's a TBD. Hopefully, I guess, you listen carefully to the commentary from Spirit yesterday. We're optimistic that those fuselage and other component problems to get resolved. It's not sitting in our control. Should those begin to improve, I think that's a major step forward in Boeing realizing its own plans for production rate increases and also getting behind it the retrofit of those sales which were subject to past those only or holes billed too big and bigger fasteners. So I think they're hoping Herculean efforts to try to achieve all of that. But as you know, circular events by themselves don't sort of produce the output and we've still got to see that improve. Hopefully, during October, November, December, we'll begin to see rate pick up, it's Spirit, other suppliers, and then obviously, Boeing itself to get to their required or stated rate for next year. On the engine side, you've read commentary or I think anyone, I've seen was the GE commentary instead of let's say 1,700 engines, 1,600 engines isn't really impactful for us at this point in time. Because for us, it's just us meeting their rate requirements, and then there's a choice. As I said rather than the previous question, what goes to OE compared to what goes to search requirements. We're dealing with very robust demand on both sides. We see that demand increasing again next year plus some blended in changes potentially for the technology change yet to come.

Okay. I appreciate it. Thank you.

Thank you.

Hi John and hi Ken. Thank you, guys.

Hi Sheila.

I have two questions if that's okay. John, don't...

Well, I am completely leaning today announce it is two-parts, three-parts so yeah sure. Go for it.

You are. You are. But I want some good nuggets here. So the OEs that are calling out castings and forgings in terms of supply chain kind of slowing down the supply chain. I know you've been clear that Howmet isn't a bottleneck and you aren't in the large structural casting business anyway. So maybe could you characterize your output today? And what you're capable of in terms of demand? And then, this is more of like a larger opportunity in terms of pricing and volume. How do you think about that trade-off going forward?

Forgings and castings have faced challenges over the past few years. Before these challenges, we may not have fully recognized the need to enhance skills for production, particularly in casting, where the skill requirements are quite high. The recruitment and training processes to produce effective workers in this area have certainly been challenging for companies like Howmet. We decided to start recruitment earlier, which has likely cost us about 20 basis points in margin due to being slightly ahead of the curve. However, it has paid off because we have been able to meet production schedules, maintain quality, and deliver on time. I want to clarify that in the structural casting market, we are probably the second largest player, trailing only Precision Cast Parts, which remains the leader in structural castings. We are producing at a good rate, achieving about 98% of our structural casting output. Initially, we encountered some issues with certain products, but those have been resolved without incurring additional costs. If demand for structural castings increases, we are equipped to meet that demand as we still have available capacity and are willing to invest strategically for a solid return. Overall, I am optimistic about our investment in the engine business, especially when compared to our structures business, which is driven by returns. This indicates that we are in a strong position. In terms of structural casting, we are a significant supplier in the turbine blade industry. I hope this provides a clear overview.

How do you think about pricing and your contract structures going forward given the constraints in the supply chain and you're hiring ahead of the curve?

Pricing has been favorable for us, reflecting the value we provide. In examining the requirements for enhanced temperature performance in narrow-body engines, we are utilizing some of the technologies developed for the F-35 engine to manage pressure and thermal performance in the high-pressure turbine. We can produce parts that meet specific customer specifications; if they require operation at 2,500 degrees, we can exceed that, as we are capable of handling temperatures up to 3,500 degrees for the F-35. We are the only company that can supply turbine parts that perform under such conditions. We have previously mentioned that we are working on improvements for the 2028 engine upgrade to enhance its thrust and performance. We can further elevate the temperature capabilities of these parts, and although we've touched on this briefly during our Technology Day, we are positioned to deliver substantial performance and scalability. This needs to be reflected in the value because, in reality, the turbine blade is a small component of the engine's overall worth. Meeting the requirements for a lower carbon footprint involves continuously increasing pressure within the engine to optimize fuel efficiency and improve burn characteristics, ultimately benefiting the industry's environmental goals.

Great. Thank you.

Thank you.

Hey, thanks very much. Good morning everyone. So John, I know you said you wouldn't say this or haven't said this and so I'm not necessarily expecting a number in terms of the margin outlook for next year, but if we think about that sort of baseline incremental of 30% plus or minus 5%. How do we think about the puts and takes for where next year can come in relative to that 30%. Does the addition of headcount and the need for the learning to develop among your employees? Does that keep things sort of below that 30% range as it's been in recent years? Or are there other opportunities to be above it? What's the best way to think about that at this point?

Yes, we achieved a 19% operating profit and a 23% EBITDA rate last quarter. I don't have insights on margin rates for next year. Currently, I anticipate a few more months of unstable production, especially in free manufacturing, but this is just a possibility. If we get fortunate, things may stabilize in the latter half of next year. We're starting to see some favorable developments, particularly regarding inventory and our engine business. I'm still optimistic that we're about a year away from reaching what I call the "state of Grace," where margins stabilize and improve. This may happen towards the end of 2024 but is more likely in 2025. I hope this coincides with aircraft production developments, including a wide-body mix, which would position us well. Overall, I have medium to long-term optimism as we’re in a strong position with a substantial backlog and positive prospects, despite facing short-term challenges due to fluctuations and changes in various market segments, especially in commercial aerospace. That's the best I can provide.

Excellent. Thanks very much. Helpful.

Thank you very much.