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spk01: Good morning, ladies and gentlemen, and welcome to the HowMed Aerospace Fourth Quarter and Full Year 2021 Results Conference Call. My name is Natalia, 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.
spk10: Thank you, Natalia. Good morning and welcome to the HowMed Aerospace fourth quarter and full year 2021 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer, and Ken Giacobi, 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 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.
spk16: Thanks, PT, and good morning, everyone. Let's move to slide four. First, let me frame the quarter for you. The environment was challenging with the new variant of Omicron emerging today after Thanksgiving. Fortunately, once we take time to understanding the changing nature of the pandemic, we find that the virus appears to be weakening, albeit it's quite transmissible. Boeing also continued to test us with reduced build or zero build of the 787 wide-body aircraft as recertification is once again delayed and unclear. Despite these impacts, Hammett performed well with revenues at $1.285 billion, improving well above last year and in line with Q3. Adjusted EBITDA improved both over last year and sequentially, and was $296 million, with an EBITDA margin at 23%. We were pleased with the margin exit rate for both the Q4 and the second half of 2021. The sales picture is one of strength in commercial aerospace narrow-body production, healthy defense and IGT sales, combined with constrained sales of a high-performance wheel segment due to the supply chain constraints at our customers in the commercial truck manufacturing business. Clearly, both Delta and Omicron variants of the virus impacted production operations, but nevertheless, we were able to bring through a good level of efficiency. Turning to the balance sheet now and the cash flow of the company, adjusted free cash flow was a record at $517 million for the year and well ahead of both last year and guidance with a conversion rate of 117% of net income. We also made incremental voluntary pension contributions in the quarter, and if we excluded these contributions, adjusted free cash flow would have been 123% conversion of net income. For your information, the free cash flow conversion has continued in the last three years at a level well in excess of our long-term guide of 90%. The year-end cash balance was $722 million and reflects both the good cash flow conversion and the fact that in the fourth quarter, Hammett repurchased $205 million of shares at an average price of $30.32. The fourth quarter average diluted share count reduced to $431 million, and the year-end diluted shares stood at $428 million. The repurchase of shares continued in early 2022, with a further 3 million shares purchased for $100 million during the month of January. As of the end of January, the diluted share count has been reduced to approximately 425 million shares. And finally, the 2021 tax rate was reduced by the work we've done, and the effect was one cent on earnings in the fourth quarter. We look forward to 2022 and I'll provide commentary when we get to the outlook section of our presentation. Meanwhile, I'll hand the call over to Ken Giacobe.
spk05: Thank you, John. Let's please move to slide five. Fourth quarter total revenue was up 4% year over year and flat sequentially. Commercial aerospace increased to 44% of total revenue. which is an improvement sequentially, but far short of the pre-COVID levels of 60%. Commercial aerospace recovery continued in the fourth quarter with commercial aerospace revenue up 13% year over year and 4% sequentially driven by the engine product segment and the narrow body recovery. Defense aerospace was down 22% year over year and 4% sequentially driven by customer inventory corrections and production declines for the joint strike fighter. Commercial transportation, which impacts both the forged wheels and the fastening system segment, was up 20% year over year, driven by higher aluminum prices. However, the market was down 1% sequentially as the market continues to be impacted by supply chain constraints at our customers, which is limiting commercial truck production. Finally, The industrial and other markets, which is composed of IGT, oil and gas, and general industrial, was down 2% year-over-year and 3% sequentially. Now let's move to slide six, which sums up the year nicely. Let's start with the P&L. For the full year, price increases were up year-over-year and in line with expectations, as they are primarily tied to long-term agreements. Structural cost reductions were approximately 130 million, which exceeded our target of 100 million. Adjusted EBITDA margin for the year was 22.8%, which was an increase of 220 basis points year over year, despite 285 million of lower revenue. The fourth quarter exit rate was 23%. Adjusted earnings per share was $1.01, or 31% higher than 2020. Moving to the balance sheet, our cash balance was healthy at 722 million. Adjusted free cash flow was a record 517 million, which was well above the guidance. Free cash flow conversion was 117% of net income, and if we exclude voluntary pension contributions of 28 million, Adjusted free cash flow conversion was 123% of net income. Net pension and OPEB liabilities were reduced by approximately $275 million, while pension and OPEB expense, as well as the associated cash contributions, were each reduced by approximately 54%. Net debt to EBITDA improved to 3.1 times. Regarding capital allocation, we have taken a balanced approach. Capital investment projects for forged wheels in Hungary and Mexico are now essentially complete. Concurrently, we have been investing in automation projects in the engines and fastener segments. During the year, we paid down gross debt of approximately $845 million with cash on hand and reduced annualized interest costs by approximately $70 million. We also reinstated the quarterly dividend of 2 cents per share of common stock in Q3 of 2021. Lastly, we repurchased approximately 13.4 million shares of common stock for $430 million, with an average acquisition price of $32.07 per share. To sum it up, during the year, we enhanced our profitability, strengthened the balance sheet, and were balanced in our capital allocation. Let's move to slide seven to briefly cover the segment results. Engine products year over year revenue was 9% higher in the fourth quarter. Commercial aerospace was 39% higher driven by the narrow body recovery. Defense aerospace was down 26% year over year driven by customer inventory corrections and production declines for the joint strike fighter. Operating profit increased 10% year over year and operating margin improved 20 basis points, despite adding approximately 150 employees in the fourth quarter, which now brings our total employees added since Q1 to approximately 950 employees. Now let's move to slide eight. As expected, fastening systems year-over-year revenue was 3% lower in the fourth quarter. Commercial aerospace was 15% lower as we continued to experience production declines for the Boeing 787. Commercial transportation was up approximately 46%. Year-over-year, Fastening Systems was able to maintain segment operating profit on $7 million of lower revenue. As a result, operating margin improved 50 basis points. Now let's move to slide 9. Engineered structures year-over-year revenue was 12% lower in the fourth quarter. Commercial aerospace was flat as the narrow body recovery was offset by production declines for the Boeing 787. The defense aerospace market was down 26% year over year and flat sequentially. Year over year, engine structures was able to generate $3 million more in segment operating profit on $27 million of lower revenue, primarily due to permanent cost reductions in a favorable $2.5 million non-recurring adjustment related to a customer contract negotiation. As a result, operating margin improved 260 basis points. Finally, let's move to slide 10. Forged wheels year-over-year revenue was 15% higher in the fourth quarter. Approximately $28 million of the $31 million revenue increase was due to higher aluminum price pass-through. Pass-through of higher aluminum prices did not impact operating profit dollars, but unfavorably impacted operating profit margin by approximately 350 basis points. On a sequential basis, revenue and operating profit were essentially flat. Commercial transportation demand remained strong, but volumes continued to be impacted by customer supply chain issues. Aluminum prices were flat sequentially, resulting in minimal impact to sequential operating profit margin. One final comment on the segments. The incremental profit flow through for the segments in Q4 was 30% year-over-year and can be found in the appendix. The 30% includes a 55% increase in aluminum prices year-over-year, which adversely impacted the incremental profit flow through. If we adjust for aluminum prices, incrementals were above 70%. Now let's move to slide 11. We continue to focus on improving our capital structure and liquidity. In 2021, we took actions to lower our annualized interest costs by approximately $70 million through a combination of paying down gross debt by approximately $845 million with cash on hand, and also refinancing higher cost debt with lower cost debt. Gross debt remains at $4.2 billion. Net debt to EBITDA improved to 3.1 times, despite past use for debt refinancing, share buybacks, and dividends. All debt is unsecured, and the next maturity is in October of 2024. Finally, our $1 billion revolving credit facility remains undrawn. Before turning it back to John to discuss the guidance, I'd like to point out a few items that you can find in the appendix. First, there's a slide in the appendix that covers special items in the quarter. Special items for the fourth quarter were a net charge of approximately $53 million, mainly driven by costs associated with non-cash pension plan settlement charges. There's a slide in the appendix that summarizes the share repurchases that occurred in 2021, as well as the share repurchases in January of 2022. Remaining common stock share repurchase authority sits at $1.25 billion as of February 1st, 2022. Finally, in the reconciliation of adjusted free cash flow, you'll notice that cash receipts from sold receivables is $0 in the fourth quarter. As a result of restructuring our accounts receivable securitization program in Q3 2021, cash receipts from sold receivables will be zero going forward, and the entire impact from the sale of accounts receivables will be in cash from operations. Therefore, starting with Q4 of 2021 and beyond, the definition of pre-cash flow will be simplified and be cash from operations less capex. Please note that the net cash funding from the sale of accounts receivable has been $250 million since Q4 of 2020, which means that the sale of accounts receivables has neither been a source of cash or use of cash in 2021. So with that, let me now turn it back over to John.
spk16: Thanks, Ken. Let's move to slide 12 for guidance for 2022. The leading indicators for air travel continue to show improvement, notably for domestic travel. We continue to hold the view that we'll see an acceleration in revenue growth during the course of the year, following a fairly flat Q1 compared to Q4. The engine products business has led the recovery to date, and we now expect the engineered structures business will see lower revenue in the first half of 2022 due to the continued delays with the 787. Fastening systems is expected to show growth in the first half of 2022, starting in the first quarter. In terms of specific numbers, we expect the following. The guidance for Q1 revenue at $1.3 billion, plus or minus $20 million. EBITDA at $295 million, plus or minus $9 million. EBITDA margin of 22.7%, plus or minus 30 basis points. And EPS of $0.29, plus or minus a penny. And for the year, we expect revenue to be 5.64 billion, plus or minus 80 million. EBITDA at 1.3 billion, plus or minus 35 million. EBITDA margin at 23%, plus 30 basis points and minus 20 basis points. EPS to increase to $1.37, plus or minus 6 cents. And cash flow to be 625 million, plus or minus 50 million. Moving to the right-hand side of the slide, we expect the following. Revenue to be up approximately 13% versus 2021, driven by commercial aerospace, commercial transportation, and the IGT market. The 2022 revenue guidance includes more than 125 million of material pass-through, impacting margins by at least 50 basis points. And for clarity, the price increases are excluded from the $125 million of pass-through. Adjusting for that 125 plus million of material pass-through, then the incremental EBITDA margins fall nicely in the 30 to 35% range. Adjusted EBITDA is expected to be up 15% versus last year. Adjusted earnings per share to be up approximately 36% versus 2021. Pension and OPEB contributions of approximately $60 million in the year. CapEx should be in the range of $220 to $250 million, and that continues to be less than depreciation and amortization, resulting in a net source of cash. Adjusted free cash flow compared to net income is approximately 110%. Incrementals adjusting for the metal are between 30% and 35%, as previously stated. So let's move to slide 13 for the summary of 2021. In conclusion, Hammett delivered really well in 2021. And I note the challenges that we overcame. EBITDA and EBITDA margin increased with a Q4 exit rate of 23%. Operational productivity was healthy and structural costs reduced by $130 million. Pricing was improved during the course of the year. and well above inflation recovery. Free cash flow was excellent and allowed for further share buybacks of $430 million, or $13 million shares, while also improving the net leverage of the company and reducing gross debts by $845 million, and furthermore, reducing interest carrying costs of $70 million, thereby improving future free cash flow yield of the company. Furthermore, pension and OPEB gross liabilities were reduced by $440 million, which is another huge step in the improvement in the balance sheet of the company, and net liabilities by $275 million. Lastly, work performed on the tax rate showed improvement, with the rate reduced by 250 basis points to 25%. Thank you, and now let's take your questions.
spk01: Thank you. We will now begin the question and answer session. We request that you limit yourself to one question. To ask a question, please press star one on your telephone keypad. Again, that's star one. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Robert Spengarn with Milius Research.
spk15: Hi, good morning. John, I wanted to ask you about what we've been hearing on castings and forgings potentially being a bottleneck with capacity ramp from some of the OEMs and other folks in the industry. Could you talk about that?
spk16: Yeah, I mean, I'll probably just give you what I think are three levels of response to your question. I'll probably just cover the first two. I think it's most simplest. no CEOs that have commented publicly have contacted me to register any concerns whatsoever. I could leave it at that. But I think I'd like to go a little bit further and say I'm really glad it's recognized just how hard and how exacting the production of such products are. And it's a good job that There is inventory in the pipeline at many levels, starting with completed engines at Boeing and Airbus, and also in the pipeline between us and the engine manufacturers. I think it would be also great to recognize the lead times with scheduled commitments to back up the skylines and aircraft production in full, assuming these volumes are required. And then the third level of commentary would be, I'll say, commenting on the whole supply chain labor availability, skills, response times, et cetera. But for right now, I have no recognition of this as a significant issue in any dimension.
spk15: I think that's a fair point that there's so much uncertainty in the production rates. The other thing I'd ask on this is if the competition might not be able to keep up, does this present an opportunity for you?
spk16: Obviously, it always depends upon the parts that are in question. My expectation is that the spot business will pick up in 2022, and that will be to our benefit. And hopefully we can respond in the same way that we were able to respond in 2019 and pick up that additional business should it occur. And I think that's probably as far as I can go at this point, Rob.
spk15: Fair enough. Thank you, John.
spk16: Thank you.
spk01: Your next question is from the line of Gautam Khanna with Cowen.
spk08: Hey, thanks, guys. I was wondering if you could just spell out, quantify the change in guidance from the Q3 earnings call. You know, obviously the sale's taken down, but, you know, what are you now embedding in terms of 787 rate, 777 rate, just some of the moving parts there? relative to what you previously provided?
spk16: Yeah, so if I exclude metals from that revenue line, then the volume increases around 11%, so close to that 12 to 15 that I previously called. And the reason for it being the lower end of that is down to the 787 and the lack of visibility that we have regarding that aircraft. And we note that our customer hasn't provided any solid-view skyline, and therefore, we have to make our own assumption of volume of production. In addition, I'd say there's a bit of an inventory overhang on F-35, given that while we supplied to schedule during 2021, I note that Lockheed did not build the full quantity of aircraft. So while the aircraft production is going to increase in 2022 and increase in 2023, then that's great, but we're going to burn off a bit of an overhang in the early part of 2022, and then we'll see further volume improvements as we go into 2023. when that overhang hopefully will no longer be there and it will all be vaporized in the first part of this year. So those would be the couple of comments regarding the revenues for the 22 and the early part of the year. Does that cover it or do you need a bit more?
spk08: No, that's very helpful. And just to follow up on Rob's earlier question on pinch points, have you seen any
spk16: pinch points upstream with respect to nickel billet or what have you given the PCP strike and Carpenter having the the outage the unexpected outage at Reading I don't know how do you feel about yeah so far nothing on nickel I recognize the Carpenter matter and and I think that's going to be a little bit of a pinch point in in the first half of this year So nothing dramatic that we see at this point, but definitely having some impact.
spk17: Thank you.
spk01: Your next question is from the line of David Strauss with Barclays.
spk14: Thanks. Good morning. Hey, David. Hey, John. So I guess within that 11% revenue growth, John, that you're talking about, can you just give us an idea by end market, you know, what you're assuming, I guess, you know, aero defense, commercial transportation being the big ones, maybe industrial if you want to throw it in there. And then on, on, on Max, can you give us an idea of what you produced in 2021 and what you're assuming for production in 22? Yeah. So by end markets,
spk16: Commercial aero is going to be up in 22, led by Narrowbody, but not a lot happening on Widebody with the 787 being the complete wildcard in all of this. IGT should continue to be healthy and I believe to be up in the year. And commercial transportation for our wheels business will be up, and I think that the supply chain constraints ease that we're going to see a fairly healthy second half of the year in that business and a really great 2023. The weak point at the moment would be defense for us. I think it's going to be flat to slightly down the year with most of that playing out in the first half of 22. and oil and gas too difficult to call at this point we're hopeful for an improvement but haven't planned on it so that covers out the the end markets um 737 um i haven't got the exact numbers and maybe while i'm chatting here ken can get them but essentially um while we we note the the production for last year and it's increasing the second half of the year to I don't know what the number was let's say 14 I'm going to recognize rather than the numbers I've seen thrown around we've seen that improvement but again we've been supplying it below that level as the remains of the inventories been being burnt off on particularly the LEAP 1B for us in the engine segment and and that's hopefully going to show healthy growth for us this year. Again, strengthening as we go through the year when we see the further rate increase and there's no inventory left in the pipeline to get burnt off. And then should Boeing feel more confident and do consider raising the rate, that would be great for us and above what we've guided. Spares, just to comment on that, that's going to be healthy for us this year by way of percentage increase. So I'm thinking on the commercial arrow side, maybe something like a 30% increase in our aftermarket revenues, 30% plus. But as you know, it's coming off a fairly low base. So the dollars are beginning to be interesting, but still well below our previous levels in 2019.
spk05: Yeah. In terms of, David, the exit rates on the 737 and Q4, we were at about 17, 17 aircraft. And as we look into 2022, consistent with what we said last quarter, probably low 20s in the first half and low 30s in the second half.
spk14: Right. Thanks for all the detail, guys.
spk01: Your next question is from the line of Robert Stallard with Vertical Research.
spk12: Thanks so much. Good morning. John, to follow up on this 787 issue, have you taken the 787 out completely from your 2022 revenue guidance? And then secondly, assuming that's an accurate forecast, can you use this capacity for other stuff?
spk16: We've assumed, I mean, it's just a ballpark number, about 35. aircraft production for the year. It's just a guess. With very limited production, it will maybe zero production in the first quarter. And then assuming there's something, but not quite sure what, so we ballparked it at around that 35 level. In terms of those production facilities, If you take the Air Force that go to the engines, clearly, I mean, while that will release casting capacity, the dyes are dedicated to that aircraft, so no, nothing could be changed over there. And for the most part, that type of fastening system and titanium structures are dedicated to the aircraft, albeit there's enough capacity to produce for other customers for any of those flight types or any bolt fasteners. So, yes, there's the ability to use them elsewhere, but we've already made provision to be at production rates for everything elsewhere. So there's no upside in 787 being down. We just like the aircraft to get back certified and production to start and lift, and that would be very helpful to us.
spk12: Yeah, that's great. Thanks very much, John.
spk16: Thank you.
spk01: Your next question is from the line of Miles Walton with the UBS.
spk09: Thanks. Good morning. I was wondering, I don't know if it's Ken or John, but on the cash flow, obviously better performance in 21 and then 22 still at pretty elevated levels of conversion. I guess the question is why aren't you building more working capital as you're ramping up into the double-digit growth likely this year and next year? Are there customers, payables coming in, or excuse me, receivables coming in at pace and POs coming in better than you would otherwise historically wanted, or are we just setting a new bar for cash conversion versus the 90% long-term target?
spk16: No change to long-term guidance, just that when you've got, let's say, capex below DNA for a period of time that's healthy. We expect, as I guided, the pension contributions to be lower in 2022 than the previous year. So we are expecting some working capital build. And should we hit our marks in terms of, I'll say, receivables and payables, then I'd be quite excited to use increased working capital in the back end of the year because that would mean a very healthy exit rate and great momentum going into 2022. Working capital drag for us is not the biggest deal given the strength of margin and we'd much prefer to see the improved revenues. Having said all of that, we do hope to further improve our inventory efficiency during the course of the year. It's part of what we do And that's helping us reduce the, what you, it's just pro-rata, you know, working capital drag from the increased revenue. So, in summary, there is a working capital drag on cash flow. We're trying to improve efficiency, but would love that drag to be even higher because that shows strength, particularly in the second half of the year.
spk05: Yeah. Miles, what I would add to that, this is Ken. As John said, it's a modest cash burn in working capital. But as we exited 2021, we built some inventory, specifically in the engines business, on some of these key platforms in order to get ahead of the ramp. So we think we're in good shape.
spk09: And did you acquire any inventory from the supplier who maybe has been liquidating in the fourth quarter? A small amount, yes. Okay. Thanks.
spk01: Thank you. Your next question is from the line of Seth Seisman with JP Morgan.
spk03: Hey, thanks very much, and good morning. I wonder if you could comment on maybe not the exact number, but in a relative sense, the LTAs that are coming up this year relative to, I don't know, maybe if they're three to five years on average, then, you know, you'd think of 25% coming up each year. Is this a heavier year, a lighter year, and kind of what, you know, is there much expectation for what that might be able to deliver this year?
spk16: Yeah. So consistent with what I've said previously, 2021 was a big year for us. And you saw that number through the third quarter was a cumulative 60 plus million of price excluding inflationary pass-through. The Q4 number will be issued as we issue the pay in a week or so's time. And for 2022, the book of LTA will not be as big as 2021. Again, consistent with what I've previously said. Nothing's changed. We're well through our negotiations, but not completed for 2022, but well through. And our expectation for the price improvement is exactly in line with the previous statement.
spk03: Great. Thanks very much.
spk16: Thank you.
spk01: Your next question is from the line of Noah Poppenack with Goldman Sachs.
spk07: Hi. Good morning, everybody. Hey, Noah. John, I heard your comments on the math of the pass-through versus the pricing in terms of what that does to margins. But just the midpoint of the EBITDA margin guidance is a little constrained year over year. It seems like sort of the high end of the EBITDA versus the low end of the revenue gets you the 35% incremental, but a lot of different places in the ranges don't get that incremental you've been speaking to. So maybe you're just trying to tell us there's risk to revenue, but you feel good about your operating performance. But just wanted to get your latest thinking on your incremental margin potential versus what you were saying last quarter.
spk16: Yeah, well, the last quarter I gave you 35 plus or minus 5% PROC. And we're well within that. So I think it's exactly in line. I don't think anybody's going to argue for a couple of percent with all of the variables around us. So those variables will be Omicron, production disruption. I could talk about inflation. I could talk about recovery inflation. I could talk about 787, the F-35, the management of LEAP 1B inventory. And also things like container availability, never mind the cost of containers. So there's a lot of stuff going on. And within that overall context of uncertainty, then I think the guide's just exactly in line. And we'll see how things pad out during the course of the year. I'm not accustomed to disappointing. And the most important, I'd not disappoint myself. And so at the moment, I think we're in line. I think the most important thing is we are passing through, we can pass through these significant material changes and others. So that's the important thing. It's not an excuse me for reduced margins. Excellent. It's an and conversation. We've given you a range where we will take this and deliver and hopefully deliver improved margins in 23, just in the same way as we deliver the improved margins in 21. And 21, as you know, was a 200 plus basis points improvement over 20. And the more we've guided you to, I think 23% midpoint, which would be an increase over 2021.
spk07: And Fastening didn't see that as much in 21 and is the furthest below. pre-pandemic, now that the revenue has stabilized there, is that where there's the most upside left moving forward?
spk16: Well, I'm certainly optimistic for our fastener business because that's a good margin business. I'd be a lot more bullish about it if I knew more about the 787. But while I don't, I'm going to be fairly cautious. I still think that given, I mean, when you're going to sort through this given, I think, in the Q4, revenue slightly down, but margin up. And if you think margin up, when wide bodies down and 787 down, and given the differential mix of fasteners and aircraft, it was a really credible, incredible performance for the fastener business.
spk07: Okay. Thanks very much.
spk01: Thank you. Our next question is from the line of Christine Lewag with the Morgan Stanley.
spk13: Hey. Good morning, guys. John, on Russia, you know, there are discussions again on sanctions. How do you think this will pan out for the titanium industry? And is that a risk point, a potential pain point for you? How are you thinking about all of this?
spk16: If anything, I did note comments in the press from Boeing regarding concerns about geopolitical stability and the impact for titanium. And should those concerns prove material or real, then that would be great for us because we've got titanium capacity. We'd be happy to commit to a long-term agreement with that customer or indeed any others. So if there is geopolitical uncertainty, whether it's for the defense contractors or for civil aerospace production, then I think that's, you know, we'd be happy to take your calls.
spk13: So, John, I mean, following up on that, I mean, how much capacity do you have for titanium? How much of the aerospace industry's demand can you meet should, you know, this come about?
spk16: Well, it's clearly not the whole of VSMPO demand, that's for sure. But it's like those who come first will get the contracts locked and the capacity we're able to offer. Our reuse of revert and also titanium sponge, which for the most part for us comes from Japan, is not affected by the geopolitical uncertainties. And I would certainly want to guarantee for myself that I've got access to titanium.
spk13: Thanks, John. Very helpful.
spk01: Thank you. Your next question is from the line of Matt Akers with Wells Fargo.
spk04: Hey, good morning, guys. Thanks for the question. Could you kind of share your thoughts on headcount additions at this point? You added a lot of people in 2021. Are you sort of covered for this year or are there a lot more that you need to add to support some of the ramp up later this year?
spk16: So we've tried to put headcount in sequence to those businesses that are, I'll say, the early movers in the aerospace recovery map. And so you've seen just under 1,950 net adds in our engine business. We think we're going to start adding in our fastener business shortly. We already are adding in our fastener business. And so trying to get ahead of that volume recovery that we see. In terms of access and availability of labor, so far it's been okay. I'm saying about 70% of it's come from people that we've recalled, and they're saying therefore 30% from fresh labor for us. My expectation is that if things work out, uh as we expect then we'll probably recruiting an additional similar number probably somewhere between 800 000 people during the course of 2022 and if things work out well we'll be on the upside of that and if not we'll be on the downside but we'll keep uh adjusting it as we as we see fit during during the year um but again if you think about what we've said to you today is that we've tried to be thoughtful about the addition of labor to be ahead of the curve and training and taking those costs off so that we are not unable to meet our customers' demand in these, especially in those very difficult parts to manufacture I already talked about. But also, we took the time and effort and cash cost of building some additional inventory such that we could protect for some of the volume ramp that we expect coming. And we think that the demand actually could be quite healthy. And rather than get stressed about our production, we want to be ahead of the game. And that's where we think we are currently.
spk04: Great. Thanks, John. That's helpful.
spk16: Thank you.
spk01: Your next question is from the line of Timna Tanners with Wolf Research.
spk11: Yeah. Hey, good morning. I just had a follow-up on asking about capital allocation. I know you mentioned that 2021 was a balanced approach. You did mention you don't see a lot of CapEx needs. So I guess really just remaining trying to get an understanding of how you're looking at dividends versus buybacks versus refine and seeing other opportunities. Thanks.
spk16: Yeah. My guess at this point is that... Given our healthy cash flow, we'll still be returning money of note to shareholders during 2022. In fact, if you think about it, we've already done $100 million in the first few weeks of January, so that gives you an idea of our confidence and strength in the cash flows of the company. We'll feel our way through the year and see how we go. But clearly, if all things go as we expect them, we'll be buying additional shares back during the course of the year with a cadence yet to be determined. But we have plenty of authorization to do so. Clearly, we're also going to make sure we fund the business appropriately, and that's taken care of in a slightly higher capex number than before. And I guess that when we get through our first quarter, which we'll be reporting to you in early May, we'll just take a view of the dividend and whether we feel as though that would benefit from being lifted or not, or just do a sense check as we go through. So I expect a balanced approach, but with probably more share buyback than dividend in terms of any cash flow implication for the company. But I'm willing to consider all things. My guess is that when we exit 2022, we're going to also have improved leverage once again of a similar order of magnitude of terms compared to 2021. So what I think we're going to have is another and conversation where we're going to buy back shares, consider dividends, and improve our debt structure and improve our leverage as we exit 22. And that'll set 2023 up in a really good way.
spk11: Okay, great. Thanks for the detail.
spk16: I can't believe I just talked about 2023 and it's only the start of 22. but I must be getting carried away.
spk01: Your next question is from the line of Phil Gibbs with the KeyBank Capital Markets.
spk06: Hey, good morning. Hey, Phil. A question was on the pricing evolution. Safe to say that last year pricing gains were about $80 million, and I think you already said this year is probably going to be something a bit less than that. Is that fair?
spk16: Yeah. Well, the second part is I haven't commented on the first part because that'll be at IK in the week or so's time.
spk06: Okay. You talked about the pass-through, I think largely, I would think largely in the forged wheels business for 2022. But aside from the labor bill that you expect over the course of the year, Any other incremental inflationary factors that you guys have, maybe at a bit higher level than you were expecting three months ago or something that you don't have hedged out?
spk16: Energy costs are high, that's for sure, particularly in Europe. So if you were to go to almost any country in Europe, all of them having differential percentages, then the cost of energy is because of their, I'll say, policy towards renewables, etc. And I'll say security of energy is causing that to be an elevated level. It's also higher in the US, but nothing like the increases that are there in Europe. So I draw your attention to energy as one thing. And of course, we're all familiar with the wider general inflation increase that's there. I guess that's about it really.
spk06: And then just a second part to that energy comment that you just made. Are you all hedged in terms of your energy exposure there or are you feeling the brunt of the spot market gyration?
spk16: You can assume that it's pretty costly to hedge energy and therefore will be incurring additional energy costs during the course of the year. And those which are, let's say, not covered by our customers are all contained within the guidance we've given. And as I said, our guidance is within the incremental range already provided when you're just for that metal pass-through.
spk06: Thanks, John. Appreciate it.
spk16: Thank you.
spk01: Your next question is from the line of Perotash Mizra with the Bierenberg.
spk02: Thanks. Good morning. On your CapEx guidance and recognizing it's below depreciation in 22, but is there any larger project that you're undertaking that's worth flagging?
spk16: No. I mean, there's no significant projects at all. So there's no capacity expansion. For example, in our engine business, as we've had previously, there's Ken's already commented that we finished the capacity expansion in our wheels business in Hungary and Monterrey, Mexico. So that's also behind us and expect to see the benefits of that capacity available for our customers as we go through the year, in particular into next year. So that's all good. If there's one theme, I think we are going to have an elevated spend compared to previous years. It will be the culmination of many of the automation projects that we've started throughout the company. And I've been willing to commit to those additional projects, in fact, stimulated in many cases those projects, because I really do feel that's going to pay dividends for us in terms of muting our ingestation of labor and also taking out those inflationary costs for the future in terms of just managing our productivity. And also, I think, going along with that productivity, we will also gain further improvement in our quality indices. And as you probably recall from previous earnings calls, I have noted that the improved quality and delivery from Hammett over the last two or three years. And we'd like to continue that path And I think automation is going to be key to do so while we go through the volume ramps that we are for the next two or three years.
spk02: Interesting. Thanks. And then just a quick follow-up on your comments regarding the aftermarket. Sorry if I missed that, but did you say how big your aftermarket business was last year in 2021? I did not, but
spk16: For clarity, for everyone on the call, then defense and aerospace, I think the mark we called out in 19 was about 400 million, and that's closer to 500 million these days. And the 400 million, which was in commercial and industrial, that dropped the depths of, let's say, the pandemic to about 100 million or less. And compared to, say, 2021 saw a fractional improvement in the back end of the year, and it's on that commercial aerospace business where I believe we're going to have a 30% plus improvement in 2022 for spares, both for narrowbody and widebody.
spk02: Got it. Thanks, John.
spk16: And business jet as well, because business jet is really going very well. Got it. Very clear.
spk01: Thank you. Your next question is from the line of George Shapiro with Shapiro Research.
spk17: Yes. Good morning, John. For the last couple of quarters, you've been a little bit less in revenues than you thought, but the margin's either been as good or better than what you've been guiding to. So How long can you continue to do that if we see the recovery somewhat slower so the revenues continue to be a little bit less than expected out there?
spk16: Okay. Well, certainly, if you'd say compared to what I'd have liked to have seen in the back end of 2021, then revenue would have been a disappointment. But as you know, we can only supply that much our customers want and I think all of us recognize that, I mean, if you call out one instance rather than go through everything, then 787 overshadows everything in the back end of the year, and in particular, effectively, production going to zero in the fourth quarter. And so, yeah, revenue lines are a disappointment. The most important thing is that despite all despite all within that output, you know, containing that through cost reduction programs and our efficiency, despite all of the impact of Omicron and that production disruption that it did provide. Plus, if you also want to pile on, you can add all of the additional protection that we try to provide our employees so we can maintain production. And it's like testing regimes and we've been whipsawed, as you know, by mandates and governments um court you know changes so again a lot going on um and if you look at the guide for the first quarter you know it's not really if you then you know go through it closely and you'll say well part of that revenue let's say maybe it's half is material pass-through so there's not much volume and but when you adjust for that material you'll see that margin is right on top of where we exited the second half of 2021. So at the moment, what we're telling you is we think we can continue to convert effectively while I'll say waiting for the volume. And then for me, the really interesting bit is what happens in our second quarter and second half. and we'll know a lot more as we go through when we see firmness of production schedules, but we're getting a little bit more optimistic for the second quarter, and certainly we feel more optimistic in the second half, even though when you think about it in the round, it's never good to have a year where you're back-end loaded, but that's always going to be the nature of it when you're in a recovery situation that certainly the commercial aerospace market is. And in recovery, it's going to be that way through 22. It's going to be that way through 23 as well. So I'd say all good, George, with the moment trying to hold things together. And we have held things together while, you know, say the market hasn't been kind to us by way of volumes. And then, you know, should we get a little bit of a whiff of increase, like the same as we had in Q3? then I'm hopeful we're going to convert and maybe enter those sunny uplands, as I think.
spk17: Okay, no, it's been an impressive performance. I just wonder how long you keep it going if you don't get the revenue.
spk16: Yeah, well, I guess, I mean, if you want to light a candle at night, make sure that I want the volume, because operating with... The lack, I mean, the headwinds we've had over the last few quarters, a year or two years, it's been tough. But, you know, the answer is we've converted, we've done what we should do and delivered. And I'm looking forward to the volume improvements, which will happen. It's a strong statement, but will happen during 22 at some point. Thanks very much. I think it's also important to keep the big picture in mind. Despite all the little bits of stuff that you deal with, the big picture is, let's just consider, you know, revenues are going up, we're in recovery, the commercial aerospace business is going to improve, narrow body is leading the way, volume increase, whether it's from Airbus and Boeing, and hopefully stronger from Boeing, and hopefully, you know, aircraft will start being delivered in China shortly for the narrow body. I mean, it's all good. So let's keep focused on the big picture here.
spk17: Very helpful. Thanks very much. Thank you.
spk01: Your final question is from the line of Noah Poppenack with the Goldman Sachs.
spk07: Hey, John. I just wanted to try to better understand what's going on with the 787. I'm a little surprised by your comments that you're sort of not hearing much from them. I mean, is that surprising to you? I know they have a lot of inventory, but They're talking about restarting the underlying production rate. Presumably they'd need to give the supply chain that info. So what's going on there? And then putting their comments aside, what's your assessment of what's happening there, why it's taking so long, and when it starts back up?
spk16: I don't know if my assessment counts for much at all. It does. But I think Boeing's assessment makes a lot of difference. My take is Boeing rightly don't want to get ahead of the FAA in providing commentary I don't think that's been helpful in the past and therefore I think a cautious line is being taken and my thought is that the MPS Italian Leonardo problem is behind them solutions are done. The gaps which were there in terms of shims are being worked through. The issue around the doors has been solved and is being worked through. And I think the audit of the supply base in terms of supplier conformance has been completed. And so there's a lot of milestones which I think are being done. And everybody is a bit snakebit on making predictions for the aircraft. And my hope is that during this quarter, or latest early in the second quarter, is that the FAA give recertification. And then I think that those aircraft will be flowing, because clearly there's a fundamental demand for this aircraft. composite wide-body aircraft and its efficiency. It's a great aircraft. So, you know, if you just look at some of the summer cancellation of schedules by the airlines, they need those aircraft. And so as it gets recertified, production will begin to lift from the, let's assume that, you know, those penny numbers are being done currently. And we're going to see rates of five, you know, in the second half of this year. Five per month, that is. So I think that's the way it plays out, but I'm not in control of those events at all. And I'm just trying to give you a view, albeit it's a view that, as I said, doesn't count for much, really.
spk07: It does, and that's helpful. And I guess given the inventory they have and then that the production rate would start pretty low and maybe be there for a bit, while it may sound surprising to me that they're not giving you a schedule, they don't necessarily need to because they're going to restart at such a low rate. Combine that with the sensitivity of being ahead of the regulator, and that would explain what the communication is right now, even if things are going to restart relatively soon.
spk16: Yeah, and I do believe they need to get back to five a month. And overall, you know, if we're not careful, if we end up at zero for an extended period of time, then it's going to be really difficult to get production rates up for that aircraft. I mean, it's a difficult aircraft to build. As we all know, that was an aircraft where not only was the fundamental technology changed, but that was combined with a supply chain change of great notes back in, say, the 2000s let's call it eight, nine timeframe. And when you think about all the different subs around the world, let's say from as far away as Japan and lots of other countries as well, then there's inventory in the system all the way through and that'll take a bit of burning off.
spk07: Okay. Thank you very much.
spk16: Thank you.
spk01: This concludes Today's conference call, thank you for participating. You may now disconnect.
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