Howmet Aerospace Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 12 speakers on the call.

Operator

Good day, and welcome to the Halmet Aerospace First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Luther, Vice President, Investor Relations, please go ahead.

Speaker 1

Thank you, Andrew. Good morning and welcome and Kenji Ecobee, 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.

Speaker 1

In today's presentation, references to EBITDA and EPS mean 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. With that, I'd like to turn the call over to John.

Speaker 2

Thanks, BT, and good morning, everyone. Hammitt's Q1 results speak loudly for themselves. Revenue was $1,600,000,000 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.

Speaker 2

And naturally, The increased revenues require some working capital. EBITDA was $360,000,000 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 $41,000,000 driven by the higher revenues and will now be followed by 3 successive quarters of substantial cash inflow.

Speaker 2

During the quarter, debt was reduced by $176,000,000 from the 2024 bonds with cash on hand. And this will further reduce future interest payments by $9,000,000 annually and hence increasing free cash flow yield. In addition, dollars 25,000,000 of common stock was repurchased. During the balance of 2023, shareholders can expect further steps regarding the application of cash flows and 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.

Speaker 2

I will comment further on the outlook after Ken has outlined the growth by markets and performance by each business segment.

Speaker 3

Thank you, John, and good morning, everyone. Let's move to Slide 5 for an overview of the markets for the Q1. Revenue was up 21% year over year and 6% sequentially. Commercial Aerospace continued to lead year over Revenue growth was an increase of 29% driven by Engine Products, Engineered Structures and Fastening Systems. Sequentially, Commercial Aerospace was up 4%.

Speaker 3

Commercial Aerospace has grown for 8 consecutive quarters and stands at 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-thirty 5 program and growth in legacy spares. Sequentially, Defense Aerospace was flat due to strong year end seasonality. Commercial transportation, which impacts both forged wheels and fastening systems 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%.

Speaker 3

Sequentially, these markets were up 15% with oil and gas up 25%, IGT up 15% and general industrial up 10%. In summary, strong growth across all of our end markets. Now let's move to Slide 6. We will start with the P and L and the focus on enhanced profitability for the Q1. Revenue, EBITDA and earnings per share all exceeded the high end of guidance.

Speaker 3

Revenue was $1,600,000,000 or up 21 Adjusting for the year over year inflationary cost pass through of approximately $35,000,000 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 were approximately 500 net headcount additions. Earnings per share was $0.42 which was up 35% year over year. The 1st quarter represented the 7th consecutive quarter of growth in revenue, EBITDA and earnings per share. Moving to the balance sheet, The ending cash balance was $538,000,000 after approximately $218,000,000 of capital allocation, Debt reduction of $176,000,000 common stock repurchases of $25,000,000 and quarterly dividends of 17,000,000 Free cash flow for the quarter was a negative $41,000,000 driven by higher revenues in the Q1. Finally, net debt to EBITDA remained at a record low of 2.6 times.

Speaker 3

All bond debt Our next BAW maturity is in October of 2024 and the $1,000,000,000 revolver remains undrawn. Moving to capital allocation, we continue to be balanced in our approach. Capital expenditures were $64,000,000 in the quarter and continue to be less than depreciation. Capital installed prior to COVID-nineteen 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 by approximately $9,000,000 The October 2024 debt tower now stands at approximately $900,000,000 which is below our revolver.

Speaker 3

Our continued progress on debt reduction, EBITDA growth And healthy liquidity has resulted in an upgrade to our outlook from S and P last week from stable to positive. You can find our remaining debt towers in the appendix. Moving to share repurchases, The Q1 was the 8th consecutive quarter of common stock repurchases. Since the separation in 2020, We have repurchased approximately $928,000,000 of common stock with an average acquisition price of $31.79 per share. Share buyback authority from the Board of Directors stands at 922,000,000 Lastly, we continue to be confident in free cash flow.

Speaker 3

In the Q1, the quarterly Common stock dividend remained at $0.04 per share after it was doubled in the Q4 of last year. Now let's move to Slide 7 to cover the segment results for the Q1. Engine Products continued its strong performance. Revenue was $795,000,000 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.

Speaker 3

IGT was up 14% And oil and gas was up 57%. EBITDA increased 23% year over year to a record for the segment of $212,000,000 EBITDA margin was 26.7 percent despite the addition of approximately 260 net new 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 approximately $20,000,000 of Russian Titanium share gains.

Speaker 3

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 $42,000,000 increase in revenue year over year was driven by 18% increase in volume.

Speaker 3

Segment EBITDA increased 18% year over year in line with the higher volumes. Margin increased 20 basis 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 expense assumption for 2023 from $227,000,000 to 222,000,000 This change reflects the 2023 impact of reducing debt by $150,000,000 late in the Q1. As you may recall, we had already included the impact of reducing debt by approximately $26,000,000 in January before we published our original 2023 guidance. Now let me turn it back over to John.

Speaker 2

Thanks, Ken, and let's move to Page 11. Moving to ESG, we continue to leverage differentiated technologies to help our customers manufacture lighter, more fuel efficient aircraft and commercial trucks with lower carbon footprints. Within our own operations, Hammett remains committed to managing our energy consumption and environmental impacts as we increase production. In 2022, our actions have reduced the intensity of Hammitt'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.

Speaker 2

Hammet is also committed to a safe workplace while fostering a diverse, and is 7 times better than the industry average. Moreover, Hammitt was named one of the best places to work for LGBT Equality by the Human Rights Campaign Foundation. We also increased our workforce by 1500 people and invested nearly $200,000,000 in 2022 to support the significant production growth. Regarding governance, the company was recognized by Our sustainability programs considered to be leading or active. I encourage you to read our sustainability report found at hamet.com in the Investors section.

Speaker 2

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 continues 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, This is further driven by the commitment of airlines to meet carbon emission targets for today, 20302,050, which can only be achieved by using the new fuel efficient engines and aircraft.

Speaker 2

Current new engines fitted to narrow body jets All looking at steps to further increase efficiency, which also helps Hermes given our capabilities in complex casting shapes to provide improved air management and hence fuel efficiency. The other divisions of Hamath are also benefiting by the increased Titanium and sophisticated plasma 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-thirty five drones, rocket motor parts on how it supports. The last part of the F-thirty five inventory correction regarding bulkheads that resulted from the prior underbuild The F-thirty 5 fighters in 2020 2021 should be dissipated over the next 2 to 3 quarters. IGT turbine blade demands continue to be steady and turbine demand from the oil and gas sector is very high.

Speaker 2

The year started well in commercial truck. 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 1 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 pre build.

Speaker 2

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 consistent production rate increases, which will be controlled by the efficiency of both the aircraft assembly lines and the supply of parts, which leads to the final production being set by the weakest link in all of this supply chain. We, as you know, saw this effect of the effect of this phenomenon in late Q3 of 2022 and also in Q4 when Hammitt delivery requirements were curtailed to balance customer inventories. More specifically and turning to guidance for the Q2, we now see revenue of $1,610,000,000 plus or minus 10,000,000 EBITDA of $362,000,000 plus or minus $3,000,000 and earnings per share of $0.42 plus or minus a penny. For the year, we see revenue of $6,250,000,000 plus $75,000,000 minus $50,000,000 EBITDA of 1 point $415,000,000 plus $20,000,000 minus $15,000,000 Earnings per share of $1.67 at midpoint plus $0.03 minus $0.02 And free cash flow increased by $20,000,000 to $635,000,000 plus or minus $35,000,000 Please move to Slide 13.

Speaker 2

In summary, Q1 performance was healthy and a great start to 2023, and the outlook as seen by Hammad is improving. The balance sheet was improved with debt reductions of 176,000,000 Our 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 This cash is generated and the current authority is sufficient to continue this program. Annual cash to service legacy pension OPEB liabilities is modest approximately $56,000,000 We look forward to updating you again in August. And thank you very much.

Speaker 2

Let's move to your questions.

Operator

We will now begin the question and answer And we would like to withdraw your question. Please keep yourself to one question only. At this time, We will pause momentarily to assemble our roster. The first question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 4

Hey, good morning everyone. John, if I take the 1Q actual on the revenue and then the 2Q guide, the full year guide in order to get into that range, 3Q and 4Q, It looks like we would need to be closer to $1,500,000,000 recognizing everything you've been saying and the posture you've been taking with Just in general, how do we get there? And I guess Last quarter was helpful to describe what you were assuming on the major aircraft production rates in the guide, if you could just update us there?

Speaker 2

Yes. Before I comment specifically on any aircraft build guide, let me just back up And we talk how we thought about the balance of year. And 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 build have been taken up, down, delayed with some regularity over the last the year 2 years. And so how we thought about it is that we see essentially Q2 playing out very similar to Q1 and preparing for, I'd say the improvement in build and in doing so we need to add to our costs.

Speaker 2

And so In Q1, as you saw Ken from Ken's commentary, we recruited some 500 people. And 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 listed second half volumes. And of course, you will know as everybody else knows is that Boeing has announced that for their 7 37 that they will take their production rates up to 38 sometime later in the year without where they may go in volume. And so 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 4 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.

Speaker 2

And 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. And 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. And hopefully, that might produce a good outcome and possibly even better than we currently see.

Speaker 2

But I'm going to say who knows and we're one of the few, almost the not quite the one or but say the handful of Aerospace supplies have actually increased guidance. So in summary, what I'm saying to you 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 1 quarter in and 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. Yes. I've also referenced The only public change in production rate, which is for the 737 later in the year.

Speaker 2

And essentially, we are not calling out any changes, any other specific numbers, because we don't know of any.

Operator

The next question comes from Myles Walton with Wolfe Research. Please go ahead.

Speaker 5

Thanks. Good morning. John or Ken or I was hoping you could touch on those. Obviously, the EBITDA margin is a couple of 100 basis points below the last year or so. It doesn't really look like mix.

Speaker 5

I know You're hiring and there's a recruiting training production cost associated with that.

Speaker 3

Can you just give

Speaker 5

us some color on the margin trajectory from here? Thanks.

Operator

Yes.

Speaker 2

So, Processing Systems margin is Not where I'd like it to be. And at the same time, We also need to recognize exactly where we are in terms of the production mix, which is still very much metallic focused Narrow bodies for the main. And we've seen really no demand change for No, essentially no demand change for our wide body business currently except for something on the Airbus A350. We do expect that mix will change and improve in the balance of the year. And in preparing ourselves, if you look at the net recruitment, I think we called out like 250, 260 net people in engine, which of course is 2.5x larger than our Fasteners, but say we were at 215, 220 people in Fast.

Speaker 2

So We recruited disproportionately in fasteners preparing for that improvement. So essentially, when I think about the year and margin rate is that I don't see much A little bit of change positively maybe in Q2, but essentially having absorbed the costs of raising production And stabilizing the workforce, plus the increase in volume, plus the improvement in mix, I do think that we will see some margin rate improvements in the second half of the year. So basically, don't expect much in Q2. And we are being positioning ourselves optimistically for improvements in the back end of the year, Miles.

Speaker 5

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

Speaker 2

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 how that tend to come to reality. But I have no comment specifically about saying does it match this segment as well on average. All I know is that I'll be somewhat pointed if we are not earning a margin rate in 2024 above our current Q1 level And indeed, don't expect it to be like that.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Robert Spingam with Melius Research. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Hi, Rob.

Speaker 3

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 Q1, so how does that trend as we go through the year?

Speaker 2

If I Pick apart our if you'd I'd great let's call it our wider industrial business, We saw really strong demand in terms of oil and gas sector, which is really for derivative turbines. And that was quite extraordinary at 50% plus. And we don't see Anything that being positive for the next, say, few quarters and we haven't really thought about 24% at this point, but so oil and gas has been quite strong and then that's backed up by Industrial gas turbine business at 14%. So we those are the 2. But beyond that, the wider industrial business It was really low single digits, so nothing exceptional there at all.

Speaker 2

But for the 2 specific sectors which make a difference to us, which is oil and gas an IGT. We don't think we pulled anything forward or there's any concerns whatsoever.

Speaker 3

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

Speaker 2

Well, I did say Q2 we see is very similar to Q1. So I don't think you should be expecting anything Given what has been a really, really great Q1, maybe I shouldn't say it myself, It was good. So I think you should think about Q2 being pretty similar and us taking on cost repair for the second half. And then we're going to wait and see how our customers' volumes pan out. And we think we've tried to give you a balanced view of the way forward.

Speaker 2

And I think that you so I don't think you should expect any sequential growth over and above what's been quite exceptional growth already.

Speaker 3

Okay. Thanks so much, John.

Speaker 2

Thank you.

Operator

The next question comes from Christine Liwag with Morgan Stanley. Please go ahead.

Speaker 6

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 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 7 37 MAX And what do you think the OEMs could do better to make it easier for the supply chain to meet these volume increases?

Speaker 2

Well, really, I don't have any comments regarding any specific knowledge about Boeing's production and it's moves up or down, except that I'm very And I know that we can support them whether it's directed for airframe parts or through parts supplied by the engine manufacturer. So And 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 fastening to the fuselage. And obviously, my guess and it's a guess is that there's a 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 aircrafts which are out with airlines or even the inventory they've got. We don't know and we don't control any of that.

Speaker 2

So we're just hopeful that our customers Keep to their statements and their plans. And as I said, I think they will absolutely will schedule the parts upon us. And then should they build at that rate, they'll have a pass. But if they fail to build at those rates, Then of course, there is the potential to be cut back as they rebalance their inventories for parts they've had, which they didn't use. And so It's a very difficult question for us to answer.

Speaker 2

And so I think the takeaway really is We are ready. We are committed to support our customers. At the same time, we're not willing to get ahead of ourselves. We are I'm willing to do the recruitment necessary, but I hope that we don't end up with what we did last year and like in the Q4 where we shed some employees because we were a little bit too far ahead of where our customers were. And so that's how we think about it.

Speaker 2

But I can't call out anything specific. There is this issue, if that was fixed, that would solve the problem. And I guess it's all wrapped up in the statement later in the year. And I guess you can ask Boeing specifically which month that is.

Speaker 6

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 materialized. And at that point, you might have CapEx and labor already in place.

Speaker 6

So when we kind of look out to 2024, 2025, where could incremental margins be for the aero businesses? Is this Something that could be in the 30s percent or 40s percent?

Speaker 2

When we talked about this a year or so ago, we did say we probably see a I think it is at 35% incrementals plus or minus 5%. And you've seen all of that play out In terms of being in the low 30s to the high 30s, it's very much been dependent upon the change of volume by quarter. And when we're prepared and I'll say it's a reasonable growth, we convert really well. When it's been So that's how we play over the last couple of years. In the Q1 of this year, here we are again, We're preparing for volume and taking people on and all of that's good because we know at some point it's going to happen because the demand is so strong.

Speaker 2

And adjusting for them is a metal and the non metal inflation flow through to 25%. And if you reverse engineer from our guide for the year, you'll see that it's around about 29%. And so if you've got a 29% for the year and you start off at 25%. That then implies just by the math is that the 2nd half, we anticipate to be over 30%. And again, you can reverse engineer that from the numbers already given without So should that continue?

Speaker 2

And then obviously, it depends on the growth rate going into 2024 This is what the incrementals will be, but it should be in a good zone. And at the moment, I'm voting for the higher volume. And because ultimately having those higher volumes with our leverage of applying our margin rate to the higher volumes Clearly overcomes the working capital drag and the capital expenditure drag, and so it all ends up in free cash flow, Christine.

Speaker 6

Great. Thank you, John.

Operator

Thank you. The next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 7

Thank you. Good morning, John and Ken and Pete. Thank you.

Speaker 2

Hi, Sheila.

Speaker 7

Hi. Just on 2023 EBITDA margin, you guys had a nice boost 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 $70,000,000 to $100,000,000 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.

Speaker 2

Yes. I mean, we've seen Some commodities come in, but also quite a few have moved out against, for example, if you take hafnium and manium, Those become very expensive in the last few months. In fact, we've been laying in some security stocks of certain of those metals to make sure that we have adequate coverage to be able to support our customers in the Quest for the 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.

Speaker 2

Let's call it 6%, 7% in that zone. And those non metal inflation is where the big action is today in trying to Look at that, control it, at the same time, recover it. So for me, the major story on margin rate is Volume and then do we see those flow throughs that we anticipate? And obviously, it would be great if everybody built what they say they're going to build then and 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, but I mean calling out a 1 or 0.2 on the margin rate is difficult.

Speaker 2

You're talking fraction like $1,000,000 or $2 here or there. So I'd say it doesn't really matter Sheila.

Speaker 7

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

The next question comes from Seth Seifman with JPMorgan. Please go ahead.

Speaker 8

Hey, thanks very much. Good morning, everyone.

Speaker 2

Thanks, Seth.

Speaker 8

I think during the prepared remarks, I think I think Ken mentioned the $20,000,000 of share gain on from Russia on Titanium in Engineered Structures. I think that's the wraparound on the share gain that you made last year. So can you talk a little bit about the state of opportunity there? And Maybe specifically with some of the more refined forgings, where how that might be In the running to do that and there aren't many others and whether the OEMs have moved forward there with Walter alternative sources or not yet?

Speaker 2

Okay. So you're actually correct, Tim, the $20,000,000 was the increase in our Q4 2022 volume and the way to think about 2023 is you take that $20,000,000 multiply it by 4 And then add on to that about a 25% plus or minus growth for 2023. And currently, I think you just take our 23% number and you probably add another 25% to 30% on for 2024. That's the way I'm thinking about it. And we've taken a lot of very positive steps With order intake notably from Airbus, but also from Embraer and also more recently our first orders with Boeing and that's both for mill product and some forgings.

Speaker 2

And 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, but we see them preparing for ordering and release and gradually increasing those requirements during the back end of this year and into 2024. So It's all playing out as expected and see the titanium opportunity is very positive. It's Only blemished at the moment by reverts, very tough to get hold of and it's expensive. So we've laid in for additional sponge requirements and are seeking really to ramp up our production in our titanium

Speaker 8

Great. Thank you very much.

Speaker 2

Thank you.

Operator

The next question comes from Robert Stallard with Vertical Research. Please go ahead.

Speaker 9

Thanks so much. Good morning.

Speaker 2

Hi, Rob.

Speaker 9

John, 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?

Speaker 2

Yes. You're right. And so we are recognizing that We are increasing rate and some of that is occurring now. And it's only balanced by Yes, the amount of inventory that we have and as you know, we carried, let's call it $100 plus 1,000,000 of inventory from 2022 into 2023. And because of the volume that we saw, we I chose not to reduce inventories in the Q1 and we wanted to keep everything healthy And we've tried to input materials such that we can respond to both the production requirements as scheduled and also what we think is going to be some spot buy purchases, which will be required in the balance of the year.

Speaker 2

So We are ready and poised to be able to respond, I think, hopefully in a good and efficient manner. But as I said before, we don't know that exactly what all of the issues are in terms of the Fine. That got the final production rates, but we're prepared.

Speaker 9

Okay. Sorry, just a 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 30s to

Speaker 2

38. It very much depends upon the path. And so Where we are accessing base metal, it will be, let's say, more in that, let's say, 6 to 9 months. But if it's where alloyed metal, you're now So we're already having to anticipate what 2024 might look like for our material ordering and laying those requirements On our supply base, and it's all, again, predicated on how many are built this year, Did we build in excess or are you things pushed and what the growth rate will be next year? So as I said in my prepared remarks, managing an upturn has From more and many dimensions than managing a downturn, whether it's labor, materials, production facilities, capital, etcetera, etcetera.

Speaker 2

And so it's quite fascinating. And I'd say it's really, I'll say in one sense, a really high class problem to have. So here we are debating what's the angle of the growth rate. And we worry excessively about some of the minutiae, but at the same time, we got to keep our mind focused on the main goal, which is These are really good conditions to be anywhere. We're looking at the growth rates that we're talking about and we know that we're going to grow again in 2024 We know we're going to grow again in 2025.

Speaker 2

And so in my book, all of that's pretty good, Rob.

Speaker 9

Yes. Thanks so much, Joe.

Speaker 2

Thank you.

Operator

The next question comes from David Strauss with Barclays. Please go ahead.

Speaker 10

Thanks for taking the question.

Speaker 2

Hi, David.

Speaker 10

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.

Speaker 2

Okay. So in Whitehall, we continue to be in negotiations with the UAW and have extended the agreement with no work interruption. So that's just going on as normal. And in fact, we've been discussing that again in the last few days. So I'd say normal sort of negotiations around that topic.

Speaker 2

Just remind me, David, your second one, got focused on the

Speaker 10

negotiation then. Yes, thanks. The change in leadership

Speaker 2

Change in leadership. Yes. We made a change we actually changed out the leadership of the Faster Group The Q4 of 2022 and have been managing through, let's say, a Temporary solution there with an acting, let's say, President of Strassner. And it's also given me the opportunity of even being, let's say, more intimate with that business. And now appointed what we think is going to be a great leader for that business.

Speaker 2

And you've Started, the person has started, they were engaged with us the week before starting that quarterly business operating reviews. And so that I think that was a good learning and Information Exchange. And so I'm optimistic that with the changes that we've made and the increased focus and performance orientation The business that the things that I see are possible, become not just possible, but tolerable. And you heard me talk already in response to a question, I think it's from Miles, about the Fastener margin rate, which I'm optimistic for the second half of this year, especially if we carry on recruiting in the 2nd quarter taking those costs on Getting ready and the improvement in volume and then the improvements in mix with widebody coming more to the fore and in particular, We are beginning to see stirrings of life in the, I'll call, the sub tiers of the 787 Suppliers around the world, which will require the fasteners from us to be able to produce their parts, which they then ship to Boeing. So it's a long supply chain and we do see that wide body mix beginning to improve in the second half and then improve again in 2024, both for the requirements of Airbus for the A350 anticipated increases and further increases In 787, because those are it's quite dramatic, the change, which is you get from those wide body aircraft and the degree of composites they contain.

Speaker 10

Do you anticipate having to make additional hires in the 2nd 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?

Speaker 2

If it is as we think, we should be at rate in the first half, but inevitably there's always some attrition. And so there is a replacement. And the case for hiring in the second half will be, I'll say, basically predicated on 2 factors is, One, what is the actual rate of production required in the second half? And secondly, When we get to the Q4, we will have to be anticipating to some degree the rate of growth into 2024, which as I said, we expect It's difficult to be precise until I know more about the final requirements for second half and then what's the angle of increase for 2024?

Speaker 3

Thank you.

Speaker 2

Okay. Thank you.

Operator

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Speaker 8

Hey, guys. Good morning. Hey, Goham. I promise I'll keep it to 1 this time.

Speaker 2

I know you gave me a bit of grief of your one three part question last time, I think it was. But That's right.

Speaker 8

I deserved it. Hey, I just wanted to get your pricing expectations over the next couple of years and if you could specify Price opportunities, I should say. And then if you could specify where at which segments the pricing opportunity is greatest? Thank you. Okay.

Speaker 2

I think when I talked in February, I indicated to you that we were about 80%, 85% done in terms of moving through the long So 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 2022 And that as you know is over and above any recoveries for either metals or non metals 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. And it's why it's a little bit early is that my guess it's a similar order of magnitude heading in that direction for 2024, Gartha.

Speaker 8

Okay. And any segment that stands out with the greatest Pricing opportunity over the next couple of years.

Speaker 2

Price is positive for us in all four segments. Inevitably for ENGIE, it has to be greater because it's the largest segment. And but it also carries with it some of the More exceptional technologies where we are now pushing the boundaries once again of what's possible Let's say, lower fuel usage and improved carbon footprint. And I see that those Impacts not only for the fact you've got the fuel efficient aircraft, but the engine developments, which are being made by our customers. Those are really You're going to assist on that whole achievement of lower greenhouse gas emissions for the aerospace and airlines in particular.

Speaker 2

So I think it's still good news and the Hammitt technologies are intimate to helping to achieve that in the stage of the turbine, particularly after the combustor.

Speaker 8

Thank you, guys. Thank you.

Operator

The next question comes from Matt Akers with Wells Fargo. Please go ahead.

Speaker 8

Yes. Hey, guys. Good morning. Thanks for the question. John, I was wondering if you could talk about kind of your latest thoughts on this Asheville facility that Pratt is ramping up and is that I think that's supposed to ramp up production a little bit this year.

Speaker 8

Have they given you any indication of kind of what the volumes are there? And Maybe what kind of timeframe you think that could is there any risk to kind of your airfoil volume?

Speaker 2

Well, I don't think anything in terms of narrative have changed from all the words that I've expended on this topic over the last 2 or 3 years, starting with Pratt and Whitney deciding to sell Airfoil GasLink's business, which is in Poland in 2016. And then deciding in 2017 that they would reenter, but with using new core technologies from a company they bought and They've been obviously continue to develop that. And I see it's Because most of our I mean, we take both GE and I think Pratt, we've coexisted with them for many, many years with them having their own Development and production capabilities, but in terms of when you get to, I will say, real production at high volume of very complex parts, I'd say Halmet is a really good zone. I'm not going to use the word league of its own, but I mean in terms of The achievement of the complexity with the yield rates, that's really important to the whole economics of at the Casting business. The information I have is that the 650,000,000 That's still being applied to machining, coating, hole drilling and casting.

Speaker 2

The only information I've got is that I read or heard from an earnings call that they were on the machining side, They were now 63% completed in terms of that investment. As you know, the machining investments are very expensive for machining of turbine parts and they're expecting First, pass off some qualification for those machine parts in May of this year. And so, I guess it's proceeding to plan. At the same time, I've also noted with you the extension of our long term agreements with Pratt. And I've also shared with you conceptually without giving you detail The further technology improvements we are making both for the Block 4 Joint Strike Fighter for the 28 improvements in the requirements for efficiency and thrust in that program.

Speaker 2

And also on the advantage engine, so there's a lot going on and we're intimate with those developments with our customer.

Speaker 3

Great. Thank you.

Speaker 2

Thank you.

Operator

The next This question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 11

Hey, 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?

Speaker 2

We're seeing a nice improvement in our spares business. So if you go back to the reference point that we gave you of 2019, we're about $800,000,000 and the fact is roughly half of it was defense and industrial. And now it's probably closer for 75, maybe 500 missiles that's continued to grow. And commercial aerospace dropped quite dramatically to well below $100,000,000 And this year, we see that Commercial aero segment, which used to be $400,000,000 probably back to at least 75% of its pre COVID pandemic levels and so not that part of the or that half of the spares is not Yet back to where it was, but growing rapidly with 30% 40% compounding and I expect That 75% depending where it's a way to turn it, but 75% could be 80% of the 2019 level by the end of the year of that what was 400,000,000 yen.

Speaker 11

Thanks,

Speaker 2

John. Thank you.

Operator

This concludes our question and answer session and the Halmet Aerospace First Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect. Thank you.

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Earnings Conference Call
Howmet Aerospace Q1 2023
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