Howmet Aerospace Inc.

Good morning, ladies and gentlemen, and welcome to the Helmet Aerospace Third Quarter 2020 results. My name is Thea, and I will be your operator for today. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.

Thank you, Thea. Good morning and welcome to the Helmet Aerospace Third Quarter 2020 results conference call. I'm joined by John Plant. executive chairman and co-chief executive officer, Tolga Ohl, co-chief executive officer, and Ken Giacobi, executive vice president and chief financial officer. After comments by John, Tolga, and Ken, we will have a question and answer session. I would like to remind you that today's discussions 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 in earnings press release and in our most recent SEC filings. In addition, we've included some non-GAAP financial measures 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, PT, and good morning, everyone, and welcome to this morning's call. I plan to give an overview of Hamet's third quarter performance, ask Talcott to speak to segment information, and then Ken will provide further financial detail. Lastly, I will return to talk to the outlook for the fourth quarter and 2020 financial year. Please move to slide number four. The third quarter performance was good. and in line with expectations, including strong cash generation. Revenue in the quarter was 1.1 billion, down 37% year-over-year, and was impacted by commercial aerospace being down 56%, driven by customer inventory corrections. We continue to expect that this is the low point for Hammett revenues, while anticipating that there could be some lingering inventory corrections that could carry over into the fourth quarter and possibly the first half of 2021. Commercial transportation was down year over year, but we had healthy sequential growth of 42%, which favorably impacts the forged wheels and commercial transportation fastening segments. Moreover, we had growth in defense aerospace and in the industrial gas turbine business year over year. The mix of our portfolio has changed with approximately 40% of Q3 revenue being tied to commercial aerospace. Operating income, excluding special items, was $100 million. And this includes the buyout of an unfavorable long-term contract, which costs $8 million. This hopefully should be the last of the cleanup items over the last year. Segment decremental margins, including the contract termination, were 37% year over year. I had indicated on the Q2 call that the third quarter was likely to be more decremented than the second quarter and reflects that we chose not to take out costs for one quarter and risk not having the people assets in place meet what we expect to be an uptick in future demand. For example, early in the third quarter, we completed all of the people reductions in our wheel segment and have since pulled people back from furlough and have begun recruitment in certain countries as we bring production assets back online, both for our forgings and machining lines. Structural cost reductions will continue within each of the aerospace segments to the end of 2020 and in the first quarter in Europe. Third quarter reflects further structural cost takeout of 56 million, making year-to-date cost takeout of 137 million, which is ahead of target. This structural cost takeout is in addition to the flexing of variable costs, which we expect by the end of first quarter 2021 should be at a perfect flex. Further to this, price increases of $14 million were achieved in the third quarter, compared to $9 million in the second quarter. Year-to-date price increases are $28 million. I am pleased that all of the 2020 long-term contract negotiations are now completed and price negotiations are well underway for the 2021 long-term agreements. Now let me move to the balance sheet and cash flow. Adjusted free cash flow in the third quarter was very good at $188 million before further reductions in the accounts receivable securitization program. And cash flow was $143 million after the reduction in the AR program The 45 million of the accounts receivable, sorry, the accounts securitization reduction was effectively repayment of debt. Cash severance payments in the quarter were 14 million. The third quarter cash balance increased to 1.4 billion after the $51 million of common stock share repurchases, which were at an average price of $17.36. Our peak operational cash requirements are approximately $300 million, which results in excess cash in hand of well over $1 billion. Net debt to EBITDA is approximately 3.2 times, and our revolver of $1 billion continues to be undrawn. All plants are running with employee and partner safety being a top priority. We're actively monitoring employee health risk, and all programs meet or exceed local standards. To best serve our customers, we're effectively managing daily adjustments for customer inventory corrections and shutdowns. Regarding cost out, most of the North American permanent personnel reductions have been completed and are ahead of target. Therefore, we will be raising our 2020 permanent cost outlook. We also continue to flex variable spend and labor effectively with revenue. Our strict and disciplined capital expenditure process has been effective, and we will once again be reducing our annual capital expenditure outlook. Lastly, we focused on working capital, but expect it to be use of cash in 2020 as we have reduced our AR securitization program by approximately 95 million year to date. Moreover, we have stranded inventory, which we expect to be a source of cash in 2021. Now let me turn it over to Tolga.

Thank you, Can. Please move to slide six. We summarized on slide six the status of our segments. Aerospace segments continue with revenue adjustments that follow slightly different trends. Let me start with engine products. Although strong defense aerospace and industrial gas turbine growth continued in third quarter, commercial aerospace had expected customer inventory corrections and seasonal shutdowns. We continue to expect that third quarter will be the lowest revenue quarter of 2020, and we are ahead of our permanent cost reduction plans. Additionally, we are flexing variable labor and indirect costs with revenue. Regarding our long-term agreements, 2020 negotiations are now complete, and we are actively working on 2021 contracts. Our philosophy on price has not changed. The engine product segment's biggest challenge continues to be managing the stranded inventory, which had a modest reduction quarter over quarter. Moving to fastening systems. The fastening system segment follows a lagging, reducing revenue trend, mainly due to the timing of commercial aerospace distribution business. The decline in commercial aerospace is partially offset by growth in fasteners' industrial business. Regarding permanent cost reduction, fasteners is the largest number of European locations within our business, which impacts the timing of cost reduction actions, but follows directionally the revenue reduction trend. We are bridging this timing with heavy furloughs and effective variable cost flexing. Maintaining our critical talent and skill sets is our priority during this period. The engineered structure segment has long lead time orders requiring close discussions with our customers to level out their demand for an efficient operating model for the next six to nine months. Permanent cost reduction actions are ahead of plan. Long-term agreement pricing negotiations are complete for 2020, including weeding out unprofitable products. In the forged wheel segment, Third quarter 2020 revenue started recovering from second quarter 2020. As John mentioned, third quarter sequential revenue was up 42 percent, and top U.S. shipping ports are near or above record levels of volume, which drives tracking demand. We expect continued growth in fourth quarter and have called employees back from furloughs and restarted operations. We have compressed permanent costs and have been effective in flexing production to meet customer demand. Lastly, we renewed one of our largest customers' long-term agreements while increasing share with our innovative, lightweight, 39-pound wheel. I will now hand it over to Ken to give more details on the financials.

Thank you, Tolga. Now let's move to slide seven. So before moving into the revenue and segment profitability, I wanted to note that the third quarter revenue and profit was in line with expectations and better than the implied outlook that we provided on the second quarter earnings call. The improved performance will be reflected in the updated outlook for the remainder of the year. Now to the third quarter. Total revenue was down 37% year over year driven by commercial aerospace. which now represents approximately 40% of total revenue in the quarter. Moving to the right-hand side of the slide, commercial aerospace was down 56% year over year. Consistent with our previous outlook, we expect the third quarter to be the lowest revenue quarter of the year as customers adjust inventory levels. Regarding the remaining 60% of the portfolio, I would point out that our second largest market defense aerospace continues to show year-over-year growth and was up 15% in the quarter, driven by strong demand for the joint strike fighter on both new engine builds and engine spares. Our next largest market, commercial transportation, which impacts both the forged wheels and the fastening system segment, was down 31% year-over-year. However, as Tolga has mentioned, we are seeing favorable trends for increased demand and this market improved 42 percent sequentially. Lastly, the industrial and other markets, which is comprised of industrial gas turbines, oil and gas, and general industrial was down 4 percent. I would point out that IGT, which makes up approximately 40 percent of this market, continues to be strong and was up 23 percent. Now let's move to slide eight. On this slide, we are providing historical information for the combined segments with an estimated operational view of corporate. Compared to the prior year, third quarter revenue declined approximately $660 million, with a corresponding segment operating profit decline of $246 million. Despite the 37 percent year-over-year revenue decline, we remained profitable and generated strong adjusted free cash flow in the quarter. Included in the third quarter results are continued price increases of $14 million and continued permanent cost reductions of $56 million for a combined benefit of $70 million in the quarter. On a year-to-date basis, price increases were $28 million and cost reductions were $137 million for a combined benefit of $165 million. One last comment on cost reductions. Of the 137 million realized year-to-date, this includes carryover benefits from our 2019 cost reduction program. This program generated $54 million of benefit year-to-date for 2020 and finished ahead of target. The program is now substantially complete. In the appendix, we have provided additional information including historical financials for each of the segments. Now let's move to slide nine to go into more detail on the segments. Engine products year-over-year revenue was down 43% in the quarter. In this segment, commercial aerospace was down 65% driven by COVID-19, 737 max production declines and customer inventory corrections. Commercial aerospace was somewhat offset by an 18% year-over-year increase in defense aerospace and a 23% increase in IGT. Third quarter results were impacted by an $8 million charge to exit an unprofitable long-term contract. Cost reductions and price increases continued in the segment, and the team continued to flex variable spending to mitigate the impact in the quarter of the significant decline in commercial aerospace revenue. Now let's move to the fastening systems segment on slide 10. Also, as expected, we experienced a steeper revenue decline in FASTERS as the third quarter year-over-year revenue was down 31% driven by commercial aerospace and commercial transportation, both being down over 35%. Continued cost reductions combined with third quarter price increases helped mitigate the decrease in revenue. However, a weaker product mix with less commercial aerospace and the expected delay in European cost reductions unfavorably impacted results. In the near term, we are furloughing employees to offset the delay in European cost reductions. Now let's move to slide 11 to review engineered structures. For the engineered structure segment, third quarter revenue was down 35 percent. Commercial aerospace was down 54 percent, driven by COVID-19. Production declines on both the 787 and 737 MAX, as well as customer inventory corrections. Commercial aerospace was somewhat offset by a 26% year-over-year increase in defense aerospace. Cost reductions and price increases helped mitigate the decrease in revenue, but structures experienced a weaker product mix with less commercial aerospace. Lastly, let's move to slide 12 for forged wheels. In the third quarter, revenue for the forged wheel segment was down 29% year over year, but increased 52% sequentially as expected. Employees are returning from furloughs, and we continue to quickly flex staffing at variable costs to meet changing market demand. Despite revenue being down 29%, the impact of cost reductions resulted in a healthy EBITDA margin for the quarter of 26%. Now let's move to slide 13 for special items. Special items for the quarter was a net benefit of approximately $23 million after tax and included two items. First, a $36 million after tax benefit related to a U.S. tax law change. Second, a $12 million after tax charge related to severance programs. These severance programs are tied to the permanent cost reduction actions. Now let's move to slide 14. We continue to focus on improving our capital structure and liquidity. All debt is unsecured, and our net significant maturity is in 2024. Our cash position remains strong, an increase to $1.4 billion in the quarter, and is expected to increase again in the fourth quarter. As we look into next year, we will use cash on hand to pay down the 2021 outstanding notes in the first quarter of 2021. A couple of additional items of note. First, our $1 billion five-year revolving credit facility remains undrawn. Second, we have reduced our AR securitization program. Prior to the separation earlier this year, we historically sold 350 million worth of AR each quarter. Beginning in the first quarter of this year, the amount of AR sold through the securitization program was decreased each quarter, approximately $20 million decrease in the first quarter a $30 million decrease in the second quarter, and a $45 million increase in the third quarter. The total decrease has been approximately $95 million year-to-date, from $350 million of AR sold at the end of 2019 to approximately $255 million of AR sold at the end of the third quarter. The $95 million reduction in AR sold is effectively a repayment of debt. It unfavorably impacts year-to-date adjusted pre-cash flow. Before turning it back to John to cover the 2020 outlook, let me review some assumptions on slide 15. Depreciation and amortization is expected to improve to approximately $270 million for the year. The annual operational tax rate is also expected to improve and be in the range of 27 to 29 percent for the full year. Regarding CapEx, we are once again reducing our annual CapEx spend outlook to approximately 160 million for the year, which is a historical low at 3 percent of revenue. Lastly, as a result of the common stock share repurchases in the third quarter, we're allowing the expected fourth quarter diluted share count to approximately 437 million shares. In the full year, average diluted share count to approximately 439 million shares. Now, let me turn it back over to John.

Thanks, Ken. Now let me discuss the outlook for the remainder of 2020. We are improving the outlook and narrowing the ranges. The improvement strengthens sales, increases EBITDA, increases EBITDA margins, and lifts the earnings per share compared to the prior outlook. Revenues in the fourth quarter are expected to be 1.23 billion, plus or minus 30 million, and price increases are expected to continue. EBITDA in the fourth quarter is expected to be approximately $255 million plus or minus $15 million. And we are once again increasing our annual permanent cost-out target to $185 million, $150 million. These are savings realized in the year. Our fourth quarter EBITDA margin is now increased to 20% to 21% from the prior midpoint of 20%. I think this may be the most significant item of our call this morning beyond the good cash generation. Annual earnings per share improves to a range of 68 cents to 76 cents. Cash generation in the quarters from separation Q2 to Q4 is strong and unchanged at 450 million plus or minus 50 million, despite the third quarter incremental reduction in AR securitization of 45 million. Year-end cash is expected to increase once again to approximately $1.5 billion. The year-end cash balance includes $95 million of annual reduction in AR securitization and $51 million of common stock repurchases at the average price of $17.36. Approximately $300 million of share purchase authority remains under prior announced board authorizations. Fourth quarter net debt of approximately 3.6 billion, which is an improvement post-separation, which was started out at 3.8 billion. As we move into 2021, we plan to use cash on hand to repay the outstanding 2021 bond maturities. During these uncertain times, we focused on the areas which we control, including price, variable cost flexing, structural cost reductions, capex reductions, and free cash flow, while being prudent with our cash to opportunistically repay down debt and repurchase shares. Moreover, our diverse portfolio with less than 50% of revenue tied to commercial aerospace is delivering strong results while we wait for commercial aerospace to recover. Let's move to slide 17 to summarize. Our third quarter was delivered in line or better than the implied outlook. Cost and price leverage has been deployed. We have healthy and improving liquidity with positive cash flows in this COVID environment. The fourth quarter outlook improved regarding revenues, margins, and profitability with earnings per share guidance raised. Now let me turn it over to take your questions.

Thank you. We will now begin the question and answer session. As a reminder, please press star 1 to be placed in the Q&A queue. Press the pound sign if you would like to be removed from the queue. We request that you limit yourself to one question only. And once again, ladies and gentlemen, that's star 1 for any questions. We'll pause for just a moment. The first question will come from Seth Seisman with JP Morgan. Please go ahead.

Thanks very much, and good morning. John, I'll have to make my one question about this news we saw recently about Pratt & Whitney planning to start building airfoils in North Carolina and basically how you view that, what it might reflect about customer behavior and what implications it might have for HOMED and for your own strategy.

First of all, we've not, uh, discuss this with Brad, but, uh, when you reflect on the, uh, the situation in the industry, uh, we work with, uh, companies already that have their own casting capabilities. So for example, GE, Rolls Royce, Safran, all have casting boundaries. And so that in itself is, uh, is, is nothing new to us. And, uh, And when we look at Pratt & Whitney, in fact, they had their own casting capability until they exited in 2016. So we have a pattern and a history of working with our customers in this environment. So I would say it's nothing new for us. We do feel confident in our position as innovation and technology leader, especially in the hot section of the engine. And indeed, we produce some very specialized blades, which are quite extraordinary in their capabilities for the JSF, which is a practically engine. If I comment a little bit further so that you can understand some of the I'll say depths of our capabilities. We do go to the extent of building our own furnaces. We have proprietary core preparation, waxing and casting processes and measuring and controlling the temperature gradient starting off with an average of 300 degrees Fahrenheit higher than the casting temperatures or maximum casting temperatures of our competitors. One of the things we do is by keeping all of that production equipment in-house and really not really speaking about how and why we do it in any technical detail enables us to keep, I think, the technology edge and in particular the scale that we have with it and the know-how capabilities. And I think, as you know, we've been in this, uh, in this business now between the 50 to 60 years. So, um, I think, you know, we have all three levels of casting capabilities and all of the sub processes, um, to replicate that, which had met house would probably take in the region of, uh, towards $10 billion of capital plus or minus. So, you know, I, I always absolutely respect everything that our customers do. and probably more importantly we have a competitive environment already with other competitors and currently we are market leader by probably one and a half times but I think it comes down to those very unique capabilities that we have and the experience of working very collaboratively with our customers to do the most extraordinary applications where they already have in-house capabilities and so this would mark Pratt & Whitney returning to having in-house capability alongside GE Aviation, Rolls-Royce, and Safran. So hopefully that covers it up for you, Sal.

Very good. Thanks very much.

Thank you.

The next question will come from Robert Spengarn with Credit Suisse. Please go ahead.

Good morning. John, two things. First, a clarification on what you just said, and then a question. Just specifically on Pratt, how protected is that position with contracts and LTAs, if you think about your overall revenue there? And then just given your visibility on Commercial Arrow, which I don't know if it's any better than anybody else's, but you seem to have the confidence, one, to guide up today to buy back stock. Can you talk about trends from here on that 56% decline in Q3 and commercial era revenue, how you're thinking about that percentage number as we go forward the next few quarters? Thank you.

Okay. Um, I don't think there's much to add to the, um, conversation. We do have, uh, a long-term agreement covering many years in place. So, uh, I think that's the good in all of this. So unless there's anything else, I'll move on to how we see the balance of year and into 2021 for us. We did call out the third quarter in our previous earnings call in early August that we felt that it would be the low. We felt that it would be the most severely impacted by inventory reductions at our customers. And as you know, we operate both the first tier place directly with Boeing and Airbus and also a second tier place in terms of some of the engine parts that we supply to the engine manufacturers. And so you get an increased inventory effect as you go through another tier in the supply chain. And that's what we felt back in August and tried to indicate before also calling out back then that we felt as though the majority of the severity of the image reduction we would try to accommodate and work with our customers to accommodate it sooner rather than later rather than have it drag out in a long tail. Now we are clear that we're not completely through this. It's going to continue and will have an impact into the fourth quarter and in some areas into the early part of 2021. And that's taking no account of the planned increase in Airbus narrow-body sales. We're not taking that into account at this point. But we do feel that our revenues will improve in the fourth quarter. And that gives us the platform that we always sought uh to uh to really get 2021 framed as best as we could and maybe if i could amplify that point we we set out back in the uh in the depths of the fog of war back in uh in the second quarter where we didn't know very much that uh our target um was to move quickly and uh to address the problems that we saw coming from the commercial aerospace market and target that we would ambitiously try to achieve the exit rate EBITDA margin in that 20% area. We indicated that and clearly feel confident enough now that we increased the midpoint of that fourth quarter guidance a little bit. and feel solid around it and that was really to try to you know give the best view we could as the exit rate which obviously helps when we view uh 2021 profitability um albeit today we're not guiding at all either for revenues or margins for 2021 that really is a fourth quarter call at the at the end of january early february so we are confident that the third quarter is our low. We do see revenues in the fourth quarter increasing, and increasing not just in commercial transportation, which is self-evident, but also in commercial aerospace for us. Part of it is just the natural rebound from the inventory takeout in Q4. I mean, where we go from here and there's so many things that we need to think about for 2021 and you look out a year from now and clearly you'll know a lot more three months from now, whether it's this morning's vaccine news or whether it's our narrow bodies are strong as we see. Has Max been completely recertified around the world? What's the build rate and build rate going into 2022? And it was the inventory bill to accommodate all of that. So there are so many factors, but I say maybe I've spoken too long now, but it really is confidence that third quarters are low. And we are going to see that defense strength continue and IGT strength into the fourth quarter. It's rebounding commercial aerospace sales and commercial transportation currently with the wind behind its back. in terms of volumes from our customers for commercial trucking and trade manufacturer.

Do you see commercial arrow trending up sequentially quarter by quarter from here, at least from the down 56 in Q3?

I'm not going to go beyond the fourth quarter at this point. I don't feel as though I know enough to really, you know, give clarity publicly about the quarter sequential production through next year. I think we need a little bit more knowledge. I'm hoping that the production of Boeing begins to increase next year for the narrow body, not expecting anything from wide body. And we await confirmation of the Airbus situation in terms of solidification of that in production schedules, which Airbus did announce their increase of almost 20% in narrow-body production halfway through next year. So I feel good that we see an improvement in the fourth quarter. Mapping out 2021 and what happens in each quarter is just a bridge too far for us at this point.

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

Thanks. Good morning, everyone. Hi, David. John or Ken, I wanted to go back on your comments on working capital. I think prior you've been calling for working capital to be a tailwind this year, but it sounded like now you're talking about maybe it being a headwind for the full year, but then some inventory release in 21. So if you could clarify that, and then I guess any sort of early indication or early look in terms of how you're thinking about, um, uh, pension next year. Thanks. Okay.

So maybe, um, if I start a top level to say why we see working capital, we called it out differently to be used this year. and now I'm going to hand across to Tolga to talk a little bit about trapped inventory, what we have this year and into next year. So let's do it in that sequence. I cover the two points, which is why use this year and then the pension side and pass across to Tolga. So the use essentially is that AR securitization paid out. It goes through, it affects working capital and it goes through that line on the cash flow statements. If you exempted the AR 95 million, then there would be a working capital inflow for the year. So it's a function of the accounting around securitization. One thing, David, that I've always felt a little bit uncomfortable about is We had this off-balance sheet financing, which was a carryover from Alcoa, the 2016 separation, a carryover from the Arconic separation, carried that securitization into, because it's always been as we make it, and wanted to gradually work that down. um which is effectively just uh you know working down about net debt of the company and feel that it's a good thing to do and it also improves the the interest carrying cost burden of the company so that's the the principal reason around it and if you were to do that you'll see uh ar improving our um AP under good control, and our inventory is being reduced. So the normal definition of working capital would be in good shape, and it's just a function of this AR securitization paid out, which goes through the working capital line. I'll comment on pension and pass across to Tolga. So pension, at the moment, we do see that... The thought basically is that 2021 will be lower than 2020 in terms of pension contributions, and we'll give you a more exact number on that at the time we announce our fourth quarter results, say, early Feb. Tom, if I could ask you to comment on trapped inventory, both through our engine and fastener segments and also the move into 2021. Sure, John.

It's important to highlight that we are reducing our inventory and we are supporting the cash generation. However, if you look at the scale of the reductions and the stranded inventory in hand, the days on hand translation is naturally under pressure. So the two segments that have the highest pressure on the stranded inventory are engines and structures businesses. So I mentioned that we are working very closely with our customers to level load the demand and the production levels, especially on the structure side, especially on the long lead time orders. And therefore, we projected this stranded inventory will continue into 2021, and we should be balancing our days on hand within 2021. We are managing also the stranded inventory on the engine side, and we have some more adjustments that we are working with our customers, but we expect the impact to be much smaller. And we got minimal impacts for the segments like fasteners on the stranded inventory side that we are actively managing today.

Great. Thank you very much. Thank you.

The next question is from Gautam Khanna with Calwin. Please go ahead.

Gautam, if you wouldn't mind opining on kind of the pricing opportunity in 21, 22, and 23. At the Investor Day, you gave kind of a longer-term outlook, and I wonder how that's changed, you know, maybe relative to 2020's actual price realization, if you can give us any flavor for that. That'd be helpful. Thank you.

Okay. Thank you. Well, first of all, let me comment on 2020. It's now complete. And you saw the third quarter as a comparative to the second quarter and the solidification and completion of those agreements for 2020. So all done. Regarding 2021, The several LTAs involved, as always. As you know, they're different customers, different years, different products. They're all separate. The dialogue, as you know, covers price, share, share of new technology programs, and also terms and conditions. I'm pleased with actually the progress so far on 2021s. There are a couple of major ones within 2021. Basically, I'm going to say to you that everything that we are seeing is going to be consistent with what I've said before, that 2021 will be on the same volume basis, a bigger year for us than 2020. This, of course, plays well as we go into 2022 and 2023 when hopefully commercial aerospace volumes begin to show increases and hopefully significant increases. And so those increases, price increases do get applied to the higher volume sales. If I look at the current status for 2021, we're currently about 60% complete. uh so we're probably a little bit earlier than normal in in engaging this item through uh i expect they'll continue to fill in over the next uh few months um but the important thing is 60 of all 2021 is now now complete and signed uh in the 2023 2022 um I don't believe that will be as big a year as 2021, but there's not much color I'm able to give you yet on 22 and 23 apart from we see ourselves in the positive zone.

Thank you very much.

Thank you. The next question will come from Carter Copeland with Mellius Research. Please go ahead.

Hey, good morning, gentlemen. John, I wondered if you could maybe just clarify the share comment you made earlier, the one and a half times. Does that imply a 60-40 split? And if that's not right, if you could correct that for me. And then I just wondered if you might kind of give us a sense of hot section versus cold section. You went to great length talking about the capabilities on the hot section airfoils, and I just wondered if you could, around that share disclosure, give us a sense where in the engine that might be higher or lower than the aggregate. Thank you.

Okay. When we exited 2019, our share was, the airfoil market was around about 49 percent plus or minus uh half percent or percent uh our next largest competitor was that we went around 32 33 so just about 50 percent greater than uh next largest competitors on an rms basis that's a market share basis in one and a half times um if you break it down um then our market shares would be higher at the first few blades in the turbine. So we'd be at the hot or super hot end of the turbine where our market shares would be, let's say, for the purpose of this call, in excess of 60% in that area and more. And depending upon the application, it could be as much as 100%. So that gives you some idea of the benefits market share, relative market share and topology within the engine.

Great. Thank you for the color.

Thank you. The next question is from George Shapiro with Shapiro Research. Please go ahead.

I was wondering in your raise for the year, was that mostly due to how much wheels has recovered and aerospace was comparable to what you saw last quarter? or if you could provide some color on that. And then also the incremental margin on a sequential basis in wheels was like 49%. I mean, what's kind of a sustainable incremental margin for that business? Thanks very much. Okay.

First of all, clearly wheels is a benefit to us as we move Q3 into Q4. That is not... That is not the sole reason for the improvement in the EBITDA margin guide. We're also seeing a benefit in, say, our commercial aerospace business. So it's in all aspects of the business. There's nothing which is currently lagging in our plans or of any of the implementation of the cost flexing nor structural cost takeout. So it's across the board, George. But clearly within that, when I look out, then the strength of the wheels business is coming through. And I'm hopeful that our EBITDA, as we start up in 2021, will be getting closer, if not as good, as the 2019 margin rate, even though we will not see revenues in 2021 as good as 2019. In the last earnings call, I did state that we saw revenues in that business getting back to the 2019 levels in 2022. But I think we are looking forward to margins getting back to their year earlier than that, given the structural cost takeouts and cost flexing, and basically improving the cost base that we have.

Okay, thank you very much. Thank you.

The next question will come from Josh Sullivan with Benchmark Company. Please go ahead.

Hey, good morning, John and Ken. Just a question on fasteners. You mentioned some weeding out of unprofitable products. How much volume did that include? Have you outright exited any aerospace products in particular? Just some color there. Great.

First of all, let me back up and give Tolga a bit of thinking time on the fastener side. But the exit of what we talked about, the unprofitable contract, we haven't called that the segment, but if you're interested, it wasn't Fasteners. We're in, I think, largely good shape. There's always things you can do to try to look at certain things which are low performance, but basically this was the exit of something which was loss-making and needed to be dealt with. We didn't want to carry that problem going forward. But maybe as a broader comment on fasteners, Tolga, if you'd like to say where we see basically apart from one or two areas, we're in fairly good shape.

Yeah, I just would like to clarify that my comment about the bidding out was on the structure side. If your contract is renegotiating our pricing. And in general, it has been very positive for structures, and certain part numbers, they were historically not good. So we chose the option not to renew those parts. It's in the big picture not significant for us and beneficial for the business. And specifically talking about the fasteners, our contract negotiations are going very positive, and the renewals have been very good. And we do not really have any specific action to specifically look into big numbers of contracts that are giving us margin issues. But again, overall, it has been a very positive contract renewal for all of our segments, including structures, fasteners, and engines.

Does that cover that, Josh? Yes, thank you. Thank you.

And once again, ladies and gentlemen, if you would like to ask a question, please press star 1. Again, that's star 1 for any questions over the phone line. We'll pause for just a moment. And the next question will come from Per Tosh Misra with Berenberg. Please go ahead.

Thank you. And thanks, John and Ken, for all the color. I actually had a question for Tolga, if I may. Tolga, you've been with the firm now a bit longer. So just curious, any initial impression as to what you have seen and what are some of the opportunities for the firm that you see ahead? Anything that surprised you? Obviously, very unusual time to start a new role, but would appreciate any thoughts that you could share with us.

Sure. I think I would like to start with the comment that Continuation of leadership at Hamid Aerospace is key for our success. So I have been immersed and involved deeply in our businesses since my announcement at the Investor Day, just with the separation, of course, and then the COVID-19 crisis. I have been leading the cost containment, cash preservation activities, driving key supplier and customer negotiations. And most importantly, I would like to emphasize that I have been strengthening the fundamentals of the operating playbook that John has introduced to Ahmed last year, and John and I have been working on this operating playbook for a long time. And we have a plan with John that we're rolling out step by step, and we are definitely seeing now the results and the benefits of having our disciplined training playbook in place that we continue rolling this year and will continue also as our regular process going into next year as well. Does that answer the question?

Yeah, I appreciate that. Thanks.

Thank you very much. Thanks very much. Thanks very much.

The next question is a follow-up question from George Shapiro with Shapiro Research. Please go ahead.

Yeah, John, I just wanted to pursue a little bit more of my question. So is aerospace better in the fourth quarter than you thought it was going to be in the third quarter? And if so, in what way? Thanks.

I suspect the benefit, I mean, slightly better volumes than we'd anticipated. You saw the revenue increase, and it's not just the wheel, so it's a little bit better there, but that could also be down to conservative assumptions that we tend to roll with. I think the cost takeout that you've seen both on the structural side of our cost takeout, you've seen that improve and be better. And then probably even more important because it's a bigger number than the structural cost takeout is our variable cost takeout which we've never called out the absolute dollars because I think the relevance of that is the percentage and are you getting close to what we call the perfect flex and we see ourselves flexing that cost base a little bit better across all the areas but in particular Where the volume problem has been, which is in the commercial aerospace business, that flexing of the cost base has been at a higher order than we'd, again, plan for. Again, partly because we tend to plan conservatively and then see if we can exceed it. So that's where it's at. I'm not saying that there's any increase in aircraft build or anything like that. That's not the case. But it could be in the fourth quarter, more of the assumptions that we made. But at this point, we feel confident about the revenue lift that we've talked about and the cost takeout. and therefore the improvement in the EBITDA margins that we've called out, because for us that's all about the platform we enter 2021 with.

Thanks very much for the follow-up. Thank you.

The next question is a follow-up from Gautam Khanna with Calwin. Please go ahead.

Thanks for the additional question. John, I was wondering if you could – maybe frame for us or level set us on why the company is able to get pricing in what looks like a particularly stressed time for your customers and you know is it a is it sort of a rolling one-time mark to market on some of the contracts that helmet inherited from the legacy companies maybe that were off commercial terms relative to your competitors and therefore you know you just kind of reset to market maybe fx energy pass-throughs on metal things like that weren't weren't you know uh you were taking too much risk on the legacy contracts relative to your competitors or is it in fact um the customers wanting recognizing the value you guys provide and and just you know you're seeing price inflation in the end market because again i'm just trying to square with what you guys said uh before your time as CEO, you know, Arconic used to talk about price deflation as a reality in aerospace and used to have floating bar charts that showed it on your slides. And now we're talking about the opposite trend over an extended period in a downturn. So just if you could help square why that is still true. Thank you.

Yeah, I mean, I'm not able to comment on predecessor management stance towards it. I originate from an industry which is probably more used to price deflation and the attempted commoditization of the input products for vehicle assembly. And But even there, when I always looked at it very closely, getting immersed in the technical capabilities and performance differentiation of the products. So even there, for example, I don't believe a steering wheel on a vehicle is, all steering wheels are equal. They're very different in terms of capabilities, cosmetics, and quality delivered. So it really is trying to really understand the performance differentiation of the product. I'd like to believe that Hammett provides that not only in product quality and technology, but also in delivery performance and consistency with our customers. are always trying to work collaboratively with our customers to maximize the value for both of us. And so, inherently, I've not thought of the aerospace parts market in quite the same way as the vehicle parts market. I don't believe inherently that it is, you know, consistently priced deflationary or anything like that. You know, I think there is... capabilities of most of the parts that are produced in aerospace are technological wonders in their own right and achieve a level of safety and performance for the traveling public which is quite extraordinary and so my hats off to everybody in the industry the second tier level the first tier level and obviously the plane manufacturers themselves But within that, I don't believe this is just any correction of the past. It's a correction. We have cleaned out one or two contracts which were, let's say, inappropriately taken. That's done. I tried to indicate that on an earlier comment on the call. I think we're now beyond that in dealing with such things. And that's why I call that the $8 million in the quarter, in the normal operating. We put it in the normal operating results, not as a special item. And then I just think it's the consistent application of those technical characteristics. So we're never resting. If you look at some of the developments that we're making within our portfolio in terms of parts for radar or parts for engines. We're trying to advance them all the time. And I did try to call out the descriptors of those things which we truly try to protect and even to the extent of not buying a lot of the machine tools outside such that that knowledge can't leak out into the wider marketplace. And so when you go to that level of effort of making your own equipment, because it gives you that, I'll say, capabilities, which we think is extraordinary. I think that does give you the ability to look at price and also the value produced at the scale with which we do it at. And I often think people underestimate scale within such things about the economics of production and also the methodology which you can create the scale. So it's a long way of saying I think the attitudinal stance is different. At the same time, I do recognize that there are parts that we are able to improve the economics on. There are parts that we do concede price to our customers. So it's always a range and a good negotiation. It's always important that we end in a place of equanimity where everybody's feeling good. and the shares are settled and the prices are settled, and then we move on for several years. And in the round that we've just been implementing, we're out a further five years on the majority of our parts going forward. So that's, again, a good condition to be in. I've not commented about the... adjustment for any percentage increases, I think that's not appropriate. Neither are content on share, but apart from we're in the right zone that we thought we'd be in and I think everybody from ourselves and our customers is in a good zone. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for the Q&A session. Thank you for participating in today's conference call. You may all disconnect.