Howmet Aerospace Inc (HWM) — Q4 2024 Earnings Call Transcript

Thank you, Anthony. Good morning and welcome to the Howmet Aerospace fourth quarter and full year 2024 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 the appendix in today's presentation. With that, I'd like to turn the call over to John.

Thanks, Paul, and welcome everybody to today's call. Let's move to slide four. I'll begin commentary on our fourth quarter. We closed out 2024 with healthy results, which exceeded the high end of our guide. Revenues are record as well as EBITDA, EBITDA margin, and earnings per share. Fourth quarter earnings per share was $0.74, an increase of 40% over the prior year, concluding the year at $2.69. For the full year, this represents a 46% increase year over year, and it's 25% higher than our initial guide for 2024. Operating margin for the quarter was 23%. Free cash flow for the year was also a record at $977 million, representing an 88% conversion of net income. Average free cash flow conversion of net income over the last five years has been approximately 100%. Of the $977 million of free cash flow generated in the year, it was deployed to share repurchases, debt reduction, and dividends. During 2024, Howmet repurchased $500 million of common stock, of which $190 million was completed in Q4. Howmet also reduced debt by $365 million and paid $109 million in dividends. Regarding dividends, we recently announced a 25% increase in the quarterly common stock dividend, which will be paid later this month. The balance sheet continues to strengthen with the leverage of net debt to EBITDA improving to 1.4 times. Ken will now provide additional color regarding end market revenues in the quarter and year before moving to segment results. The one segment I'll highlight is the improvement in profitability in the structures segment since it showed the largest quarterly increase. This was clearly welcome and helps with our confidence moving into 2025. The commentary regarding outlook will be provided later after Ken's comments.

Thank you, John. Good morning, everyone. Let's move to slide five. So another solid quarter for Howmet. End markets continued to be healthy. We are well positioned for the future and continue to invest for growth. Revenue was up 9% in the fourth quarter and up 12% for the full year. Commercial aerospace growth remained strong throughout 2024, with revenue up 13% in the fourth quarter and up 20% for the full year driven by all three aerospace segments. Defense aerospace growth accelerated in the fourth quarter and was up 22% for the full year, driven by fighter programs and fighter engine spares demand. Commercial transportation was expected to be challenging, as revenues were down 12% in the fourth quarter and down 7% for the full year. Although down, we continue to outperform the market with Howmet's premium products. I would also note that despite the challenging market, Howmet's wheel segment delivered a healthy 27.2% EBITDA margin for both the fourth quarter and the full year. Finally, the industrial and other markets were up 11% in the fourth quarter driven by oil and gas up 22%, general industrial up 12%, and IGT up 5%. For the full year, industrial and other markets were up 9% driven by oil and gas up 19%, IGT up 7%, and general industrial up 5%. Within our markets, we had robust spares growth. The combination of commercial aerospace, defense aerospace, and IGT spares was up approximately 25% for the full year to $1.28 billion. Spares revenue in 2024 represented 17% of total revenue and accelerated in the second half of the year. As a comparison, spares revenue in 2019 was 11% of total revenue. In summary, continued strong performance in commercial aerospace, defense aerospace, and industrial, partially offset by commercial transportation. Now let's move to slide six, starting with P&L. The focus of my comments will be on full year performance. Full year revenue, EBITDA, EBITDA margin, and earnings per share were all records. On a year-over-year basis, revenue was up 12% and EBITDA outpaced revenue growth, up 27% while absorbing approximately 700 net new employees. The engine segment added approximately 1,205 employees while we reduced employees in fasteners, structures, and wheels as we improved labor productivity and are seeing the benefits of our capex investments. Full year EBITDA margin increased 310 basis points to 25.8% with a fourth quarter exit rate of 26.8%. For the full year, incremental flow through of revenue to EBITDA was excellent at approximately 50% year over year. Earnings per share was $2.69 per share, which was up a healthy 46% year over year. Now let's cover the balance sheet and cash flow. The balance sheet continues to strengthen. Free cash flow for the year was a record $977 million, which exceeded the high end of guidance. Free cash flow conversion of net income was 88% as we continue to deliver on a long-term target of 90%. CapEx investments in the year were a record $321 million, up approximately $100 million year over year as we continue to invest for growth. The year-end cash balance was a healthy $565 million. Net debt to trailing EBITDA continues to improve and was at a record low of 1.4 times. All long-term debt is unsecured and at fixed rates. Howmet's improved financial leverage and strong cash generation were reflected in S&P's Q4 rating upgrade from BBB- to BBB. As you will also recall, in Q3, Moody's upgraded Howmet two additional notches in investment grade up to Baa1. Liquidity remains strong with a healthy cash balance and a $1 billion undrawn revolver complemented by the flexibility of a $1 billion commercial paper program. Regarding capital deployment, we deployed approximately $975 million of cash to common stock repurchases, debt pay down, and quarterly dividends. For the year, we repurchased $500 million of common stock at an average price of $87 per share. Q4 was the fifteenth consecutive quarter of common stock repurchases. The average diluted share count improved to a record low exit rate of 408 million shares. Additionally, in January 2025, we repurchased an additional $50 million of common stock at an average price of approximately $116 per share. Remaining authorization from the board of directors for share repurchases is approximately $2.15 billion as of the end of January. For the year, we reduced debt by $365 million. This included a partial pay down in Q4 of $60 million of the US dollar denominated term loan that's due in November of 2026. The combined debt actions for the year will reduce annualized interest expense drag by approximately $37 million. Finally, we continue to be confident in free cash flow. For the year, we paid $109 million in dividends, which was an increase of 53% year over year from $0.17 per share to $0.26 per share. We also recently announced a 25% increase in the quarterly common stock dividend from $0.08 a share to $0.10 per share. Now let's move to slide seven to cover the segment results for the fourth quarter.

Engine Products delivered another strong quarter. Revenue increased 14% year over year to $972 million. Commercial aerospace was up 13% and defense aerospace was up 19%, driven by engine spares growth. Oil and gas was up 31%, and IGT was up 5%. Demand continues to be strong across all of our engines markets with record engine spares volume. EBITDA outpaced revenue growth with an increase of 30% year over year to $302 million. EBITDA margin increased 380 basis points year over year to 31.1%, while absorbing approximately 220 net new employees in the quarter. For the full year, revenue was up 14% to $3.7 billion. EBITDA was up 30% to $1.15 billion and EBITDA margin was 30.8%, which was up approximately 360 basis points year over year. All were records for the engines product segment. Moreover, the engines product segment added 1,205 net new employees to support future growth. Now let's move to slide eight. Fastening systems had another strong quarter. Revenue increased 11% year over year to $401 million. Commercial aerospace was up 17%, including the impact of the wide-body recovery and the Boeing strike. General industrial was up 32%. Defense aerospace was up 2%. And commercial transportation, which represents a we was down 13%. Year over year, EBITDA outpaced revenue growth with an increase of 39% to $111 million. EBITDA margin increased 550 basis points year over year to a healthy 27.7%. The fasteners team has continued to expand margins through commercial and operational improvements. For the full year, revenue was up 17% to $1.6 billion. EBITDA was up 46% to $406 million. And EBITDA margin was 25.8%, which was up approximately 520 basis points year over year. The fasteners team delivered solid year-over-year revenue and EBITDA growth while reducing headcount by approximately 135 employees. Let's go to slide nine. Engineered structures performance continues to improve. Revenue increased 13% year over year to $75 million. Commercial aerospace was up 9%. And defense aerospace was up 51%, primarily driven by the F-35 program. Year over year, segment EBITDA outpaced revenue growth with an increase of 55% to $51 million. EBITDA margin increased 500 basis points to 18.5% as we continue to optimize the structures manufacturing footprint and rationalize the product mix to maximize profitability. For the full year, revenue was up 21% to $1.1 billion. EBITDA was up 47% to $166 million. And EBITDA margin was 15.6%. EBITDA margin was up approximately 270 basis points year over year and headcount was reduced by approximately 235 employees year over year. The team continues to make progress and we expect continued improvements in 2025. Finally, let's move to slide ten. Forged wheels revenue was down 12% year over year as the slowdown continues to take hold of the commercial transportation market. EBITDA decreased 8%. However, EBITDA margin continued to be healthy at 27.2% as the team flexed cost and expanded margins through commercial and operational performance. For the full year, revenue was down 8% to $1.1 billion. EBITDA was down 7% to $287 million. EBITDA margin for the full year was a healthy 27.2% in a challenging market and was up approximately 30 basis points year over year. Lastly, before turning it back over to John, I wanted to highlight a couple of items that are in the appendix. First, the operational tax rate for 2024 was 20.5%, which represents a 170 basis point improvement year over year. Second, pretax return on net assets improved by 800 basis points from 33% in 2023 to 41% in 2024, driven by strong profitability and the optimization of working capital in fixed assets. So with that, let me now turn it back over to John. Thanks, Ken. And let's move to slide eleven. I'm going to provide some commentary by each market segment and also then move to specific guidance. But before I do that, maybe it's worthwhile just making sure that everybody understands that we did again outgrow each of our respective markets in 2024. And that's been a theme of recent years. And we expect to do so again in 2025. Let's start with the commercial aerospace segment. Air travel and freight transportation have continued to grow, especially in Asia Pacific. Backlogs for Airbus, Boeing, and COMAC have never been higher, principally due to the underbuild of aircraft schedules by all of the aircraft manufacturers, but most notably by Boeing given the strike, which commenced in late Q3, which lasted for almost two months, and was then followed by a further month of employee retraining with no aircraft build. Hence, backlog increased again. Given the continued production of many parts by suppliers, starting with Spirit AeroSystems during this production gap, the runway is wide open for builds to now increase. Airbus came close to their revised 770 aircraft build and show promise going into 2025. Comac delivered ten C919 aircraft in 2024, principally to Chinese airlines, and we can expect higher production volume in 2025. While we have an estimated OEM build volume for each aircraft, perhaps the most interesting build assumption is the Boeing 737 MAX, which we see as about 25 aircraft per month on average for the year, skewed towards the second half. This assumption enables investors to adjust their models up or down according to their own assumptions. Of course, should Boeing build at rate 38, or indeed rate 42, we will match this. I'll now touch on spares before moving to defense. Our total revenue from spares was $1.28 billion, representing 17% of Howmet revenue. Spares revenue increased approximately 25% in the year, with acceleration in the second half of 2024. We envision spares to continue to be healthy again in 2025 and growing towards our previously stated projection of 20% of Howmet revenue. Defense was also a source of strength last year, and we see this continuing into 2025 for both legacy aircraft and the F-35. In 2025, or early 2026 at the latest, we should see the crossover where spares volumes for F-35 will exceed the F-35 OE engine revenues. Then it will continue to grow as the fleet of aircraft expands worldwide. Industrial is expected to be up mid-single digits led by demand from IGT oil and gas. I provided extensive commentary regarding future IGT demand during the November earnings call. Since then, the overall picture has become even brighter for electricity demand from data centers due to the incoming US administration's focus, which is less on renewable subsidies and more on fossil fuels. We see demand increasing from running the existing fleet of turbines harder and hence more spares being required. Moreover, we expect increases in new turbine builds to increase globally in 2025, 2026, and 2027 and beyond. The gross requirements for increased megawatts of demand were set out in November. While the change is currently towards natural gas, and hence favors Howmet, the expected growth in IGT drives an increase in IGT CAP investment for 2025 compared to 2024. As in 2024, capex investments are linked to customer contracts. As the global leader in IGT turbine blades, we'll continue to focus on additional global capacity demand for Siemens, Mitsubishi Heavy, GE Vernova, and others. We're optimistic about the next few years of IGT growth and Howmet is well positioned for both future OE build and for spares growth. Moving to commercial truck, demand continues to be muted as expected. We were pleased with our ability to increase wheel's margin despite the severity of the downturn in Q3 and Q4, and printing a very respectable 27.2% EBITDA margin for the quarter. Outlook is unchanged with some return to growth expected in the second half of 2025. In summary, we see demand increasing in 2025 with profit being back end loaded, principally due to the Boeing build and likely increase in build moving into 2026, with the increased second half truck builds as well. The overall midpoint of the revenue guide has moved upwards from 7.5% to 8% plus or minus compared with the November estimate. And this extra growth is on top of closing out a very strong fourth quarter of 2024. Moreover, we expect in the first quarter of 2025 revenues to be $1.935 billion plus or minus $10 million. EBITDA of $520 million plus or minus $5 million. And earnings per share of $0.76 plus or minus a penny. The guided Q1 incrementals are healthy at over 70%. And for the year, revenue is expected to be $8.03 billion, plus or minus $100 million. EBITDA, $2.13 billion plus or minus $25 million. And earnings per share of $3.17 plus or minus $0.04. Finally, free cash flow is expected to be above a billion at $1.075 billion, plus or minus $50 million. The full year incrementals are healthy at approximately 36% in the guide while we await more clarity on the second half and, in particular, the commercial aerospace narrow body builds. Before moving to capital allocation, a couple of comments on tariffs. We're closely monitoring the situation, and as everybody knows, the situation remains fluid. But we expect to be well positioned due to our strong commercial agreements and the mission-critical nature of our products. We'll pass on additional costs through to our customers. We've demonstrated our ability to do so and quickly pass on costs following the steep inflation that we saw in 2022. I'll make a few closing comments on capital allocation for 2025 before moving to Q&A. I invite you to view the 2024-2025 summary slide for commentary. The Howmet balance sheet is strong. We were rated well into investment grade, and net leverage closed at 1.4 times net debt to EBITDA. 2025 sets up well, but with a back-end load. The dividend payout has been increased by 25% starting in Q1. Hence, the dividend payout for the year will repatriate further funds to shareholders. The share buyback program will continue with plenty of availability under the current board authorization. We expect that the total buyback in 2025 will exceed the buyback of 2024. Debt pay down will be muted compared to 2024. This provides the company with both good shareholder return profile and also great optionality. And with that said, let's move to questions.

Good morning. Thank you. On fastening systems, you came up with EBITDA margins of 28% roughly. I mean, this has kind of been a big step up. Now, you've got, I think, a mix improvement working here with more A350, 787 fasteners. But can you talk about is there anything unusual that happened in the quarter or are you really on a path here to get materially higher margins going forward either from mix performance improvement or operating leverage?

I think when I looked back at our fastener business, the track we are on is really very good, Doug. The focus in the business from all aspects of those operational and productivity improvements has been even better than I had expected. Combining that with, I would say, commercial discipline has enabled us to move a long way along the pathway to restoring previous margin highs. And so I'm pleased with that. I don't think that the wide-body mix has changed fundamentally yet for the positive. There's a small positive change relative to narrow body that's gone on during 2024. But I do expect that the builds for 2025 to be better than 2024. I think there's still some positive mix that's there for us. Especially as we look forward to hopefully a rate ten and maybe more for the Boeing 787. Also, I think you'll recognize the Airbus future monthly build has been stated to move to twelve aircraft a month by 2027, and that compares to probably last year's about five a month. So I think the rate of increase for wide body is gonna pick up over the next two to three years, and that should be further benefits for the business. Naturally, the rate of increase in margin I would expect to be less aggressive in the future, but I don't think that we're finished yet.

Okay. Very good. Thank you.

Good morning. John, just looking at your implied guidance after the first quarter, it implies margins start to step down and certainly incrementals are half of what you're implying for the first quarter. Can you rationalize some of that for us? What's growing? What's a headwind? And or is it more conservatism given your lack of visibility beyond the first quarter?

It probably would have been fairly easy for us to be a little bit more optimistic at the same time, you know, there's lots of things going on during 2025. The rate of growth could be materially changed by additional narrow-body builds as an example. And, you know, we've chosen to be fairly conservative in that view for our financial guide. And also, you know, there's always a possibility of some cutbacks given the statements of the CFO at Boeing regarding excess inventory. Albeit, I don't think that's gonna be a problem, but you never know. Therefore, the lack of visibility that we and I suspect other suppliers have, we want to be a little bit cautious in that regard. We don't want to get ahead of ourselves. And so that's the way I think about the narrow-body side. Again, on wide body, it could be better. But let's wait and see till we are clear that some of the supply chain challenges that have been quoted publicly, whether it's been seats or fuselages sections, or say, heat exchangers, all these sort of things which have been mentioned. Are those now clear? And so we want to be cautious there as well. And, also, as you know, we're building out a couple of new manufacturing plants this year, facilitating them, and so you know, want to be cautious in that regard too. We've got our feet firmly placed under the table on those two things. And it's also, as you know, always a little bit uncomfortable having a back-end load to these two things. At this stage, I think we've given the best visibility that we have, which is another strong step forward in Q1, while choosing to be a little bit more muted in the March year. Do we know a bit more about the profile of the year and how it all out. And as you know, we also said the second half of the year for commercial truck is also expected to improve. But, again, it's an expectation, not knowledge. We need to be cautious until we've got better visibility of all of the things play out in this year, which is the demand increases from what customers say they may achieve and what markets might do. While we're, as you know, building out a substantial amount of infrastructure, to enable us to match the demand as we're going to the second half and 2026.

Just one follow-up. What is the headcount growth you're thinking about to match that expansion of capacity?

I'm guessing about a thousand net heads for the year at this point. You know, we'll have a higher gross number than that to net down to a thousand. A little bit less than in 2024. Commensurate with us also improving our productivity. But, again, it's something which is yet to be determined. That's directionally how we're thinking about it.

Okay. Thanks again.

Thanks so much. Good morning. How are you?

Good morning.

John, I just wanted to follow-up on your 737 production forecast. I was wondering what sort of purchase orders your various businesses are seeing at the moment. Whether you've got any more clarity on how much inventory is in the system at this point.

So our fourth quarter wasn't stellar in terms of requirements for Boeing. And we have seen and have fully taken account of the cutback that have occurred due to inventory. That's already been baked into our first quarter guide. There's nothing for us to be concerned about there. The thing that I do worry about is if we are unable to, let's say, smooth some of those, is that demand on us could actually accelerate to an even much higher rate in the valve to be going into 2026. It's a potential for some instability in the demand profile. We've taken account of it. The most important thing is that what we see at the moment is fully baked into our first quarter. I think it's pretty healthy anyway. So nothing to worry about there. Again, as you know, we're not yet changing over the turbine airfoils for the LEAP-1B. We expect that to continue with the existing product as we go through 2025. Looking towards a later implementation compared to the LEAP-1A. So it's worth mentioning that in the context of the dynamic idea.

Okay. Thanks so much, John.

Hey, John. You referenced engineered structures benefiting from product rationalization this quarter. Can you just explain in a bit more detail what that product rationalization point is referring to? If there is opportunity for further benefit from beyond this quarter going forward. Thank you.

Okay. So you may remember, Scott, that we closed down a couple of facilities in Europe earlier in 2024, and also sold one of our less profitable structures business. So that's some of the sort of effect on margin albeit probably even bigger than that has been the step up in productivity and performance of the business. When I think about it for 2025, I was really pleased with our exit rate. I do not think there's anything to worry about in terms of going backwards in that regard. I think the combination of having drummed out three underperforming operations while still having revenue grow, which is always a great time to do it, improvement in productivity, and also, again, commercial focus has paid dividends for us and for us to be able to step up to from a 14% level to an 18% EBITDA margin was really good, and that's why I chose to call out in my opening comments. I hope to be as good as that. It will build on it during 2025.

Thank you. And just to clarify, can you say what the guidance is assuming on the GTF advantage certification timing?

Let me just step through the overall picture on changeover on both the GTF and also it's worth mentioning the changeover on the LEAP engine. So GTF certification has not occurred. We still await final approvals from our customer Pratt & Whitney regarding the sign-off for tooling to be able to make it high rate. We have done some early production and so we're optimistic that changeover because during the 2025 year, it's unclear to us yet exactly when the changeover will occur and substantial volumes will do so. But let's assume at this point a mid-2025 changeover, albeit with everybody wanting that change to occur as soon as possible, both for the durability improvements in the engine and for Howmet's additional content and overall mix within the business. We see that as a good change. It's still struggling to put a pin in exactly which month will change over. Regarding GE, the changeover for the LEAP-1A has finally occurred. That's good. In Q4, we were during that quarter, uncertain about changeovers that we prepare to change and didn't change and then changed over again. There's a little bit of disturbance in our fourth quarter engine margin performance due to that changeover. What’s important is, as of now, in January into February, we've changed over to the new improved version. We believe that will be a net good for both GE and for Howmet. So there was LEAP-1B, my expectation is that won't change over at all during 2025, and that will be sometime more like mid-2026. But, again, the timing is to be determined. The changeovers need to be approved by both GE, Boeing, and also the FAA. The timing is less clear. In summary, GTF hopefully by midyear this year. We look forward to that change. The LEAP-1A has now changed as of January. That preservation in our margin is behind us.

Thank you.

Hey. Yeah. Good morning, John.

Hey, Ron.

Can you speak a little more to the opportunity in industrial gas turbines? Because it does seem like over the past several quarters, you've gotten, I'd say, more build-up on it. Right? So is there any more color you can give around it? And, I mean, ultimately, how big could it be for you guys?

Just well, it is tough to get me bold up on something. I'd like to believe I'm fairly level-headed, Ron, but I do think that the picture for IGT is exceptional. And has got even better since the November earnings call, which as you recall was the day after the election. The big picture is data centers being built out throughout the world. But I'll just stick with the US because it's easy. You can extrapolate it. Data centers require massive amounts of electricity both for the build-out of them, the functioning of these new chips in the servers, and also electricity for cooling. So the demands are extraordinary. It'll be interesting to see how both the electricity is provided and also the grid copes with it. I think certain data center clusters may have their own source of electricity due to security needs, which will require gas turbines to be on-site. The overall blend of electricity provision between wind, solar, and natural gas has changed with the new administration. Everybody sees an even brighter prospect for natural gas and industrial gas turbines going forward. We've been in deep discussions with some customers to create the capacity. In fact, we're actually in that capex guide I gave, we're going to build out additions to two of our sites to enable additional plants and equipment to be installed over the back end of 2025, 2026, and beyond. We're optimistic about it. Of course, these things don’t happen without some disturbance. We all are familiar with deep seek and was that a revolution? The best way I could explain it is that it was using the benefits of the open language models developed by other hyperscalers. The fundamental hyperscalers are Microsoft, Meta, Google, and Oracle. The requirements for building out these servers and data centers are intact, and I expect it to be really good for that segment going forward. In the short term, it’s gonna be provided by running the existing turbines harder, which means spares demand. At the same time, all of the major gas turbine providers in the world are gearing up to add capacity, and to do that, they need the most crucial component, which is turbine blades. That leads back to Howmet. We do have the leading market share above 50% of that global market. We're pretty optimistic about it. You know, we don’t want to get ahead of ourselves. I expect that we're constrained in our ability to supply over the next couple of years while building out this capacity compared to what's possible. Very pleased to be investing in what we think is going to be a bright future, both for sales revenue and margin.

Yeah. Got it. Thank you.

Thank you. Good morning. Hey, John. Hey, Ken. Maybe a question for Ken. Ken, what is assumed in the cash guide for working capital? It looks like usage similar to 2024. And you know, maybe somewhere between $100 and $200 million. Then, John, in terms of template, you know, should we expect to lessen the way of, you know, kind of gross debt reduction this year? And you talked about a higher buyback. Is it fair to think about that you could look to return pretty close to 100% of free cash flow in terms of buyback and dividend? Thanks.

Maybe I'll go first, Ken, and then you clear out the working capital assumption. What would be very clear, David, is that if you look at 2022, 2023, and 2024, our cash flow is essentially being, I would say, repatriated to shareholders either by share buyback or dividend. I also think of debt reduction and improving future free cash flow as also part of that. Given our net leverage is that when I look at it is that we can increase the dividend, but that's not going to fundamentally change the contours of our cash flow and its usage. This year in 2025, I just don't see us doing anything like what we've done in the last couple of years in terms of putting our debt stacks into really great order while keeping an average interest cost of our long-term debt in a good condition. This leaves us with share buyback. The commentary I've given so far is it will be above 2025. I haven't put a pin in the exact number. But you can assume that the combination of all of that is that the benefits of our cash flow will be largely, if not wholly, repatriated to shareholders because everything else is in such great shape. So in terms of working capital?

Yeah. So, David, so in terms of free cash flow, working capital, starting with 2024, that $977 million, the free cash flow was a record as we talked about that 88% conversion. Very pleased with the performance of the team on that, especially considering, you know, embedded in that was record capex investment. That was around $321 million. You can see in the reports that we have here, that $100 million increase in CapEx, primarily in the engines business, has tremendous return on net assets. Moving into 2025, we try to give you the assumptions on slide fifteen in the deck regarding some of the building blocks of free cash flow. Over a billion dollars of free cash flow in 2025. If you look at the working capital specifically to your question, embedded in there is a burn of around $180 million of working capital burn. Typically, with revenue year over year up by $600 million ish on the guide, you can expect about $120 million of working capital burn.

Perfect. Thanks very much, guys.

Thank you. Good morning, John, Ken, and Paul. Maybe can you talk about the step down in engines margins in Q4? They were down about 450 bps quarter over quarter. A surprise given the continued volume growth there and how do we think about margin levels in 2025 and 2026 for engines given new capacity coming online and the narrow body engine kits you talked about and maybe a follow-up to Myles' question. What segment decelerates the most from Q1 levels?

Okay. So first of all, in my view, Sheila, the small margin change in engine in the fourth quarter is what I called noise. I wouldn't read too much into that at all. It doesn't bother me. Of course, I'd have not liked it to occur, but at the same time, in terms of the long-term team value for that business, I think it's very inconsequential. The thing I said earlier in the call which maybe I should amplify a little bit is that we went through the changeover in preparing for the new LEAP-1A stage one turbine blade, which has been noted. What’s not been noted is the change of dates in terms of implementation and to final FAA certification and readiness. We incurred some costs during the fourth quarter in that whole changeover. The most important thing is that changeover is behind us. The new blade is, as far as we can see, performing well. I can’t see any of those changeover costs reoccurring in 2025 for the LEAP range of engines because the LEAP-1B will be a 2026 item. That’s a TBD. There will be the changeover coming for the GTF, which we see as positive. Possibly even more so for the LEAP engines. The technology change is considerable. We look forward to that. So I think the most important thing is, Q4 was a normal quarterly noise. I don't think anybody can be that good in terms of what's a fractional change for a percentage point while undergoing such significant change. That's how I categorize it. Regarding margins, I'd guess that a lot of the segments expect improvements year over year, with structures probably having the biggest percentage improvement.

Okay. Thank you.

Hey, thanks very much, and good morning. I guess maybe following up on that last question with Structures, impressive margin performance. If kind of exited some areas. So not a place where you've been looking to add incremental capital. Once you've got it performing the way you want it to perform, how do you think about its place in the portfolio?

I think the structures business is moving to the high teens in terms of margin performance. One quarter doesn't make a year, but if you take what I guess, we will probably repeat that in 2025. I think that when you begin to do many of the right things in that business, it earns its way to have some additional capital deployed towards it, whereas we've been really starving that business or certainly not reinvesting at its depreciation rate. Because of its overall place in the portfolio. For margin performance, I'm very pleased. The inventory overhang at Lockheed in terms of bulkheads is, I think, behind us, and you can see some of the effects of that. Titanium demand continues to be healthy in 2025. Nothing in terms of being able to play in the portfolio. It’s a good contributor creating value.

Excellent. Thanks very much.

Yeah. Hey, John. Thanks for squeezing this in. You had really strong spares growth in 2024. What's the underlying assumption for spares growth in 2025 if you can provide that? In particular, what you're seeing in aerospace outlook?

Let me deal with the CFM56 comment first. My view has been that the statements a few years ago that 2025 would be the year of peak demand for CFM56 is pushed to more like 2027. The existing fleet is being worked harder. Demand into MRO shops for those legacy engines is still increasing, and facilities are being created with more deeper overhauls. If 2027 is the peak, it might be later than that. I don't see a massive change. When we started out 2024, the assumption around LEAP production was much higher than it turned out. Those new engines are not in the market, which increases demand for CFM56s since airlines still use those planes as much as possible. Spares demand continues to grow, and if anything, the demand for LEAP-1B is expected to accelerate in 2025. However, we do not control how many go to spares and how many go to new engines. That will be an interesting dynamic as we go through 2025. My expectation is that we will see increased demand for spares.

Great. Thank you.